FILED PURSUANT TO RULE 424(b)(3)
                                                      REGISTRATION NO. 333-30809

PROSPECTUS
                                  $70,000,000
 
  OFFER FOR ALL OUTSTANDING REMARKETED REDEEMABLE PAR SECURITIES, SERIES A IN
EXCHANGE FOR REMARKETED REDEEMABLE PAR SECURITIES, SERIES B WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OF
 
                 IMPERIAL CREDIT CAPITAL TRUST I (THE "TRUST")
                   (LIQUIDATION AMOUNT $1,000 PER SECURITY)
                   *FULLY AND UNCONDITIONALLY GUARANTEED BY
 
                   [LOGO OF IMPERIAL CREDIT INDUSTRIES, INC.]
 
  THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON JUNE 22,
                 1998, UNLESS EXTENDED (THE "EXPIRATION DATE")
 
  Imperial Credit Capital Trust I, a Delaware statutory business trust (the
"Trust"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (the
"Letter of Transmittal" which, together with this Prospectus, constitute the
"Exchange Offer"), to exchange an aggregate liquidation amount of up to
$70,000,000 of its Remarketed Redeemable Par Securities, Series B (the "New
Par Securities") of the Trust, which have been registered under the Securities
Act, for a like liquidation amount of the issued and outstanding Remarketed
Redeemable Par Securities, Series A (the "Old Par Securities") (together, the
"Par Securities") of the Trust from the registered holders thereof.
Concurrently herewith, the following exchanges will also occur: (i) Imperial
Credit Industries, Inc., a California corporation (the "Company"), will
exchange its guarantee of the payment of distributions and payments on
liquidation or redemption of the Old Par Securities (the "Old Trust
Guarantee") for a like guarantee of the New Par Securities (the "New Trust
Guarantee"), (together, the "Trust Guarantee"); (ii) the Company will exchange
all of its outstanding Resettable Rate Debentures, Series A (the "Old
Debentures") for a like amount of its Resettable Rate Debentures, Series B
(the "New Debentures"); (iii) Auto Marketing Network, Inc., a Florida
corporation ("AMN"), Imperial Business Credit, Inc., a California corporation
("IBC"), Imperial Credit Advisors, Inc., a California corporation ("ICAI"),
Imperial Credit Commercial Asset Management Corp., a California corporation
("ICCAMC"), and Imperial Credit Worldwide, Ltd., a California corporation
("ICW") (collectively the "Subsidiary Guarantors") will exchange their full,
unconditional and joint and several guarantee of the Old Debentures (the "Old
Subsidiary Guarantees") for a full, unconditional and joint and several
guarantee of the New Debentures (the "New Subsidiary Guarantees") (these
transactions, together with the exchange of the Old Par Securities for the New
Par Securities, are collectively referred to herein as the "Exchange"). The
New Trust Guarantee, the New Debentures, and the New Subsidiary Guarantees
have also been registered under the Securities Act. The Old Par Securities,
the Old Trust Guarantee, the Old Debentures and the Old Subsidiary Guarantees
are referred to collectively herein as the "Old Securities," and the New Par
Securities, New Trust Guarantee, New Debentures and the New Subsidiary
Guarantees are collectively referred to herein as the "New Securities."
 
  The terms of the New Securities are identical in all material respects to
the Old Securities, except for certain transfer restrictions relating to the
Old Securities. See "Risk Factors--Consequences of Failure to Exchange Old Par
Securities" and "The Exchange Offer" for information concerning the effect of
not tendering and exchanging Old Par Securities in the Exchange Offer. The New
Par Securities will be a new issue of securities for which there currently is
no established trading market. Accordingly, there can be no assurance as to
the development or liquidity of any market for the New Par Securities. See
"Risk Factors--Lack of Public Market May Affect Resale of New Par Securities."
Neither the Company nor the Trust will receive any cash proceeds from the
issuance of the New Par Securities offered hereby. No dealer-manager is being
used in connection with this Exchange Offer. See "Use of Proceeds."
                                                          (continued on page i)
                               -----------------
  SEE "RISK FACTORS" BEGINNING ON PAGE 26 FOR A DESCRIPTION OF CERTAIN RISKS
TO BE CONSIDERED AND FOR CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE
PAR SECURITIES, INCLUDING THE PERIOD AND CIRCUMSTANCES DURING AND UNDER WHICH
PAYMENTS OF DISTRIBUTIONS ON THE PAR SECURITIES MAY BE DEFERRED AND THE
RELATED UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF SUCH DEFERRAL.
 
                               -----------------
 
 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
  EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
   TIES AND  EXCHANGE COMMISSION OR ANY STATE  SECURITIES COMMISSION PASSED
    UPON  THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.  ANY REPRESENTATION
      TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
                               -----------------
 
                 THE DATE OF THIS PROSPECTUS IS MAY 15, 1998.

 
(Continued from cover page)
 
  The Par Securities represent undivided beneficial ownership interests in the
assets of the Trust. The Company indirectly owns all of the beneficial
ownership interests represented by common securities of the Trust (the "Common
Securities" and together with the Par Securities, the "Trust Securities"). On
June 9, 1997, the Trust issued $70,000,000 liquidation amount of Par
Securities and $2,165,000 liquidation amount of Common Securities in
transactions pursuant to exemptions from the registration requirements of the
Securities Act and applicable state securities laws. The Trust exists for the
sole purposes of issuing the Trust Securities and investing the proceeds
thereof in the Old Debentures, which will be exchanged for the New Debentures
(together, the "Debentures"). New Debentures will evidence the same class of
debt as the Old Debentures and will be issued pursuant to, and entitled to the
benefits of, the Indenture governing the Old Debentures (the "Indenture").
 
  Tenders of Old Par Securities may be withdrawn at any time on or prior to
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
liquidation amount of Old Par Securities being tendered for exchange. However,
the Exchange Offer is subject to certain events and conditions which may be
waived by the Company or the Trust. The Company has agreed to pay all expenses
of the Exchange Offer. See "The Exchange Offer--Fees and Expenses." This
Prospectus, together with the Letter of Transmittal, is being sent to all
registered holders of Old Par Securities as of May 20, 1998. For an index of
defined terms, see "Index of Principal Definitions."
 
- --------
* Taken together, the Company's obligations under the Declaration of Trust,
  the Debentures, the Indenture and the Trust Guarantee provide, in the
  aggregate, a full and unconditional guarantee of payments of distributions
  and other amounts due on the Par Securities. No single document standing
  alone or operating in conjunction with fewer than all of the other documents
  constitutes such guarantee. It is only the combined operation of these
  documents that has the effect of providing a full and unconditional
  guarantee of the Trust's obligations under the Par Securities.
 
                               ----------------
 
                             AVAILABLE INFORMATION
 
  The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith file reports and other information with the Commission. The Company,
the Trust and the Subsidiary Guarantors have filed a Registration Statement on
Form S-4 (the "Registration Statement") with the Commission under the
Securities Act with respect to the New Securities. This Prospectus does not
contain all the information, exhibits and undertakings contained in the
Registration Statement, to which reference is hereby made. Statements
contained in this Prospectus as to the terms of any contract or other document
are not necessarily complete with respect to each such contract or other
document filed as an exhibit to the Registration Statement. Reference is made
to the exhibits for a more complete description of the matter involved. Such
reports, proxy statements and other information filed by the Company with the
Commission pursuant to the informational requirements of the Exchange Act may
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and at the following Regional Offices of the Commission: Chicago
Regional Office, Suite 1400, Citicorp Center, 14th Floor, 500 West Madison
Street, Chicago, Illinois 60661; and New York Regional Office, 7 World Trade
Center, 13th Floor, Suite 1300, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. Documents filed by the Company can also be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. The Commission also maintains a Web site (http://www.sec.gov) that
contains reports, proxy statements and other information regarding the
Company.
 
                                       i

 
  No separate financial statements of the Trust have been included or
incorporated by reference herein. The Company does not believe that such
financial statements would be material to holders of the Par Securities
because (i) all of the voting securities of the Trust are owned by the
Company, a reporting company under the Exchange Act, (ii) the Trust has no
independent operations and exists for the sole purpose of issuing securities
representing undivided beneficial interests in its assets and investing the
proceeds thereof in the Debentures issued by the Company, and (iii) and the
Company's obligations under the Declaration of Trust, the Debentures, the
Indenture and the Trust Guarantee provide, in the aggregate, a full and
unconditional guarantee of the obligations of the Trust under the Par
Securities. See "Description of Securities," "Description of Debentures,"
"Description of Trust Guarantee" and "Relationship Among the Par Securities,
the Debentures and the Trust Guarantee."
 
  No separate financial statements of AMN, IBC, ICAI, ICCAMC or ICW, have been
included or incorporated by reference herein. The Company does not believe
that such financial statements would be material to holders of the Par
Securities because (i) all of the common stock of AMN, IBC, ICAI, ICCAMC and
ICW is owned by the Company, a reporting company under the Exchange Act and
(ii) each of AMN, IBC, ICAI, ICCAMC and ICW fully and unconditionally
guarantees the obligations of the Company under the Debentures. See
"Description of Debentures" and "Description of Trust Guarantee."
 
                          INCORPORATION BY REFERENCE
 
  The Company's annual report on Form 10-K for the fiscal year ended December
31, 1997 filed by the Company with the Commission pursuant to the Exchange Act
is incorporated herein by reference.
 
  The reports and other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the Exchange Offer hereunder shall
be deemed to be incorporated by reference herein and to be a part hereof from
the date of filing of such reports and documents. Any statement contained in
this Prospectus or in a document incorporated by reference herein will be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in this Prospectus or in any subsequently
filed document which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified
or superseded will not be deemed, except as so modified or superseded, to
constitute a part of the Registration Statement or this Prospectus.
 
  The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, copies of any and all of the documents incorporated herein by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference into the information incorporated
herein). Requests for such documents should be directed to Imperial Credit
Industries, Inc., 23550 Hawthorne Boulevard, Building One, Suite 240, Torrance
California 90505, telephone number (310) 791-8040. Attention: General Counsel.
 
  THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE NO LATER
THAN FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE.
 
                                      ii

 
                               PROSPECTUS SUMMARY
 
  The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the consolidated financial statements and the notes thereto appearing elsewhere
in this Prospectus. References in this Prospectus to "ICII" refer to the
Company as a separate entity from its subsidiaries. All references to the
"Company" in this Prospectus refer, unless otherwise stated or unless the
context otherwise requires, to ICII and its subsidiaries on a consolidated
basis.
 
  This Prospectus contains forward-looking statements that inherently involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
 
               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
  This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"). Investors should note
that any safe-harbor for "forward-looking statements" does not apply to
statements made in connection with an initial public offering. All statements
other than statements of historical facts included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and located elsewhere herein regarding industry
prospects and the Company's financial position are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed in this Prospectus including, without
limitation, the forward-looking statements included in this Prospectus and
under "Risk Factors." All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.
 
                                   THE TRUST
 
  The Trust is a statutory business trust formed under the Delaware Business
Trust Act, as amended (the "Trust Act"), pursuant to (i) a declaration of trust
(as so amended and restated, the "Declaration") dated as of May 28, 1997,
executed by the Company, as sponsor, and the trustees of the Trust and (ii) a
certificate of trust, dated as of May 28, 1997, filed with the Secretary of
State of the State of Delaware. The Trust exists for the exclusive purpose of
(i) issuing and selling the Trust Securities representing undivided beneficial
ownership interests in the assets of the Trust, (ii) investing the gross
proceeds from such sales in the Debentures and (iii) engaging in only those
other activities necessary or incidental thereto.
 
  All of the Common Securities of the Trust are owned by the Company. The Par
Securities rank on a parity, and payments will be made thereon pro rata, with
the Common Securities. Distributions are payable semi-annually in arrears on
June 15th (June 14 in 2002) and December 15th of each year, commencing December
15, 1997, and on the Scheduled Remarketing Settlement Date (as defined below).
In the event that any date on which Distributions are payable on the Par
Securities is not a Business Day, then payment of the Distributions payable on
such date will be made on the next succeeding day that is a Business Day (and
without any additional Distributions or other payment in respect of any such
delay), except that, if such Business Day is in the next succeeding calendar
year, such payment will be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on the date such payment
was originally payable (each date on which Distributions are payable in
accordance with the foregoing, a "Distribution Date"). A "Business Day" means
any day other than a Saturday or a Sunday, or a day on which banking
institutions in The City of New York are authorized or required by law or
executive order to remain closed or a day on which the principal corporate
trust
 
                                       1

 
office of the Property Trustee or the Indenture Trustee (as defined below) is
closed for business. If on any Distribution Date or redemption date an
Indenture Event of Default (as defined herein under "Description of
Debentures--Indenture Events of Default") shall have occurred and be
continuing, the rights of the holders of the Common Securities to payment in
respect of distributions and payments upon liquidation, redemption and
otherwise will be subordinated to the rights of holders of the Par Securities.
See "Description of Securities--Subordination of Common Securities."
 
  The Trust's affairs are conducted by the trustees (the "Trustees") appointed
by the Company as the owner of all of the Common Securities. The holder of the
Common Securities is entitled to appoint, remove or replace any of, or increase
or reduce the number of, the Trustees. The duties and obligations of the
Trustees are governed by the Declaration. As of the date of this Prospectus,
the Trust has five Trustees. Three Trustees (the "Regular Trustees") are
employees or officers of the Company. A fourth Trustee (the "Property Trustee")
of the Trust is a financial institution that is not affiliated with the Company
and has a minimum amount of combined capital and surplus of not less than
$50,000,000, which acts as property trustee and as indenture trustee for the
purposes of compliance with the provisions of Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The fifth Trustee of the Trust is an
entity having a principal place of business in, or a natural person resident
of, the State of Delaware (the "Delaware Trustee"). The Company will pay all
fees and expenses related to the Trust and the Exchange Offer.
 
  The Property Trustee for the Trust is The Chase Trust Company of California
and its principal corporate trust office is at 101 California Street, Suite
2725, San Francisco, California 94111. The Delaware Trustee for the Trust is
The Chase Manhattan Bank Delaware and its address in the State of Delaware is
1201 Market Street, Wilmington, Delaware 19801.
 
                                  THE COMPANY
 
  Imperial Credit Industries, Inc. (the "Company") is a diversified commercial
and consumer finance company. In 1995, the Company began to reposition its
business from originating and selling conforming residential mortgage loans to
offering higher margin loan and lease products. The Company accomplished this
repositioning through a business strategy that emphasizes: (i) opportunistic
expansion and acquisitions of businesses in niche segments of the financial
services industry, (ii) conservative and disciplined underwriting and credit
risk management, (iii) loan and lease originations, where possible, on a
wholesale basis, (iv) securitization or sale in the secondary market of
substantially all of the Company's loans and leases, other than those held by
Southern Pacific Bank ("SPB") for investment and (v) maintaining business and
financial flexibility to take advantage of changing market conditions with
respect to specific financial services businesses.
 
  The Company has diversified its loan and lease products by focusing on the
creation and acquisition of additional finance businesses in order to reduce
its dependency on residential mortgage lending. When acquiring new businesses
or targeting expansion opportunities, the Company seeks to retain existing
management and recruit additional experienced management to increase growth and
profitability and to reduce the risks associated with operating the newly
acquired entity. As a result, the Company has divested substantially all of its
residential mortgage lending and residential mortgage servicing businesses and
expanded its presence in other specialty finance markets. Throughout this
realignment, the Company's core business has remained consistent in that it
originates loans and leases funded primarily by warehouse lines of credit and
repurchase facilities and securitizations and whole loan sales in the secondary
market. For the years ended December 31, 1997, 1996 and 1995, the Company
originated or acquired $1.2 billion, $2.2 billion and $3.0 billion of loans and
leases, respectively, such amounts include loan and lease originations for
Franchise Mortgage Acceptance Company, LLC ("FMAC"), from date of inception of
June 30, 1995 through September 30, 1997. In August 1997, FMAC incorporated
Franchise Mortgage Acceptance Company ("FMC"), for the purpose of succeeding to
the business of FMAC. Immediately prior to FMC's initial public offering of its
common stock, FMAC merged into FMC. As of the fourth quarter of 1997 FMAC is no
longer a majority owned subsidiary of the Company. See
 
                                       2

 
"Summary Historical and Pro Forma Consolidated Financial and Other Data." In
addition, during the years ended December 31, 1997, 1996 and 1995, the Company
completed securitization transactions totaling $919.1 million, $1.3 billion and
$1.0 billion, respectively.
 
  For the year ended December 31, 1996, a substantial portion of the Company's
operations were conducted through its sub-prime residential mortgage lending
subsidiary, Southern Pacific Funding Corporation ("SPFC"). In June 1996, as
part of the Company's repositioning, SPFC completed an initial public offering
of its common stock pursuant to which ICII was a selling shareholder. During
the fourth quarter of 1996 and the year ended December 31, 1997, ICII sold
additional shares of its SPFC common stock reducing its ownership percentage to
47.0% as of December 31, 1997. As a result, commencing with the three months
ended March 31, 1997, the financial statements of SPFC are no longer
consolidated with those of ICII. As a result of this deconsolidation, certain
of the financial and operating data presented for the year ended December 31,
1997 will not be comparable with such data for periods prior to the
deconsolidation. For a further description of the effect of such
deconsolidation, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General--Deconsolidation."
 
  Until November 1997, franchise lending was conducted through ICII's 66.7%
owned subsidiary, FMAC. In August 1997, FMAC incorporated FMC, a Delaware
corporation for the purpose of succeeding to the business of FMAC. Immediately
prior to FMC's initial public offering on November 24, 1997, of its common
stock, FMAC merged into FMC (the "Reorganization"). As a result of the
Reorganization, the historical financial statements of FMAC have become those
of FMC. Immediately prior to the FMC initial public offering, the Company owned
66.7% of the outstanding shares of FMC common stock. The Company participated
as a selling stockholder in the FMC initial public offering, and as a result of
such participation, the Company's percentage ownership of FMC was reduced to
38.4%, and consequently, the financial statements of FMAC are no longer
consolidated with those of ICII. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General--Deconsolidation."
 
  The Company offers loan and lease products in the following sectors:
 
  BUSINESS FINANCE LENDING. Business finance lending is conducted through the
Imperial Business Credit, Inc. ("IBC") subsidiary of the Company and three
divisions of the Company's SPB subsidiary: Coast Business Credit ("CBC") the
Loan Participation and Investment Group ("LPIG") and the Auto Lend Group ("Auto
Lend").
 
    Coast Business Credit. CBC is an asset-based lender specializing in
  lending to middle market manufacturing and high-technology businesses.
  CBC's predecessor operated as a division of Coast Federal Bank until its
  acquisition by the Company in September 1995. CBC originates loans and
  commitments subject to stringent underwriting and collateral requirements.
  As of December 31, 1997, CBC had total loan commitments of $803.3 million
  of which $484.8 million of loans were outstanding.
 
    Imperial Business Credit. IBC leases business equipment including
  copying, data processing, communication, printing and manufacturing
  equipment exclusively to business users. IBC was formed in May 1995 to
  combine the Company's existing leasing business with the assets acquired
  from First Concord Acceptance Corporation ("FCAC"). In October 1996, IBC
  expanded its business through the acquisition of substantially all of the
  assets of Avco Leasing Services, Inc. and all of the assets of Avco
  Financial Services of Southern California, Inc. related to its business of
  originating and servicing business equipment leases. For the years ended
  December 31, 1997, 1996 and 1995, IBC originated $151.3 million, $87.2
  million and $36.0 million of leases and securitized $213.6 million, $87.0
  million and $85.2 million of leases, respectively.
 
    Loan Participation and Investment Group. LPIG was formed in September
  1995 to invest in and purchase syndicated commercial loan participations in
  the secondary market originated by commercial
 
                                       3

 
  banks. As of December 31, 1997, LPIG had total loan commitments of
  $483.7 million of which $196.4 million of loans were outstanding.
 
    Auto Lend Group. Auto Lend was formed in September 1996 to finance
  automobile dealership inventories. As of December 31, 1997, Auto Lend had
  total loan commitments of $62.4 million of which $14.1 million of loans
  were outstanding.
 
  COMMERCIAL MORTGAGE LENDING. The Company conducts its commercial mortgage
lending operations through the Income Property Lending Division ("IPLD") of
SPB. IPLD was formed in February 1994 to expand the Company's apartment and
commercial property lending business. The focus of IPLD's lending activities is
the small loan market (consisting of loans less than $2.5 million) for multi-
family apartments and commercial buildings. For the years ended December 31,
1997, 1996 and 1995, IPLD loan originations totaled $295.9 million, $260.9
million and $160.0 million, respectively.
 
  CONSUMER LENDING. Consumer lending is conducted through the Auto Marketing
Network, Inc. ("AMN") subsidiary of the Company and through the Auto Lending
Division ("ALD") and Consumer Credit Division ("CCD") of SPB.
 
    Auto Marketing Network. AMN was acquired on March 14, 1997 to finance on
  a nationwide basis the purchase of new and used automobiles primarily to
  sub-prime borrowers. At December 31, 1997, AMN was headquartered in Tulsa,
  Oklahoma and had regional offices in Texas, Virginia and Tennessee. For the
  period from its acquisition through December 31, 1997, AMN originated
  $170.6 million in sub-prime auto loans. 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 of $20.1 million was
  written off during the fourth quarter of 1997.
 
    Auto Lending Division. ALD was formed in October 1994 and lends primarily
  to credit-impaired buyers of new and used automobiles who are unable to
  access traditional sources of financing from banks and automobile finance
  companies. ALD currently operates from three retail offices in Northern
  California and expects to further expand its operations within California.
  For the years ended December 31, 1997, 1996 and 1995, ALD originated $74.2
  million, $35.0 million and $19.0 million, respectively, of sub-prime auto
  loans.
 
    Consumer Credit Division. CCD was formed in early 1994 and offers loans
  to finance home improvements and consumer goods. For the years ended
  December 31, 1997, 1996 and 1995, CCD originated $19.8 million, $22.0
  million and $14.6 million respectively, in loans and had $40.8 million of
  loans outstanding as of December 31, 1997.
 
  ADVISORY, INVESTMENT AND OTHER ACTIVITIES. The Company conducts advisory
services through its Imperial Credit Advisors, Inc. ("ICAI") and Imperial
Credit Commercial Asset Management Corp. ("ICCAMC") subsidiaries and has
substantial investments in SPFC, a publicly traded sub-prime residential
mortgage lender, FMC, a publicly traded specialty commercial finance company,
Imperial Capital Group, LLC ("ICG"), an investment banking firm, Imperial
Credit Commercial Mortgage Investment Corporation ("ICCMIC"), a publicly traded
REIT engaged in commercial mortgage finance activities and Imperial Credit
Worldwide, Ltd. ("ICW"), a holding company for international finance
activities.
 
    Imperial Credit Advisors. ICAI provides capital markets, portfolio
  management and research services to the Company's subsidiaries and
  affiliates. Prior to December 1997, ICAI oversaw the day-to-day operations
  of IMH pursuant to a management agreement, recently terminated as more
  fully described in "Certain Transactions--Relationships with IMH--Other
  Arrangements and Transactions with IMH." For
 
                                       4

 
  the years ended December 31, 1997, 1996 and 1995, ICAI earned $4.9 million,
  $3.3 million and $38,000 in management fees and incentive payments pursuant
  to the management agreement, respectively. See "--Recent Developments."
 
    Imperial Credit Commercial Asset Management Corporation. ICCAMC oversees
  the day-to-day operations of ICCMIC pursuant to a management agreement more
  fully described in "Certain Transactions--Relationships with ICCMIC--ICCMIC
  Management Agreement."
 
    Southern Pacific Funding Corporation. SPFC is a publicly traded sub-prime
  mortgage banking company (NYSE Symbol: SFC) which originates, purchases and
  sells high yielding, single family sub-prime mortgage loans. Substantially
  all of SPFC's loans are secured by first or second mortgages on owner
  occupied single family residences. The majority of the originated and
  purchased loans are made to borrowers who do not qualify for or are
  unwilling to obtain financing from conventional mortgage sources. As of
  December 31, 1997, ICII owned 9,742,500 shares of SPFC common stock,
  representing 47.0% of the outstanding common stock of SPFC, which,
  commencing with the three months ended March 31, 1997, is reflected on the
  Company's financial statements as "Investment in Southern Pacific Funding
  Corporation." ICII's investment in SPFC constituted 3.1 % of the Company's
  total assets and contributed 8.4% of the Company's total revenue for the
  year ended December 31, 1997.
 
    Franchise Mortgage Acceptance Company. FMC is a publicly traded specialty
  commercial finance company (NASDAQ Symbol: FMAX) engaged in the business of
  originating and servicing loans and equipment leases to small businesses,
  with a primary focus on established national and regional franchise
  concepts. More recently, FMC has expanded its focus to include retail
  energy licensees (service stations, convenience stores, truck stops, car
  washes and quick lube businesses) and golf operating businesses (golf
  courses and golf practice facilities). FMC originates long-term fixed and
  variable rate loan and lease products and sells such loans and leases
  either through securitizations or whole loan sales to institutional
  purchasers on a servicing retained basis. FMC also periodically makes
  equity investments or receives contingent equity compensation as part of
  its core lending and leasing business. FMC originated loans and leases
  through 16 marketing offices in 10 states at December 31, 1997. Since
  inception, it has funded over $1.7 billion in loans and leases and at
  December 31, 1997, had a servicing portfolio of $1.3 billion. For the years
  ended December 31, 1997, 1996 and the six months ended December 31, 1995,
  FMAC and or its successor FMC originated or acquired $801.0 million, $459.5
  million and $163.5 million of franchise loans and leases and securitized
  $483.1 million, $325.1 million and $105.2 million of loans, respectively.
  During the fourth quarter of 1997, FMC completed an initial public offering
  of its common stock pursuant to which ICII was a selling stockholder. As a
  result of the Company's participation in the public offering, the Company's
  percentage ownership of FMC was reduced to 38.4%, consequently, beginning
  with the fourth quarter of 1997, the financial statements of FMAC are no
  longer consolidated with those of ICII. ICII's investment in FMC is
  recorded on the Company's financial statements as "Investment in Franchise
  Mortgage Acceptance Company" and is accounted for pursuant to the equity
  method of accounting. ICII recognized a $92.1 million gain on FMC's stock
  offering.
 
    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, will offer individual and institutional
  investors financial products and services. ICG is a registered
  broker/dealer with the Commission and is a member of the National
  Association of Securities Dealers, Inc. ICG 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,
  an investment advisor registered with the Commission, provides investment
  management services to high net worth individuals and institutional
  clients. ICG has completed the purchase of substantially all of the assets
  of Dabney/Resnick/Imperial ("DRI"). When ICG was initially capitalized in
  September 1997, the Company's ownership percentage was 80%. Subsequently,
  on December 5, 1997
 
                                       5

 
  the Company's ownership percentage was reduced to approximately 60%. During
  the fourth quarter of 1997, the Company incurred a $3.7 million loss on the
  restructuring of its loan to DRI.
 
    Impac Mortgage Holdings. Simultaneously with IMH's initial public
  offering in November 1995, the Company contributed certain operating assets
  of ICII's mortgage conduit operations and SPB's warehouse lending
  operations for 500,000 shares of IMH's common stock. IMH is a publicly
  traded specialty finance company (AMEX Symbol: IMH) which operates three
  businesses: (i) long-term investment operations which invests primarily in
  nonconforming residential mortgage loans and securities backed by such
  loans, (ii) warehouse lending operations which provides short-term lines of
  credit to originators of mortgage loans and (iii) conduit operations,
  through its affiliate Impac Funding Corporation ("ICIFC"), which primarily
  purchases and sells or securitizes non-conforming mortgage loans. During
  December 1997, IMH and the Company negotiated a termination of the
  management agreement resulting in a pre-tax gain of approximately $19.0
  million. For further information see "Certain Relationships and Certain
  Transactions--Relationships with IMH--Other Transactions."
 
    Imperial Credit Commercial Mortgage Investment Corporation. In October
  1997, the Company completed a public offering of ICCMIC (NASDAQ Symbol:
  ICMI). ICCMIC invests primarily in performing multifamily and commercial
  loans and mortgage-backed securities. The Company purchased 2,970,000
  shares of ICCMIC common stock for $41.4 million in October 1997. On
  December 12, 1997, the Company purchased an additional 100,000 shares of
  ICCMIC common stock for $1.5 million. The Company owns 8.9% of the
  outstanding common stock of ICCMIC as of December 31, 1997.
 
    Imperial Credit Worldwide, Ltd. ICW is a holding company for the
  Company's international finance activities and is a majority owner of
  Credito Imperial Argentina, a mortgage banking company conducting business
  in Argentina.
 
  ICII was incorporated in California in 1986. The Company's principal
executive offices are located at 23550 Hawthorne Boulevard, Building One, Suite
110, Torrance, California 90505 and its telephone number is (310) 373-1704.
 
                                FUNDING STRATEGY
 
  Pending loan securitization transactions or whole loan sales, the Company has
historically funded its loan originations from warehouse lines of credit and
repurchase facilities, equity and debt offerings in the capital markets and
deposits or borrowings at SPB.
 
  As of December 31, 1997, the Company had warehouse lines of credit and
commitments of $434.6 million. The Company plans to use existing warehouse
lines to fund the business operations and securitization programs of its
subsidiaries. Business operations are conducted through divisions of SPB and
are also financed through deposits, capital contributions from ICII to SPB and
Federal Home Loan Bank of San Francisco ("FHLB") and commercial borrowings. At
December 31, 1997, SPB had total deposits of approximately $1.2 billion
(excluding deposits of the Company maintained with SPB).
 
  On January 23, 1997, the Company concurrently completed a tender offer (the
"Tender Offer") for its 9 3/4% Senior Notes due 2004 (the "9 3/4% Senior
Notes") and issued $200.0 million of the 9 7/8% Senior Notes for net proceeds
of approximately $193.8 million. The Company used approximately $73.2 million
of the net proceeds to consummate the Tender Offer and incurred an
extraordinary loss of $4.0 million. Approximately $20.2 million of the 9 3/4%
Senior Notes remain outstanding as of December 31, 1997.
 
  On June 9, 1997, the Trust issued $70.0 million liquidation amount of Par
Securities and $2.2 million liquidation amount of Common Securities in
transactions pursuant to exemptions from the registration requirements of the
Securities Act and applicable state securities laws. The Trust invested the
proceeds thereof in the Old Debentures, which will be exchanged for the New
Debentures, which will be issued pursuant to, and entitled to the benefits of,
the Indenture.
 
                                       6

 
 
                               THE EXCHANGE OFFER
 
  The Trust is making the Exchange Offer of the New Par Securities in reliance
on the position of the Staff of the Division of Corporation Finance of the
Securities and Exchange Commission (the "Commission") as set forth in certain
interpretive letters addressed to third parties in other transactions relating
to the transferability of the exchanged securities following registration.
However, none of the Company, the Trust nor the Subsidiary Guarantors
(collectively, the "Registrants") has sought its own interpretive letter and
there can be no assurance that the Staff of the Division of Corporation Finance
of the Commission would make a similar determination with respect to the
Exchange Offer as it has in such interpretive letters to third parties. Based
on these interpretations by the Staff of the Division of Corporation Finance,
and subject to the two immediately following sentences, the Registrants believe
that New Par Securities issued pursuant to this Exchange Offer in exchange for
Old Par Securities may be offered for resale, resold and otherwise transferred
by a holder thereof (other than a holder who is a broker-dealer) without
further compliance with the registration and prospectus delivery requirements
of the Securities Act, provided that such New Par Securities are acquired in
the ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Par Securities. However, any holder of Old Par Securities who is an
"affiliate" of the Registrants (within the meaning of Rule 405 under the
Securities Act) or who intends to participate in the Exchange Offer for the
purpose of distributing New Par Securities, or any broker-dealer who purchased
Old Par Securities from the Trust to resell them pursuant to Rule 144A under
the Securities Act ("Rule 144A") or any other available exemption under the
Securities Act, (a) will not be able to rely on the interpretations of the
Staff of the Division of Corporation Finance of the Commission set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Old Par Securities in the Exchange Offer and (c) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Old Par Securities unless
such sale is made pursuant to an exemption from such requirements. In addition,
as described below, if any broker-dealer holds Old Par Securities acquired for
its own account as a result of market-making or other trading activities and
exchanges such Old Par Securities for New Par Securities, then such broker-
dealer must deliver a prospectus meeting the requirements of the Securities Act
in connection with any resales of such New Par Securities.
 
  Each holder of Old Par Securities who wishes to exchange Old Par Securities
for New Par Securities in the Exchange Offer will be required to represent that
(i) it is not an "affiliate" of any of the Registrants (ii) any New Par
Securities to be received by it are being acquired in the ordinary course of
its business, (iii) it has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of
such New Par Securities, and (iv) if such holder is not a broker-dealer, such
holder is not engaged in, and does not intend to engage in, a distribution
(within the meaning of the Securities Act) of such New Par Securities. In
addition, the Registrants may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Registrants (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934 (the "Exchange Act")) on behalf of whom such holder holds
the Par Securities to be exchanged in the Exchange Offer. Each broker-dealer
that receives New Par Securities for its own account pursuant to the Exchange
Offer must acknowledge that it acquired the New Par Securities for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Par Securities.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Based on the position
taken by the Staff of the Division of Corporation Finance of the Commission in
the interpretive letters referred to above, the Registrants believe that
broker-dealers who acquired Old Par Securities for their own accounts, as a
result of market-making activities or other trading activities ("Participating
Broker-Dealers") may fulfill their prospectus delivery requirements with
respect to the New Par Securities received upon exchange of such Old
 
                                       7

 
Par Securities with this Prospectus, as it may be amended or supplemented from
time to time. Subject to certain exceptions, the Registrants have agreed that
this Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of such New
Par Securities for a period ending one year after the Registration Statement of
which this Prospectus constitutes a part is declared effective. Any
Participating Broker-Dealer who is an "affiliate" of the Registrants (within
the meaning of Rule 405 under the Securities Act) may not rely on such
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. See "The Exchange Offer--"Purpose and Effect."
 
                                 THE SECURITIES
 
  The Par Securities represent undivided beneficial ownership interests in the
assets of the Trust. The Company indirectly owns all of the beneficial
ownership interests represented by the Common Securities of the Trust. On June
9, 1997, the Trust issued $70,000,000 liquidation amount of Par Securities and
$2,165,000 liquidation amount of Common Securities in transactions pursuant to
exemptions from the registration requirements of the Securities Act and
applicable state securities laws. The Trust exists for the sole purposes of
issuing the Trust Securities and investing the proceeds thereof in the Old
Debentures, which will be exchanged for the New Debentures. The New Debentures
will evidence the same class of debt as the Old Debentures and will be issued
pursuant to, and entitled to the benefits of, the Indenture.
 
  The Debentures will mature on June 15, 2032, or earlier in certain
circumstances following the occurrence of a Tax Event. A "Tax Event" means the
receipt by the Company of an opinion of independent tax counsel to the Company,
experienced in such matters, to the effect that, as a result of any amendment
to, change in or announced proposed change in the laws (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is adopted or which proposed change,
pronouncement or decision is announced on or after the date of original
issuance of the Par Securities, there is more than an insubstantial risk that
(i) the Trust is, or will be within 90 days of the date of such opinion,
subject to United States federal income tax with respect to income received or
accrued on the Debentures, (ii) interest payable by the Company on such
Debentures is not, or within 90 days of the date of such opinion, will not be,
deductible by the Company, in whole or in part, for United States federal
income tax purposes, or (iii) the Trust is, or will be within 90 days of the
date of such opinion, subject to more than a de minimis amount of other taxes,
duties or other governmental charges. See "Description of Securities--
Redemption--Special Event Redemption or Distribution of Debentures; Shortening
of Stated Maturity." The Par Securities will have a preference under certain
circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the Common Securities. See
"Description of Securities--Subordination of Common Securities."
 
  Holders of Par Securities are entitled to receive cumulative cash
distributions ("Distributions"), accumulating from the date of original
issuance, at a rate per annum equal to 10 1/4% (the "Initial Distribution
Rate") of the liquidation amount of $1,000 per Par Security from the date of
original issuance until but excluding the Remarketing Settlement Date.
"Remarketing Settlement Date" means the Scheduled Remarketing Settlement Date
on which purchases and sales of Par Securities pursuant to a Remarketing are
consummated. "Scheduled Remarketing Settlement Date" means June 14, 2002, or
such other date determined pursuant to this definition, unless a Trust
Enforcement Event has occurred and is continuing on the 25th Business Day prior
to such Scheduled Remarketing Settlement Date, in which case the Scheduled
Remarketing Settlement Date will be the 30th Business Day after the date of
cure or waiver of such Trust Enforcement Event; provided that if (x) purchases
and sales of Par Securities pursuant to a Remarketing are not consummated on
any Scheduled Remarketing Settlement Date for any reason (including the
Company's failure to make the deposit required in the event of a Special
Mandatory Redemption) other than the occurrence and continuance of any other
Trust
 
                                       8

 
Enforcement Event or if (y) the Company fails to redeem Debentures in
connection with a Tax Opinion Redemption after cancelling the Remarketing, the
next Scheduled Remarketing Settlement Date will be the 30th Business Day after
such Scheduled Remarketing Settlement Date. From and after the Remarketing
Settlement Date, holders of Par Securities will be entitled to receive
Distributions at the rate per annum that results from the implementation of the
remarketing procedures described herein (the "Remarketing") consummated on the
Remarketing Settlement Date. See "Prospectus Summary--Remarketing" and
"Description of Securities--Remarketing." The Remarketing is scheduled to occur
on June 11, 2002, and the Remarketing Settlement Date is scheduled to be June
14, 2002. Distributions accumulate and are payable semi-annually in arrears on
June 15th (June 14 in 2002) and December 15th of each year commencing December
15, 1997, and on the Scheduled Remarketing Settlement Date. At all times, the
distribution rate in effect on the Par Securities (the "Applicable Distribution
Rate"), the distribution payment dates and other payment dates for the Par
Securities will correspond to the interest rate, interest payment dates and
other payment dates for the Debentures, which are the sole assets of the Trust.
See "Description of Securities--Distributions."
 
  The Company guarantees the payment of Distributions and payments on
liquidation of the Trust or redemption of the Par Securities, but only in each
case to the extent of funds held by the Trust, as described herein. See
"Description of Trust Guarantee." If the Company does not make interest
payments on the Debentures held by the Trust, the Trust will have insufficient
funds to pay Distributions on the Par Securities.
 
  The Debentures are fully, unconditionally and jointly and severally
guaranteed on a senior unsecured basis by each of the Subsidiary Guarantors,
which consist of all of the Company's Restricted Subsidiaries other than
Southern Pacific Bank ("SPB") and the Special Purpose Subsidiaries (as defined
herein under "Description of Debentures--Certain Definitions") until the
Remarketing Settlement Date. The Subsidiary Guarantees will be released on the
Remarketing Settlement Date.
 
  The Company's obligations under the Trust Guarantee, taken together with its
obligations under the Debentures and the Indenture, including its obligation to
pay all costs, expenses and liabilities of the Trust (other than with respect
to the Par Securities), constitute a full and unconditional guarantee of all of
the Trust's obligations under the Par Securities and the Declaration of Trust.
Until the Remarketing Settlement Date, the Trust Debentures and the Trust
Guarantee will be general unsecured obligations of the Company ranking on a
parity with all Indebtedness of the Company, if any, that is not subordinated
to the Debentures or the Trust Guarantee and senior to any Indebtedness of the
Company that is subordinated to the Debentures or the Trust Guarantee. Until
the Remarketing Settlement Date, when the Subsidiary Guarantees will be
released, the Subsidiary Guarantees will rank on a parity with all Indebtedness
of the Subsidiary Guarantors, if any, that is not subordinated to the
Subsidiary Guarantees and senior to any Indebtedness of the Subsidiary
Guarantors that is subordinated to the Subsidiary Guarantees. Until the
Remarketing Settlement Date, the Debentures and the Trust Guarantee will be
effectively subordinated to all Indebtedness and other liabilities of SPB and
the Special Purpose Subsidiaries, and the Debentures, the Guarantee and the
Subsidiary Guarantees will be effectively subordinated to secured Indebtedness
of the Company and the Subsidiary Guarantors. As of December 31, 1997, after
giving effect to the sale of the Par Securities by the Trust (the "Offering")
and the application of proceeds thereof, the Debentures and the Trust Guarantee
would have been effectively subordinated to approximately $1.3 billion of
deposits and other borrowings at SPB and the Debentures, the Trust Guarantee
and the Subsidiary Guarantees would have been effectively subordinated to
approximately $109.8 million of secured Indebtedness of the Subsidiary
Guarantors.
 
  After the Remarketing Settlement Date, the Debentures and the Trust Guarantee
will be subordinated and junior in right of payment to all Senior Debt of the
Company and will be effectively subordinated to all Indebtedness and other
liabilities of all the Subsidiaries of the Company. "Senior Debt" means all
Indebtedness permitted to be incurred by the Company under the terms of the
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Debentures and all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the
 
                                       9

 
foregoing, Senior Debt does not include (i) any liability for federal, state,
local or other taxes owed or owing by the Company, (ii) any Indebtedness of the
Company to any of its Subsidiaries or other Affiliates, (iii) any trade
payables or (iv) any Indebtedness that is incurred in violation of the
Indenture. As of December 31, 1997, after giving effect to the Offering, the
application of proceeds thereof and the Remarketing, the Debentures and the
Trust Guarantee would have been subordinated to approximately $219.8 million of
Senior Debt of the Company and would have been effectively subordinated to
approximately $1.4 billion of Indebtedness of the Company's Subsidiaries
(including approximately $1.3 billion of deposits and other borrowings at SPB
and approximately $109.8 million of secured Indebtedness of the Subsidiary
Guarantors, but not including the Trust's guarantee of $200.0 million of the 9
7/8% Senior Notes due 2007 (the "9 7/8% Senior Notes")). After the Remarketing
Settlement Date, the terms of the Debentures place no limitation on the amount
of Indebtedness that may be incurred by the Company or on the amount of
liabilities and obligations of the Company's subsidiaries. See "Description of
Debentures--Ranking."
 
  Following the Remarketing Settlement Date, the Company has the right to defer
payment of interest on the Debentures at any time or from time to time for a
period not exceeding 10 consecutive semi-annual periods with respect to each
deferral period (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the Debentures. "Stated
Maturity" means, with respect to any installment of principal or interest on
any series of Indebtedness, the date on which such payment of principal or
interest was scheduled to be paid in the original documentation governing such
Indebtedness, and shall not include any contingent obligations to repay, redeem
or repurchase any such principal or interest prior to the date originally
scheduled for the payment thereof. Upon the termination of any such Extension
Period and the payment of all amounts then due on June 15th (June 14 in 2002)
and December 15th of each year, commencing December 15, 1997, and on the
Scheduled Remarketing Settlement Date (each, an "Interest Payment Date"), the
Company may elect to begin a new Extension Period subject to the requirements
set forth herein. Accordingly, there could be multiple Extension Periods of
varying lengths throughout the term of the Debentures. If interest payments on
the Debentures are so deferred, distributions on the Par Securities will also
be deferred and the Company may not, and may not permit any subsidiary of the
Company to, (i) declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, the Company's
capital stock or (ii) make any payment of principal, interest or premium, if
any, on or repay, repurchase or redeem any debt securities that rank on a
parity with or junior to the Debentures or make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks on a parity with or junior to
the Debentures (other than (a) dividends or distributions in common stock of
the Company, (b) payments under the Trust Guarantee, (c) any declaration of a
dividend in connection with the implementation of a stockholders' rights plan,
or the issuance of stock under any such plan in the future, or the redemption
or repurchase of any such rights pursuant thereto, and (d) purchases of common
stock related to the issuance of common stock or rights under any of the
Company's benefit plans). During an Extension Period, interest on the
Debentures will continue to accrue (and the amount of Distributions to which
holders of the Par Securities are entitled will accumulate) at the Adjusted
Distribution Rate (as defined herein under "--The Exchange Offer--The New Par
Securities--Remarketing"), compounded semi-annually, and holders of the Par
Securities will be required to accrue interest income for United States federal
income tax purposes prior to receipt of the cash related to such interest
income. See "Description of Debentures--Option to Extend Interest Payment
Period" and "United States Federal Income Tax Consequences--Interest Income and
Original Issue Discount."
 
  The Par Securities are subject to mandatory redemption, in whole or in part,
upon repayment of the Debentures held by the Trust at maturity or their earlier
redemption, in an amount equal to the amount of related Debentures maturing or
being redeemed and at a redemption price equal to the redemption price of such
Debentures, in each case plus accumulated and unpaid Distributions thereon to
the date of redemption.
 
  The Debentures are redeemable at the option of the Company, in whole or in
part, at any time or from time to time through and including June 15, 2001, at
a redemption price equal to the greater of (i) 100% of the principal amount of
such Debentures or (ii) the present value of the principal amount of such
Debentures if such
 
                                       10

 
Debentures were redeemed on June 14, 2002 together with scheduled payments of
interest from the prepayment date to but excluding June 14, 2002 (the
"Remaining Life") discounted at the Adjusted Treasury Rate (as defined herein),
plus, in each case, accrued and unpaid interest, if any, to the date of
redemption. On and after June 15, 2012, the Debentures are redeemable prior to
maturity, at the option of the Company, in whole or in part, at a redemption
price equal to 100% of the principal amount thereof, plus a premium which will
decline ratably on each June 15 thereafter to zero on and after June 15, 2022,
plus accrued and unpaid interest thereon, if any, to the date of redemption. If
the Exchange Offer has occurred, any Old Par Securities which have not been
exchanged for New Par Securities pursuant to the Exchange Offer will be
mandatorily redeemed by the Company on the Remarketing Settlement Date, as
described under "Description of Securities--Redemption--Transfer Restricted
Security Redemption." After the Remarketing Settlement Date, the Debentures are
also redeemable by the Company at any time, in whole (but not in part), upon
the occurrence and continuation of a Special Event, at a redemption price equal
to 100% of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date of redemption, subject to the further conditions
described under "Description of Securities--Redemption."
 
  If, by 4:00 P.M., New York City time, on any Scheduled Remarketing Date (the
third Business Day prior to any Scheduled Remarketing Settlement Date), Lehman
Brothers Inc. (the "Remarketing Agent") is unable to remarket, at a price of
$1,000 per Par Security, all of the Par Securities tendered or deemed tendered
for purchase in the Remarketing on such Scheduled Remarketing Date, then such
unsold Par Securities will be exchanged on the related Scheduled Remarketing
Settlement Date with the Trust for Debentures having an aggregate principal
amount equal to the aggregate liquidation amount of such unsold Par Securities
and such Debentures shall be immediately redeemed, unless as a result of such
redemption, less than $25.0 million principal amount of Debentures would remain
outstanding. In such latter event, the Company is required to redeem on such
Scheduled Remarketing Settlement Date all of the Debentures and the
consummation of purchases and sales of Par Securities pursuant to such
Remarketing will not occur. In either such case (a "Special Mandatory
Redemption"), the redemption price of the Debentures will be 100% of the
principal amount of the Debentures so redeemed. See "Description of
Securities--Remarketing."
 
  Upon the occurrence and continuation of a Special Event, the Company will
have the right, if certain conditions are met, (i) to terminate the Trust and
cause the Debentures to be distributed to the holders of the Par Securities in
exchange therefor upon liquidation of the Trust, (ii) to shorten the Stated
Maturity of the Debentures, in the case of a Tax Event, to a date not earlier
than June 14, 2012, or (iii) after the Scheduled Remarketing Date, to redeem
the Debentures in whole (but not in part) within 90 days following the
occurrence of such Special Event and thereby cause a mandatory redemption of
the Par Securities. See "Description of Securities--Redemption--Special Event
Redemption or Distribution of Debentures; Shortening of Stated Maturity."
Moreover, the Debentures are also redeemable on the Remarketing Settlement Date
in connection with a Tax Opinion Redemption. See "Description of Securities--
Redemption--Tax Opinion Redemption."
 
  In the event of the liquidation of the Trust, after satisfaction of the
claims of creditors of the Trust, if any, as provided by applicable law, the
holders of the Par Securities will be entitled to receive a liquidation amount
of $1,000 per Par Security, plus accumulated and unpaid Distributions thereon
to the date of payment, which may be in the form of a distribution of such
amount in Debentures as described above. If such liquidation amount can be paid
only in part because the Trust has insufficient assets available to pay in full
the aggregate liquidation amount, then the amounts payable directly by the
Trust on the Par Securities will be paid on a pro rata basis. The holders of
the Common Securities will be entitled to receive distributions upon any such
liquidation pro rata with the holders of the Par Securities, except that if an
Indenture Event of Default (as defined herein under "Description of
Debentures--Indenture Events of Default") has occurred and is continuing, the
Par Securities will have a priority over the Common Securities. See
"Description of Securities--Liquidation Distribution Upon Dissolution."
 
                                       11

 
                               THE EXCHANGE OFFER
 
  On June 9, 1997, the Trust issued $70,000,000 liquidation amount of Old Par
Securities. The Old Par Securities were sold pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. Lehman Brothers Inc. (the "Initial
Purchaser"), as a condition to their purchase of the Old Par Securities,
required that the Trust, the Company and the Subsidiary Guarantors agreed to
commence the Exchange Offer following the offering of the Old Par Securities.
The New Par Securities will evidence the same class of security as the Old Par
Securities and will be issued pursuant to, and entitled to the benefits of, the
Indenture. As used herein, the term "Par Securities" means the Old Par
Securities and the New Par Securities, treated as a single class.
 
SECURITIES OFFERED....  Up to $70,000,000 aggregate liquidation amount of New
                        Par Securities which have been registered under the
                        Securities Act. The terms of the New Par Securities and
                        the Old Par Securities are identical in all material
                        respects, except for certain transfer restrictions
                        relating to the Old Par Securities.
 
THE EXCHANGE OFFER....  The New Par Securities are being offered in exchange
                        for a like principal amount of Old Par Securities. The
                        issuance of the New Par Securities is intended to
                        satisfy obligations of the Trust, the Company and the
                        Subsidiary Guarantors contained in the Registration
                        Rights Agreement, dated June 9, 1997, among the Trust,
                        the Company, the Subsidiary Guarantors and the Initial
                        Purchaser (the "Registration Rights Agreement"). The
                        Company will issue, promptly after the Expiration Date,
                        $1,000 liquidation amount of New Par Securities in
                        exchange for each $1,000 liquidation amount of
                        outstanding Old Par Securities tendered and accepted in
                        connection with the Exchange Offer. For a description
                        of the procedures for tendering Old Par Securities, see
                        "The Exchange Offer--Procedures for Tendering Old Par
                        Securities."
 
TENDERS, EXPIRATION
 DATE; WITHDRAWAL.....  The Exchange Offer will expire at 5:00 P.M., New York
                        City time, on June 22, 1998, or such later date and
                        time to which it is extended (as so extended, the
                        "Expiration Date"). A tender of Old Par Securities
                        pursuant to the Exchange Offer may be withdrawn at any
                        time prior to the Expiration Date. Any Old Par Security
                        not accepted for exchange for any reason will be
                        returned without expense to the tendering holder
                        thereof as promptly as practicable after the expiration
                        or termination of the Exchange Offer.
 
PROCEDURES FOR
 TENDERING OLD PAR      
 SECURITIES...........  Tendering holders of Old Par Securities must complete   
                        and sign a Letter of Transmittal in accordance with the 
                        instructions contained therein and forward the same by  
                        mail, facsimile or hand delivery, together with any     
                        other required documents, to the Exchange Agent, either 
                        with the Old Par Securities to be tendered or in        
                        compliance with the specified procedures for guaranteed 
                        delivery of Old Par Securities. Certain brokers,        
                        dealers, commercial banks, trust companies and other    
                        nominees may also effect tenders by book-entry          
                        transfer. Holders of Old Par Securities registered in   
                        the name of a broker, dealer, commercial bank, trust    
                        company or other nominee are urged to contact such      
                        person promptly if they wish to tender Old Par          
                        Securities pursuant to the Exchange Offer. See "The     
                        Exchange Offer--Procedures for Tendering Old Par        
                        Securities."

                                       12

 
 
                        Letters of Transmittal and certificates representing
                        Old Par Securities should not be sent to the Trust, the
                        Company, or the Subsidiary Guarantors. Such documents
                        should only be sent to the Exchange Agent. Questions
                        regarding how to tender and requests for information
                        should be directed to the Exchange Agent. See "The
                        Exchange Offer-Exchange Agent."
 
ACCRUED                 
 DISTRIBUTIONS........  Each New Par Security will pay cumulative distributions
                        from June 9, 1997. Holders of the Old Par Securities   
                        whose Old Par Securities are accepted for exchange will
                        not receive any accumulated distributions on such Old  
                        Par Securities and will be deemed to have waived the   
                        right to receive any distributions on such Old Par     
                        Securities accumulated from and after June 9, 1997.     

FEDERAL INCOME TAX
 CONSEQUENCES.........  The exchange pursuant to the Exchange Offer will not
                        constitute a taxable event for United States federal
                        income tax purposes. Holders of Old Par Securities
                        should review the information set forth under "United
                        States Federal Income Tax Consequences" prior to
                        tendering Old Par Securities in the Exchange Offer.
 
USE OF PROCEEDS.......  There will be no proceeds to the Company from the
                        exchange pursuant to the Exchange Offer.
 
EXCHANGE AGENT........  The Chase Trust Company of California is serving as the
                        Exchange Agent in connection with the Exchange Offer.
 
SHELF
 REGISTRATIONSTATEMENT. Under certain circumstances described in the
                        Registration Rights Agreement, certain holders of Par
                        Securities (including holders who are not permitted to
                        participate in the Exchange Offer or who may not freely
                        resell New Par Securities received in the Exchange
                        Offer) may require the Trust, the Company and the
                        Subsidiary Guarantors to file, and use best efforts to
                        cause to become effective, a shelf registration
                        statement under the Securities Act, which would cover
                        resales of Par Securities by such holders. See "The
                        Exchange Offer--Purpose and Effect."
 
CONDITIONS TO THE
 EXCHANGE OFFER.......  The Exchange Offer is not conditioned on any minimum
                        principal amount of Old Par Securities being tendered
                        for exchange. The Exchange Offer is subject to certain
                        other customary conditions, each of which may be waived
                        by the Trust. See "The Exchange Offer--Certain
                        Conditions to the Exchange Offer."
 
CONSEQUENCES OF
 FAILURE TO EXCHANGE..  Any Old Par Securities not tendered and accepted in the
                        Exchange Offer will remain outstanding and will be
                        entitled to all the same rights and will be subject to
                        the same limitations applicable thereto under the
                        Declaration (except for those rights which terminate
                        upon consummation of the Exchange Offer). Following
                        consummation of the Exchange Offer, the holders of Old
                        Par Securities will continue to be subject to all of
                        the existing restrictions upon transfer thereof and
                        neither the Company nor the Trust will have any further
                        obligation to such holders (other than under certain
                        limited circumstances to provide for registration under
                        the Securities Act of the Old Par Securities held by
                        them). Any Old Par Securities which have not been
 
                                       13

 
                        exchanged for New Par Securities pursuant to the
                        Exchange Offer will be mandatorily redeemed by the
                        Company on the Remarketing Settlement Date, as
                        described under "Description of Securities--
                        Redemption--Transfer Restricted Security Redemption."
                        To the extent that Old Par Securities are tendered and
                        accepted in the Exchange Offer, a holder's ability to
                        sell untendered Old Par Securities could be adversely
                        affected. See "Risk Factors--Consequences of Failure to
                        Exchange Old Par Securities."
 
                             THE NEW PAR SECURITIES
 
THE TRUST.............  Imperial Credit Capital Trust I, a Delaware statutory
                        business trust. The sole assets of the Trust are the
                        Debentures.
 
SECURITIES OFFERED....  $70,000,000 aggregate liquidation amount of the Trust's
                        Remarketed Par Securities, Series B, which have been
                        registered under the Securities Act (liquidation amount
                        $1,000 per Par Security). The terms of the New Par
                        Securities are identical in all material respects to
                        the terms of the Old Par Securities, except for certain
                        transfer restrictions relating to the Old Par
                        Securities. See "The Exchange Offer--Purpose and Effect
                        of the Exchange Offer," "Description of Securities" and
                        "Description of Old Securities."
 
DISTRIBUTIONS.........  From the date of original issuance until but excluding
                        the Remarketing Settlement Date, holders of the Par
                        Securities will be entitled to receive Distributions at
                        a rate per annum equal to 10 1/4% of the liquidation
                        amount of $1,000 per Par Security. From and after the
                        Remarketing Settlement Date, holders of Par Securities
                        will be entitled to receive Distributions at the rate
                        per annum that results from the Remarketing consummated
                        on the Remarketing Settlement Date. See "--Remarketing"
                        below. The Remarketing is scheduled to occur on June
                        11, 2002, and the Remarketing Settlement Date is
                        scheduled to be June 14, 2002. See "Description of
                        Securities--Distributions." Distributions accumulate
                        and will be payable semi-annually in arrears on June
                        15th (June 14 in 2002) and December 15th of each year,
                        commencing December 15, 1997, and on each Scheduled
                        Remarketing Settlement Date. The distribution rate,
                        distribution payment dates and other payment dates for
                        the Par Securities will correspond to the interest
                        rate, interest payment dates and other payment dates on
                        the Debentures. See "Description of Securities."
 
DEBENTURES............  The Trust invested the proceeds from the issuance of
                        the Trust Securities in an equivalent amount of
                        Debentures of the Company. The Debentures will mature
                        on June 15, 2032, or earlier in certain circumstances,
                        following the occurrence of a Tax Event (the "Stated
                        Maturity"). See "Risk Factors--Ranking of Obligations
                        Under the Debentures, the Trust Guarantee, and the
                        Subsidiary Guarantees of Note to Investors" and
                        "Description of Debentures--Ranking."
 
SUBSIDIARY              
GUARANTEES............  Until the Remarketing Settlement Date, the Debentures  
                        will be fully and unconditionally and jointly and      
                        severally guaranteed on a senior unsecured basis by    
                        each of the Company's Restricted Subsidiaries (as      
                        defined herein under "Description of Debentures--      
                        Certain Definitions") other than SPB and the Special   
                        Purpose Subsidiaries (the "Subsidiary Guarantors"). The
                        Subsidiary Guarantees will be released on the          
                        Remarketing Settlement Date. See "Description of       
                        Debentures--Subsidiary Guarantees."                     
 
                                       14

 
 
TRUST GUARANTEE.......  Payment of distributions out of monies held by the
                        Trust, and payments on liquidation of the Trust or the
                        redemption of Par Securities, are guaranteed by the
                        Company to the extent the Trust has funds available
                        therefor. If the Company does not make principal or
                        interest payments on the Debentures, the Trust will not
                        have sufficient funds to make Distributions on the Par
                        Securities, in which event the Trust Guarantee shall
                        not apply to such Distributions until the Trust has
                        sufficient funds available therefor. The Company's
                        obligations under the Trust Guarantee, taken together
                        with its obligations under the Declaration of Trust,
                        the Debentures and the Indenture, including its
                        obligation to pay all costs, expenses and liabilities
                        of the Trust (other than with respect to the Par
                        Securities), constitute a full and unconditional
                        guarantee of all of the Trust's obligations under the
                        Par Securities. See "Description of Trust Guarantee"
                        and "Relationship Among the Par Securities, the
                        Debentures and the Trust Guarantee."
 
RANKING...............  Until the Remarketing Settlement Date, the Debentures
                        and the Trust Guarantee will be general unsecured
                        obligations of the Company ranking on a parity with all
                        Indebtedness of the Company, if any, that is not
                        subordinated to the Debentures or Trust Guarantee and
                        senior to any Indebtedness of the Company that is
                        subordinated to the Debentures or Trust Guarantee.
                        Until the Remarketing Settlement Date, when the
                        Subsidiary Guarantees will be released, the Subsidiary
                        Guarantees will rank on a parity with all Indebtedness
                        of the Subsidiary Guarantors, if any, that is not
                        subordinated to the Subsidiary Guarantees and senior to
                        any Indebtedness of the Subsidiary Guarantors that is
                        subordinated to the Subsidiary Guarantees. Until the
                        Remarketing Settlement Date, the Debentures and the
                        Subsidiary Guarantees will be effectively subordinated
                        to all Indebtedness and other liabilities of SPB and
                        the Special Purpose Subsidiaries, and the Debentures,
                        the Trust Guarantee and the Subsidiary Guarantees will
                        be effectively subordinated to secured Indebtedness of
                        the Company and the Subsidiary Guarantors. As of
                        December 31, 1997, after giving effect to the Offering
                        and the application of proceeds thereof, the Debentures
                        and the Trust Guarantee would have been effectively
                        subordinated to approximately $1.3 billion of deposits
                        and other borrowings at SPB and the Debentures, the
                        Trust Guarantee and the Subsidiary Guarantees would
                        have been effectively subordinated to approximately
                        $109.8 million of secured Indebtedness of the
                        Subsidiary Guarantors.
 
                        After the Remarketing Settlement Date, the Debentures
                        and the Trust Guarantee will be subordinated and junior
                        in right of payment to all Senior Debt of the Company,
                        will be effectively subordinated to secured
                        Indebtedness of the Company and will be effectively
                        subordinated to all Indebtedness and other liabilities
                        of all of the Subsidiaries of the Company. As of
                        December 31, 1997, after giving effect to the Offering
                        and the application of proceeds thereof, and the
                        Remarketing, the Debentures and the Trust Guarantee
                        would have been subordinated to approximately
                        $219.8 million of Senior Debt of the Company, and would
                        have been effectively subordinated to approximately
                        $1.4 billion of Indebtedness of the Company's
                        Subsidiaries (including approximately $1.3 billion of
                        deposits and other borrowings at SPB and approximately
                        $109.8 million of secured Indebtedness of the Company's
                        subsidiaries, but not including the Trust's guarantee
                        of $200.0 million of the 9 7/8% Senior Notes).
 
                                       15

 
 
                        ICII is a holding company that conducts substantially
                        all of its business operations through its
                        subsidiaries. For the years ended December 31, 1997,
                        1996 and 1995, approximately 48.2%, 34.8% and 30.2%,
                        respectively, of the Company's total revenue was
                        generated by the operations of ICII, with 51.8%, 65.2%
                        and 69.8%, respectively, being generated by the
                        Company's subsidiaries. Consequently, the Company's
                        operating cash flow and its ability to service its
                        Indebtedness, including the Debentures, are dependent
                        upon the cash flow of the Company's subsidiaries and
                        the payment of funds by such subsidiaries to ICII in
                        the form of loans, dividends or otherwise. The
                        Restricted Subsidiaries are separate and distinct legal
                        entities apart from ICII and each Subsidiary Guarantor
                        has agreed to guarantee payment of the Debentures on a
                        senior unsecured basis until the Remarketing Settlement
                        Date.
 
                        In addition, although a substantial portion of the
                        Company's business is conducted through SPB, SPB is not
                        a Subsidiary Guarantor and SPB's ability to pay
                        dividends to ICII is dependent upon its ability to
                        generate earnings and is subject to a number of
                        regulatory and other restrictions described below.
                        Because SPB will not execute a Subsidiary Guarantee,
                        the Debentures will be effectively subordinated to all
                        indebtedness of SPB. As of December 31, 1997, SPB had
                        approximately $1.3 billion of deposits and other
                        borrowings, all of which would have been effectively
                        senior to the Debentures. In addition, due to these
                        restrictions and SPB's rapid growth, SPB has retained
                        most of its internally generated earnings and has
                        required the infusion of significant amounts of
                        additional capital by ICII. The Company expects such
                        trends to continue for the foreseeable future and has
                        contributed approximately $35.0 million of the proceeds
                        of the 9 7/8% Senior Notes offering to the capital of
                        SPB in the form of subordinated indebtedness. Depending
                        upon SPB's growth, ICII may be required to make
                        additional capital contributions to SPB. There can be
                        no assurance that the Company's operations will
                        generate sufficient cash flow to support payment of
                        interest or principal on the Debentures, or that
                        dividend distributions will be available from SPB or
                        any ICII subsidiary to fund such payments.
 
                        Certain provisions of the Federal Deposit Insurance
                        Corporation Improvements Act of 1991 ("FDICIA")
                        generally prohibit any state nonmember bank (including,
                        for this purpose, SPB) from making a capital
                        distribution (including payment of dividends) if it
                        would cause the institution to become
                        "undercapitalized" (as defined for purposes of those
                        provisions). See "Business--Regulation--Thrift and Loan
                        Operations." In addition, the Federal Deposit Insurance
                        Corporation (the "FDIC") has advised insured
                        institutions that the payment of cash dividends in
                        excess of current earnings from operations is
                        inappropriate and may be cause for supervisory action.
                        As a result of this policy, 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. 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 to ICII in some circumstances might
                        constitute unsafe or unsound practices and
 
                                       16

 
                        prohibit payment of dividends. Under California law, a
                        thrift and loan is subject to certain leverage
                        limitations that are not generally applicable to
                        commercial banks or savings and loan associations. In
                        particular, a financial institution that has been in
                        operation in excess of 60 months may have outstanding
                        at any time deposits not to exceed 20 times paid-up and
                        unimpaired capital and surplus as restricted by the
                        institution's by-laws not to be available for
                        dividends, with the exact limitation subject to order
                        by the California Commissioner of Corporations (the
                        "Commissioner"). The Commissioner has issued an order
                        to SPB authorizing the maximum 20 times leverage
                        standard.
 
                        Under California law, SPB is not permitted to declare
                        dividends on its capital stock unless it has at least
                        $750,000 of unimpaired capital plus additional capital
                        stock of $50,000 for each branch office. In addition,
                        no distribution of dividends is permitted unless: (i)
                        such distribution would not exceed a thrift and loan's
                        retained earnings, (ii) any payment would not result in
                        a violation of the approved minimum capital to thrift
                        and loan deposit leverage ratio and (iii) in the
                        alternative, after giving effect to the distribution,
                        either (y) the sum of a thrift and loan's assets (net
                        of goodwill, capitalized research and development
                        expenses and deferred charges) would not be less than
                        125% of its liabilities (net of deferred taxes, income
                        and other credits), and (z) current assets would not be
                        less than current liabilities (except that if a thrift
                        and loan's average earnings before taxes for the last
                        two years had been less than average interest expense,
                        current assets must be not less than 125% of current
                        liabilities). A portion of SPB's capital and surplus is
                        currently restricted from the payment of dividends. As
                        of December 31, 1997, the amount SPB could dividend to
                        ICII under California law would be limited to
                        $32.1 million. See "Risk Factors--Ranking of
                        Obligations under the Debentures, the Trust Guarantee
                        and the Subsidiary Guarantees of Note to Investors."
                        "Description of Debentures--Ranking" and "Description
                        of Trust Guarantee--Status of Trust Guarantee."
 
REMARKETING...........  On the Scheduled Remarketing Date, the Remarketing
                        Agent will use commercially reasonable efforts to
                        remarket, at a price equal to 100% of the liquidation
                        amount thereof, Par Securities (or, if the Debentures
                        have been distributed to holders of the Par Securities
                        in liquidation of the Trust, Debentures) which holders
                        of the Par Securities have tendered or have been deemed
                        to have tendered for purchase in the Remarketing. In
                        the Remarketing, the Remarketing Agent will determine,
                        after canvassing the market and considering prevailing
                        market conditions at the time for the Par Securities
                        and similar securities, the lowest distribution rate
                        per annum, if any, on the Par Securities, not exceeding
                        the rate per annum, determined on the Scheduled
                        Remarketing Date by the Remarketing Agent in its
                        discretion, equal to the greater of (a) the 30-year
                        Treasury Rate plus 600 basis points and (b) a
                        nationally-recognized high-yield index rate for
                        similarly-rated issues, plus 100 basis points (the
                        "Maximum Adjusted Distribution Rate"), that will enable
                        it to remarket, at a price of $1,000 per Par Security,
                        all Par Securities tendered or deemed tendered for
                        purchase in the Remarketing (the "Adjusted Distribution
                        Rate"). Notwithstanding the foregoing, if the
                        Remarketing Agent is able to market some, but is unable
                        to remarket all, of the Par Securities tendered or
                        deemed tendered for purchase in the
 
                                       17

 
                        Remarketing, the Adjusted Distribution Rate will be the
                        highest rate, not exceeding the Maximum Adjusted
                        Distribution Rate, required to remarket the Par
                        Securities sold in the Remarketing. See "Description of
                        Par Securities--Remarketing."
 
                        Each holder of Par Securities will be given the
                        opportunity to indicate irrevocably, no later than the
                        second Business Day prior to the Scheduled Remarketing
                        Date (the "Election Date"), whether it wishes (i) to
                        tender all or any portion of such Par Securities for
                        purchase in the Remarketing or (ii) to retain and not
                        have all or any portion of the Par Securities owned by
                        it remarketed in the Remarketing. IF ANY HOLDER OF PAR
                        SECURITIES FAILS TIMELY TO DELIVER A NOTICE TO THE
                        PROPERTY TRUSTEE OF ITS ELECTION (I) TO RETAIN AND NOT
                        TO HAVE ALL OR ANY PORTION OF THE PAR SECURITIES OWNED
                        BY IT REMARKETED IN THE REMARKETING TO BE CONDUCTED ON
                        THE SCHEDULED REMARKETING DATE OR (II) TO TENDER ALL OR
                        ANY PORTION OF SUCH PAR SECURITIES FOR PURCHASE IN THE
                        REMARKETING (A "NOTICE OF ELECTION"), THE PAR
                        SECURITIES OWNED BY IT WILL BE DEEMED TO BE TENDERED
                        FOR PURCHASE IN THE REMARKETING. See "Description of
                        Securities--Remarketing."
 
                        If a holder of Par Securities has indicated by timely
                        delivery of a Notice of Election that it wishes to
                        tender Par Securities held by it for purchase in the
                        Remarketing and such holder desires to purchase Par
                        Securities in the Remarketing at or above a specified
                        rate, such holder should separately notify the
                        Remarketing Agent in accordance with the procedures
                        specified in the Notice of Remarketing and indicate the
                        specified rate per annum at or above which such holder
                        will purchase Par Securities. In such case, the
                        Remarketing Agent will give priority to such holder's
                        purchase of a number of Par Securities equal to the
                        number of Par Securities tendered by such holder in the
                        Remarketing, provided that the Adjusted Distribution
                        Rate is not less than the specified rate.
 
                        If, by 4:00 P.M., New York City time, on any Scheduled
                        Remarketing Date, the Remarketing Agent is unable to
                        remarket, at a price of $1,000 per Par Security, all of
                        the Par Securities tendered or deemed tendered for
                        purchase in the Remarketing on such Scheduled
                        Remarketing Date, then such unsold Par Securities will
                        be exchanged on the related Scheduled Remarketing
                        Settlement Date with the Trust for Debentures having an
                        aggregate principal amount equal to the aggregate
                        liquidation amount of such unsold Par Securities and
                        such Debentures shall be immediately redeemed, unless
                        as a result of such redemption, less than $25.0 million
                        principal amount of Debentures would remain
                        outstanding. In such latter event, the Company is
                        required to redeem on such Scheduled Remarketing
                        Settlement Date all of the Debentures and the
                        consummation of purchases and sales of Par Securities
                        pursuant to such Remarketing will not occur. In either
                        such case, the redemption price of the Debentures will
                        be 100% of the principal amount of the Debentures so
                        redeemed.
 
                        AS A RESULT OF SUCH SPECIAL MANDATORY REDEMPTION, ALL
                        PAR SECURITIES TENDERED OR DEEMED TENDERED FOR PURCHASE
                        IN THE REMARKETING WILL BE PURCHASED IN THE
                        REMARKETING, OR MANDATORILY REDEEMED, ON THE
                        REMARKETING SETTLEMENT DATE.
 
                                       18

 

RIGHT TO DEFER          
INTEREST..............  Following the Remarketing Settlement Date, the Company 
                        has the right to defer payment of interest on the      
                        Debentures by extending the interest payment period on 
                        the Debentures, from time to time, for up to 10        
                        consecutive semi-annual periods. There could be        
                        multiple Extension Periods of varying lengths          
                        throughout the term of the Debentures. If interest     
                        payments on the Debentures are so deferred,            
                        distributions on the Par Securities will also be       
                        deferred for an equivalent period and the Company may  
                        not, and may not permit any subsidiary of the Company  
                        to, (i) declare or pay any dividends or distributions  
                        on, or redeem, purchase, acquire, or make a liquidation
                        payment with respect to, the Company's capital stock or
                        (ii) make any payment of principal, interest or        
                        premium, if any, on or repay, repurchase or redeem any 
                        debt securities that rank on a parity with or junior to
                        the Debentures or make any guarantee payments with     
                        respect to any guarantee by the Company of the debt    
                        securities of any subsidiary of the Company if such    
                        guarantee ranks on a parity with or junior to the      
                        Debentures (other than (a) dividends or distributions  
                        in common stock of the Company, (b) payments under the 
                        Trust Guarantee, (c) any declaration of a dividend in  
                        connection with the implementation of a stockholders'  
                        rights plan, or the issuance of stock under any such   
                        plan in the future, or the redemption or repurchase of 
                        any such rights pursuant thereto, and (d) purchases of 
                        common stock related to the issuance of common stock or
                        rights under any of the Company's benefit plans).      
                        During an Extension Period, interest on the Debentures 
                        will continue to accrue (and the amount of             
                        Distributions to which holders of the Par Securities   
                        are entitled will accumulate) at the Adjusted          
                        Distribution Rate, compounded semi-annually. During an 
                        Extension Period, holders of Par Securities will be    
                        required to include the stated interest on their pro   
                        rata share of Debentures in their gross income as      
                        original issue discount ("OID") even though the cash   
                        payments attributable thereto have not been made. See  
                        "Description of Debentures--Option to Extend Interest  
                        Payment Period" and "United States Federal Income Tax  
                        Consequences--Interest Income and Original Issue       
                        Discount."                                              

REDEMPTION............  The Trust Securities will be redeemed upon repayment of
                        the Debentures held by the Trust at maturity or their
                        earlier redemption. The Debentures are redeemable at
                        the option of the Company, in whole or in part, at any
                        time or from time to time prior to June 15, 2001, at a
                        redemption price equal to the greater of (i) 100% of
                        the principal amount of such Debentures and (ii) the
                        present value of the principal amount of such
                        Debentures as if redeemed on June 14, 2002, together
                        with scheduled prepayments of interest from the
                        prepayment date to but excluding June 14, 2002,
                        discounted at the Adjusted Treasury Rate, plus, in each
                        case, accrued and unpaid interest, if any, to the date
                        of redemption. On and after June 15, 2012, the
                        Debentures are redeemable by the Company, in whole or
                        in part, at a redemption price equal to 100% of the
                        aggregate principal amount thereof plus a premium which
                        will decline ratably on each June 15 thereafter to zero
                        on and after June 15, 2022, plus accrued and unpaid
                        interest, if any, to the date of redemption. In
                        addition, the Debentures are redeemable at the option
                        of the Company at any time after the Remarketing
                        Settlement Date, in whole, upon the occurrence and
                        continuation of a Special Event, as described under "--
                        Special Event" below, at a redemption price equal to
                        100% of the principal amount thereof plus accrued and
                        unpaid interest to the date of redemption.
 
                                       19

 
 
                        If all Par Securities tendered or deemed tendered in
                        the Remarketing are not remarketed at a price of $1,000
                        per Par Security, Debentures (and, thus, Par
                        Securities) are subject to redemption as part of a
                        Special Mandatory Redemption. As a result, investors
                        who do not validly elect to hold the Par Securities
                        following the Remarketing Settlement Date are entitled
                        to receive, on the Remarketing Settlement Date, an
                        amount equal to 100% of the liquidation amount of such
                        Par Securities. If the Exchange Offer has occurred, any
                        Par Securities which have not been exchanged for New
                        Par Securities pursuant to such Exchange Offer must be
                        redeemed by the Company on the Remarketing Settlement
                        Date, as described under "Description of Securities--
                        Redemption--Transfer Restricted Security Redemption"
                        and "--Registration Rights."
 
SPECIAL EVENT.........  Upon the occurrence and continuation of a Special Event
                        (including a Tax Event), the Company will have the
                        right, if certain conditions are met, (i) to terminate
                        the Trust and cause the Debentures to be distributed to
                        the holders of the Trust Securities in exchange
                        therefor upon liquidation of the Trust, (ii) to shorten
                        the stated maturity of the Debentures, in the case of a
                        Tax Event, to a date not earlier than June 14, 2012, or
                        (iii) after the Scheduled Remarketing Date, to redeem
                        the Debentures in whole (but not in part) within 90
                        days following the occurrence of such Special Event and
                        thereby cause a mandatory redemption of the Trust
                        Securities. See "Description of Securities--
                        Redemption--Special Event Redemption or Distribution of
                        Debentures; Shortening of Stated Maturity." Moreover,
                        the Debentures are redeemable on the Remarketing
                        Settlement Date in connection with a Tax Opinion
                        Redemption. See "Description of Securities--
                        Redemption--Tax Opinion Redemption."
 
LIQUIDATION OF THE      
TRUST.................  In the event of the liquidation of the Trust, after    
                        satisfaction of the claims of creditors of the Trust,  
                        if any, as provided by applicable law, the holders of  
                        the Trust Securities will be entitled to receive a     
                        liquidation amount of $1,000 per Trust Security plus   
                        accumulated and unpaid Distributions thereon to the    
                        date of payment, which may be in the form of a         
                        distribution of such amount in Debentures as described 
                        above. If such liquidation amount can be paid only in  
                        part because the Trust has insufficient assets         
                        available to pay in full the aggregate liquidation     
                        amount, then the amounts payable directly by the Trust 
                        on the Trust Securities shall be paid on a pro rata    
                        basis. The holder of the Common Securities will be     
                        entitled to receive distributions upon any such        
                        liquidation pro rata with the holders of the Par       
                        Securities, except that if an Indenture Event of       
                        Default has occurred and is continuing, the Par        
                        Securities shall have a priority over the Common       
                        Securities. See "Description of Securities--Liquidation
                        Distribution Upon Dissolution."                         
 
                        An explanation of the significance of ratings may be
                        obtained from S&P and Moody's. Generally, rating
                        agencies base their ratings on such material and
                        information, and such of their own investigations,
                        studies and assumptions, as they deem appropriate. A
                        credit rating of a security is not a recommendation to
                        buy, sell or hold securities. There is no assurance
                        that any rating will apply for any given period of time
                        or that a rating may not be adjusted or withdrawn.
 
                                       20

 
 
ABSENCE OF MARKET FOR
THE NEW PAR
SECURITIES............  The New Par Securities will be a new issue of
                        securities for which there currently is no established
                        trading market. Accordingly, there can be no assurance
                        as to the development or liquidity of any market for
                        the New Par Securities. The Company currently is
                        obligated to apply for listing of the New Par
                        Securities, upon request of the holders of a majority
                        in aggregate liquidation amount of the New Par
                        Securities, only in connection with this registration
                        statement covering the New Par Securities, provided
                        that the New Par Securities qualify for listing. See
                        "The Exchange Offer--Procedures for Tendering Par
                        Securities."
 
                                ----------------
 
  FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE PAR SECURITIES, SEE "RISK FACTORS" BEGINNING ON PAGE
26.
 
                                       21

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
                      PRINCIPAL SUBSIDIARIES AND DIVISIONS

                 [CHART OF IMPERIAL CREDIT INDUSTRIES, INC.]
- --------
(1) The Company has an ownership interest in SPFC's common stock of 47.0% and
    an ownership interest of 38.4% in FMC's common stock. The SPFC and FMC
    interests are accounted for using the equity method of accounting.
(2) ICII owns all of the non-transferable, beneficial ownership interests
    represented by the Common Securities of the Trust. The public owns all of
    the Par Securities of the Trust.
(3) ICG is not a Subsidiary Guarantor.
(4) PMW has applied to the DFI to change its name to PrinCap Mortgage
    Warehouse, Inc.
 
                                       22

 
    SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA
 
  The following table sets forth summary historical and unaudited pro forma
consolidated financial and other data for the periods indicated. The following
summary historical balance sheet data and income statement data are derived
from the consolidated financial statements of the Company as of December 31,
1997 and 1996 and for each of the years in the three-year period ended
December 31, 1997, which have been audited by KPMG Peat Marwick LLP,
independent auditors, and included elsewhere herein. The selected consolidated
balance sheet data as of December 31, 1995, 1994 and 1993 and the income
statement data for the years ended December 31, 1994 and 1993 are derived from
audited consolidated financial statements of the Company, which have been
audited by KPMG Peat Marwick LLP, but are not included in this Prospectus. The
unaudited consolidated pro forma income statement data and other operating
data for the year ended December 31, 1997 give effect to the application of
the net proceeds of $67.3 million from the sale of the Debentures, the
acquisition by the Company of all of the capital stock of AMN, the public
offering of FMC stock and resulting deconsolidation of FMC as if they had
occurred at the beginning of such period (the "Pro Forma Transactions"). The
pro forma consolidated financial data are unaudited and do not purport to
represent what the Company's results of operations would actually have been if
the Pro Forma Transactions, as applicable, had occurred on the dates specified
and do not project the Company's results of operations for any future periods.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this Prospectus.
 


                                               YEAR ENDED DECEMBER 31,
                            -----------------------------------------------------------------
                            PRO FORMA
                             1997(1)    1997      1996        1995        1994        1993
                            --------- --------  ---------  -----------  ---------  ----------
                                                   (IN THOUSANDS)
                                                                 
INCOME STATEMENT DATA:
 Gain on sale of loans and
  leases................... $ 27,318  $ 67,723  $  88,156  $    39,557  $   8,628  $   18,149
 Net interest income after
  provision for loan and
  lease losses.............   52,672    62,392     62,662       28,304     15,959      21,423
 Gains on sale of SPFC
  stock....................    9,488     9,488     82,690          --         --          --
 Gain on sale of IMH stock.   11,496    11,496
 Gain on termination of
  REIT advisory agreement..   19,046    19,046        --           --         --          --
 Equity in net income of
  SPFC.....................   25,869    25,869        --           --         --          --
 Equity in net income
  (loss) of FMC............    7,956    (3,050)       --           --         --          --
 Investment banking fees...    7,702     7,702        --           --         --          --
 Management fees...........    5,810     5,810      3,347           38        --          --
 Gain on sale of FMC stock.   92,137    92,137        --           --         --          --
 Other income..............   10,059    10,947     20,078       17,410     48,217      31,854
                            --------  --------  ---------  -----------  ---------  ----------
 Total revenue.............  269,553   309,560    256,933       85,309     72,804      71,426
 Personnel expense.........   53,881    60,830     48,355       34,053     33,477      24,520
 Other expenses............   84,298    89,554     50,694       27,127     28,037      15,433
                            --------  --------  ---------  -----------  ---------  ----------
 Total expenses............  138,179   150,384     99,049       61,180     61,514      39,953
                            --------  --------  ---------  -----------  ---------  ----------
 Income before income
  taxes, minority
  interest, and
  extraordinary item.......  131,374   159,176    157,884       24,129     11,290      31,473
 Income taxes..............   55,440    58,747     69,874       10,144      4,685      13,055
 Minority interest in
  income (loss) of
  consolidated subsidiaries.     956    10,513     12,026         (208)       --          --
                            --------  --------  ---------  -----------  ---------  ----------
 Income before
  extraordinary item....... $ 74,978    89,916     75,984       14,193      6,605      18,418
                            ========
 Extraordinary item net
  of income taxes..........             (3,995)       --           --         919         --
                                      --------  ---------  -----------  ---------  ----------
 Net income................           $ 85,921  $  75,984  $    14,193  $   7,524  $   18,418
                                      ========  =========  ===========  =========  ==========
CASH FLOW DATA:
 Net cash provided by (used
  in) operating activities.           $ 57,727  $ (31,262) $(1,173,703) $ 961,579  $ (903,050)
 Net cash (used in)
  provided by investing
  activities...............           (355,124)   244,177      140,961   (796,638)   (145,701)
 Net cash (used in)
  provided by financing
  activities...............            273,747   (177,834)   1,047,004   (177,314)  1,066,584
                                      --------  ---------  -----------  ---------  ----------
   Net change in cash......           $(23,650) $  35,081  $    14,262  $ (12,373) $   17,833
                                      ========  =========  ===========  =========  ==========

 
                                      23

 


                                    YEAR ENDED DECEMBER 31,
                          --------------------------------------------------
                          PRO FORMA
                           1997(1)   1997    1996    1995    1994      1993
                          --------- ------  ------  ------  ------    ------
                                     (DOLLARS IN MILLIONS)
                                                    
OPERATING AND FINANCIAL
 DATA(3):
 Loans originated:
 ICII....................  $  --    $  --   $  310  $1,816  $4,260    $6,019
 ICW.....................       1        1     --      --      --        --
 SPB.....................     398      398     531     724      NA(2)     NA(2)
 SPFC(3).................     --       --      790     288     190       --
 FMAC(4).................     --       511     450     164     --        --
 IBC.....................     151      151      87      36     --        --
 AMN(5)..................     171      171     --      --      --        --
                           ------   ------  ------  ------  ------    ------
   Total.................   $ 721   $1,232  $2,168  $3,028  $4,450    $6,019
                           ======   ======  ======  ======  ======    ======
 Loans securitized:
 ICII....................  $  --    $  --   $  --   $  177  $  --     $  --
 SPB.....................     203      203     277     511      46       --
 SPFC(3).................     --       --      657     165     --        --
 FMAC(4).................     --       343     325     105     --        --
 IBC.....................     159      159      87      85     --        --
 AMN(5)..................     214      214     --      --      --        --
                           ------   ------  ------  ------  ------    ------
   Total.................  $  576   $  919  $1,346  $1,043  $   46    $  --
                           ======   ======  ======  ======  ======    ======
 Outstanding balance of
  loans and leases
  securitized (at the end
  of period)(6)..........  $1,277   $1,277  $2,118  $1,047  $   45     $ --
SELECTED RATIOS:
 Ratio of earnings to
  fixed charges(7).......     2.2x     2.2x    2.2x    1.3x    1.2x      2.1x
 Pre-tax interest
  coverage ratio(8)......     6.1      7.1    17.0     3.9     2.4       --
 Ratio of indebtedness
  to total
  capitalization
  (at end of period)(9)..    47.2%    47.2%   40.5%   46.1%   51.4%      -- %
 Average equity to
  average assets.........   11.30    11.30    7.27    4.72    4.86      6.71
 Return on average
  common equity..........   30.50    34.95   45.55   17.59   10.57     31.76
 Return on average
  assets.................    3.45     3.95    3.31    0.82    0.51      2.13
SPB REGULATORY CAPITAL
 RATIOS (AT END OF
 PERIOD):
 California leverage
  limitation(10).........   13.20%   13.20%  13.50%  11.58%  11.50%     7.29%
 Risk-based--Tier 1......    8.75     8.75    9.71   11.72   14.21     10.27
 Risk-based--Total.......   12.25    12.25   10.87   13.18   15.13     10.73
 FDIC Leverage Ratio.....    8.30     8.30    9.35    8.04    8.08      9.47
ASSET QUALITY RATIOS (AT
 END OF PERIOD):
 Non-performing assets
  as a percentage of
  total assets...........    4.31%    4.31%   2.64%   1.55%   1.16%     0.64%
 Allowance for loan
  losses as a percentage
  of non-performing
  loans..................   53.87    53.87   38.94   44.30   53.83     65.91
 Net charge-offs as a
  percentage of average
  total loans held
  for investment.........    2.72     2.72    0.94    0.36    0.23      0.89

 
                                       24

 


                                              AT DECEMBER 31,
                          -------------------------------------------------------
                             1997        1996       1995       1994       1993
                          ----------- ---------- ---------- ---------- ----------
                                              (IN THOUSANDS)
                                                        
BALANCE SHEET DATA:
 Cash...................  $    50,597 $   74,247 $   39,166 $   24,904 $   37,277
 Interest bearing
  deposits..............      103,738      3,369    267,776     10,600     90,000
 Loans held for sale ...      162,571    940,096  1,341,810    263,807  1,238,006
 Loans held for
  investment, net.......    1,266,718  1,068,599    668,771  1,029,556    154,595
 Securitization related
  assets................       43,105    159,707     58,272      4,558        529
 Total assets...........    2,102,094  2,470,639  2,510,635  1,420,409  1,572,663
 Deposits...............  $ 1,156,022 $1,069,184 $1,092,989 $  934,621 $1,001,468
 Borrowings from FHLB...       45,000    140,500    190,000    295,000    320,000
 Other borrowings.......      144,841    694,352    987,810        --     147,611
 Senior notes(11).......      219,813     88,209     80,472     80,344        --
 Debentures(12).........       70,000        --         --         --         --
 Total liabilities......    1,778,161  2,231,131  2,416,533  1,344,536  1,504,411
 Shareholders' equity...      323,933    239,508     94,102     75,873     68,253

- --------
 (1) Income statement and related data and ratios for the year ended
     December 31, 1997 reflect the Pro Forma Transactions as if they occurred
     on January 1, 1997.
  (a) The following items relating to the deconsolidation of FMC due to the
      reduced ownership from 66.7% to 38.4% resulted in a decrease in the pro
      forma consolidated income statement data of ICII for the year ended
      December 31, 1997, using an effective tax rate of 42.2%: (In thousands)


                                INCOME STATEMENT DATA
      -------------------------------------------------------------------------
                                                                     
      Gain on sale of loans and leases................................. $40,497
      Net interest income after provision for losses................... $ 3,159
      Equity in net income of FMC...................................... $ 7,956
      Other income..................................................... $ 1,642
      Total revenue.................................................... $40,007
      Personnel expense................................................ $ 9,285
      Other expense.................................................... $ 7,348
      Income before income taxes, minority interest and extraordinary
       item............................................................ $27,802
      Income taxes..................................................... $ 3,307
      Minority interest in consolidated subsidiaries...................   9,557
      Income before extraordinary item.................................  14,938

  (b) The acquisition of AMN and the issuance of the Debentures are reflected
      as if they occurred on January 1, 1997. Interest expense was increased
      on a pro forma basis by $1.6 million reflecting interest on the
      Debentures at 10 1/4%. Results of operations for AMN are reflected for
      the period from January 1 to December 31, 1997, which resulted in a
      decrease in income before extraordinary item of $4.9 million. Earnings
      on investment of the proceeds of the issuance of the Debentures have
      not been included.
 (2) Information not available.
 (3) Does not include loans originated or securitized by ICIFC and SPFC,
     commencing with the three months ended March 31, 1997. The financial
     statements of ICIFC and SPFC are no longer consolidated with those of
     ICII.
 (4) Pro forma does not include loans originated or securitized by FMAC.
     Commencing with the quarter ended December 31, 1997, the financial
     statements of FMAC are no longer consolidated with those of ICII.
 (5)  Represents volume for the period from AMN's acquisition (March 14, 1997)
      through December 31, 1997.
 (6) Represents outstanding balance of loans and leases securitized, excluding
     loans held for sale and investment.
 (7) For purposes of calculating the ratio of earnings to fixed charges,
     earnings consist of income before income taxes and extraordinary item,
     plus fixed charges. Fixed charges represent interest expense on all
     indebtedness and the interest factor of rent expense estimated to be one-
     third of occupancy expense.
 (8) Ratio of (i) the sum of income before income taxes and extraordinary item
     plus interest expense on non-funding indebtedness to (ii) interest
     expense on non-funding indebtedness.
 (9) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness
     plus total shareholders' equity.
(10) Ratio of (i) SPB's total shareholders' equity to (ii) total deposits.
(11) At December 31, 1997, represents $200.0 million of the 9 7/8% Senior
     Notes and approximately $20.2 million of the 9 3/4% Senior Notes not
     tendered pursuant to the Tender Offer , net of discount of $361,000
     related to the 9 3/4% Senior Notes.
(12) Represents Guaranteed Preferred Beneficial Interests in the Debentures.
 
                                      25

 
                                 RISK FACTORS
 
  Prospective purchasers of the Par Securities should carefully review the
information contained elsewhere in this Prospectus and should particularly
consider the following matters. To the extent any of the information contained
in this Prospectus constitutes a "forward-looking statement" as defined in
Section 27A(i)(1) of the Securities Act (investors should note that any safe
harbor for forward-looking statements does not apply to statements made in
connection with an initial public offering), the risk factors set forth below
are cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking
statement. See "Special Note Regarding Forward-Looking Statements."
 
BORROWINGS AND SUBSTANTIAL LEVERAGE HAVE THE POTENTIAL TO CAUSE NET INTEREST
AND OPERATING LOSSES AND ADVERSELY AFFECT THE COMPANY'S ABILITY TO SERVICE
OUTSTANDING INDEBTEDNESS
 
  The Company is highly leveraged. At December 31, 1997,  the Company's total
Indebtedness (excluding deposits and borrowings at SPB) was $399.7 million and
its total shareholders' equity was $323.9 million.
 
  The Company's ability to make scheduled payments of the principal of, or to
pay the interest on, or to refinance its Indebtedness (including the
Debentures) will depend upon its future performance which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors beyond its control. Management believes that,
based on current levels of operations, cash flows from operations and
available borrowings will enable the Company to fund its liquidity and capital
expenditure requirements for the foreseeable future, including scheduled
payments of interest on the Debentures and payments of interest and principal
on the Company's other Indebtedness. There can be no assurance, however, that
the Company's business will generate sufficient cash flow from operations or
that future borrowings will be available in an amount sufficient to enable the
Company to service its Indebtedness, including the Debentures, or to make
anticipated capital expenditures. It may be necessary for the Company to
refinance all or a portion of the principal of the Debentures on or prior to
maturity, under certain circumstances, but there can be no assurance that the
Company will be able to effect such refinancing on commercially reasonable
terms or at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
 
  The degree to which the Company is leveraged could have material adverse
effects on the Company and the holders of Debentures, including, but not
limited to, the following: (i) the Company's ability to obtain additional
financing in the future for acquisitions, working capital, capital
expenditures, and general corporate or other purposes may be impaired, (ii) a
substantial portion of the Company's cash flow from operations will be
dedicated to debt service and will be unavailable for other purposes, (iii)
certain of the Company's borrowings may be at variable rates of interest,
which could result in higher interest expense in the event of increases in
interest rates and (iv) the Company will be subject to a variety of
restrictive covenants, the failure to comply with which could result in events
of default that, if not cured or waived, could restrict the Company's ability
to make payments of principal of, and interest and Additional Interest (as
defined herein), if any, on the Debentures. See "Business--Funding and
Securitizations" and "Description of Debentures."
 
DIVERSIFICATION STRATEGY AND RISK OF LENDING TO DIVERSIFIED BUSINESSES
 
  Beginning in 1995, the Company diversified away from the conforming
residential mortgage lending business, the Company's traditional focus, and
expanded into other commercial and consumer finance lending businesses. In
connection with the Company's diversification strategy, the Company sold
substantially all of its conforming residential mortgage loan origination
business. In addition, the Company sold or subcontracted out substantially all
of the servicing with respect to such loans. The Company significantly
expanded several existing businesses and commenced several new businesses,
including equipment leasing, non-conforming residential mortgage lending,
franchise lending, asset-based commercial lending and loan participations.
Furthermore, since March 1997, the Company continued to reduce its percentage
ownership of SPFC, its former non-conforming residential mortgage subsidiary,
to 47.0% as of December 31, 1997. On November 24, 1997, the Company completed
an initial public offering of FMC, its franchise lending subsidiary, and
thereby reduced its ownership interest in FMC to 38.4%. Prior to the expansion
and commencement of these new businesses, the Company had
 
                                      26

 
little or no experience in operating certain of such businesses. Although the
Company believes that these new and expanded businesses are currently managed
by individuals who have significant experience in the applicable areas, there
can be no assurance that the Company's efforts to develop as a diversified
commercial and consumer finance company will prove successful or that it can
manage these new and expanded businesses successfully.
 
THE SUCCESS OF THE COMPANY'S BUSINESS IS HIGHLY DEPENDENT UPON THE MEMBERS OF
THE SENIOR MANAGEMENT OF THE COMPANY
 
  The success of the Company's business is highly dependent upon the members
of the senior management of the Company. The loss of the services of one or
more of them could have a material adverse effect upon the Company's business
and development. In addition, the Company conducts its business through a
number of subsidiary companies operated by individual management teams. In
each subsidiary, there are key personnel, the loss of whom may have a
temporary adverse effect on that subsidiary. The Company believes that its
ability to successfully manage the growth of its subsidiaries as well as the
Company itself is due in part to its proven ability to retain and attract
highly skilled and qualified personnel. Although the Company has established
incentive compensation plans and entered into employment agreements to retain
key executives, no assurances can be made that key personnel will not depart,
or that their departure would not have adverse consequences to the operations
of the Company or any of its subsidiaries.
 
VALUE OF SECURITIZATION RELATED ASSETS SUBJECT TO FLUCTUATION
 
  As a fundamental part of its business and financing strategy, the Company
has sold substantially all of its loans and leases through securitization,
except loans held for investment by SPB. The Company believes that
securitizations provide it with greater operating leverage and a reduced cost
of funds. In a securitization, the Company sells loans or leases that it has
originated or purchased to a trust or special purpose entity for a cash
purchase price and an interest in the loans or leases securitized. The cash
price is raised through an offering of pass-through certificates by the trust
or special purpose entity. Following the securitization, the purchasers of the
pass-through certificates receive the principal collected and the investor
pass-through interest rate on the principal balance of the loans or leases,
while the Company receives the balance of the cash flows generated by the
securitized assets in the form of principal and interest on any subordinate
bonds or residual interests retained. These cash flows represent the excess
cash flow collected after credit losses on loans or leases sold over the sum
of the pass-through interest rate plus a normal servicing fee, a trustee fee
and, where applicable, an insurance fee related to such loans or leases over
the life of the loans or leases.
 
 Each loan or lease securitization may have specific credit enhancement
requirements in the form of overcollateralization which must be met before the
Company receives cash flows due. As the securitized assets generate cash
flows, they may be used to pay down the balance of the pass-through
certificates until such time as the ratio of securitized assets to pass-
through certificates reaches the overcollateralization requirement specified
in each securitization. This overcollateralization amount is carried on the
balance sheet as retained interest in loan and lease securitizations. After
the overcollateralization requirement and the other requirements specified in
the pooling and servicing agreement have been met, the Company begins to
receive principal and interest on any subordinate bonds or residual interests
retained.
 
  A substantial portion of the Company's gross income is recognized as gain on
sales of loans or leases, which represent the present value of the estimated
cash flows on the subordinate bonds or residual interests retained, less
origination and underwriting costs. The Company may retain interests in loan
and lease securitizations in the form of subordinate bonds or residual
interests, which represent interests in the trust or special purpose entity to
which such loans or leases have been sold.
 
  The Company recognizes such gain on sale of loans or leases in the year in
which such loans or leases are sold, although cash (representing the principal
and interest on any retained subordinate bonds or residual interests in loan
and lease securitizations) is received by the Company over the life of the
loans or leases. Concurrent with recognizing such a gain or sale, the Company
records any subordinate bonds or residual interests as an asset on its
consolidated balance sheet.
 
                                      27

 
  The capitalized balance of any subordinate bonds or residual interest is
determined by computing the present value of the excess of the weighted
average coupon on the loans or leases sold over the sum of: (i) the coupon in
the pass-through certificates, (ii) a base servicing fee paid to the loan or
lease servicer and (iii) expected losses to be incurred on the portfolio of
loans or leases sold, and considering prepayment assumptions.
 
  Prepayment assumptions are based on recent evaluations of the actual
prepayments of the Company's servicing portfolio or on market prepayment rates
on new portfolios and consideration of the current interest rate environment
and its potential impact on prepayment rates.
 
  The cash flows expected to be received by the Company, net of expected
losses, are then discounted at an interest rate that the Company believes an
unaffiliated third-party purchaser would require as a rate of return on a
financial instrument with similar characteristics. Expected losses are
discounted using a rate equivalent to the risk-free rate for securities with a
duration similar to that estimated for the underlying loans or leases sold.
The excess cash flows may only be available to the Company to the extent that
there is no impairment of the credit enhancements established at the time the
loans or leases are sold. Interest-only and residual certificates in
securitizations of mortgage loans retained by the Company are held as trading
securities and are adjusted to their respective market value quarterly with
corresponding charges and credits made to income in the adjustment period.
Subordinate bonds retained by the Company are held as either trading or
available for sale securities in accordance with the Company's investment
objectives.
 
  To the extent that actual results are different from the cash flows the
Company estimated, the Company's subordinate bonds, interest-only certificates
or residual interest will be adjusted quarterly with corresponding charges
made against income in that period. Upon completion and analysis of the
carrying values of the Company's subordinate bonds, interest-only certificates
or residual interest during 1996, the Company wrote down the balance of such
assets by $4.7 million. Any similar future charge against income may have a
material adverse effect on the Company's results of operations.
 
  On the Company's consolidated balance sheet, securitization-related assets
such as capitalized excess servicing fees receivable, subordinate bonds,
interest-only certificates and residual interests are reduced as cash is
received by the trust or special purpose entity holding the loans or leases
pooled and sold. Although the Company believes that it has made reasonable
assumptions, on a pool-by-pool basis, of its securitization-related assets
likely to be realized, it should be recognized that the rates of prepayment
and default or other assumptions utilized by the Company represent estimates.
Actual experience may vary from these estimates.
 
DEPENDENCE ON SECURITIZATION AND WAREHOUSE FACILITIES TO FINANCE LENDING
ACTIVITIES MAY CREATE LIQUIDITY RISKS
 
  The Company has an ongoing need for capital to finance its lending
activities. This need is expected to increase as the volume of the Company's
loan and lease originations and acquisitions increases. The Company's primary
cash requirements include the funding of (i) loan and lease originations and
acquisitions pending their pooling and sale, (ii) points and expenses paid in
connection with the acquisition of wholesale loans, (iii) fees and expenses
incurred in connection with its securitization programs, (iv)
overcollateralization or reserve account requirements in connection with loans
and leases pooled and securitized, (v) ongoing administrative and other
operating expenses and (vi) the costs of the Company's warehouse credit and
repurchase facilities with certain financial institutions. The Company has
financed its activities through warehouse lines of credit and repurchase
facilities from financial institutions, equity and debt offerings in the
capital markets, deposits or borrowings at SPB and securitizations. The
Company believes that such sources, together with the net proceeds of the
Offering, will be sufficient to fund the Company's liquidity requirements for
the foreseeable future.
 
  The Company currently pools and sells through securitization substantially
all of the loans or leases which it originates or purchases, other than loans
held by SPB for investment. Accordingly, adverse changes in the securitization
market could impair the Company's ability to originate, purchase and sell
loans or leases on a favorable or timely basis. Any such impairment could have
a material adverse effect upon the Company's
 
                                      28

 
business and results of operations. In addition, the securitization market for
many types of assets is relatively undeveloped and may be more susceptible to
market fluctuations or other adverse changes than more developed capital
markets. Finally, any delay in the securitization of a loan or lease pool
could cause the Company's earnings to fluctuate from quarter to quarter.
 
  In a securitization, the Company recognizes a gain on sale of the loans or
leases securitized upon the closing of the securitization but does not receive
the cash representing such gain until it receives the excess cash flows which
are payable over the actual life of the loans or leases securitized. As a
result, such transactions may not generate cash flows to the Company for an
extended period.
 
  In addition, in order to gain access to the secondary market for loans and
leases, the Company has historically relied on monoline insurance companies to
provide guarantees on outstanding senior interests in the special purpose
entities to which such loans and leases are sold to enable it to obtain
investment grade ratings for such interests. In addition, the Company also
relies on overcollateralization to support outstanding senior interests.
However, any unwillingness of the monoline insurance companies to guarantee
the senior interests in the Company's loan or lease pools could have a
material adverse effect on the Company's financial position and results of
operations.
 
  The Company is dependent upon its ability to access warehouse credit and
repurchase facilities in addition to its ability to continue to pool and sell
loans and leases in the secondary market, in order to fund new originations
and purchases. The Company has warehouse lines of credit and repurchase
facilities under which it had available an aggregate of approximately $434.6
million in financing at December 31, 1997. See "Business--Other Activities."
These credit and repurchase facilities expire between January 7, 1998 and
October 6, 1998. The Company expects to be able to maintain existing warehouse
lines of credit and repurchase facilities (or to obtain replacement or
additional financing) as current arrangements expire or become fully utilized;
however, there can be no assurance that such financing will be obtainable on
favorable terms. To the extent that the Company is unable to arrange new
warehouse lines of credit and repurchase facilities, the Company may have to
curtail its loan origination and purchasing activities, which could have a
material adverse effect on the Company's operations and financial position.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
 
THE COMPANY'S PROFITABILITY MAY BE ADVERSELY AFFECTED BY CYCLICAL ECONOMIC
CONDITIONS AND FLUCTUATIONS IN INTEREST RATES
 
  The Company's businesses may be adversely affected in any economic slowdown
or recession. Periods of economic slowdown or recession may be accompanied by
decreased demand for consumer and commercial credit and declining real estate
and other asset values. In the secured lending business, any material decline
in collateral values increases the loan-to-value ratios of loans previously
made and leases previously entered into by the Company, thereby weakening
collateral coverage and increasing the possibility of a loss in the event of a
default. Delinquencies, foreclosures and losses generally increase during
economic slowdowns or recessions. In addition, in an economic slowdown or
recession, the Company's servicing costs will increase. Any sustained period
of increased delinquencies, foreclosures, losses or increased costs could
adversely affect the Company's ability to sell loans or leases through
securitization and could increase the cost of selling loans or leases through
securitization, which in either case could adversely affect the Company's
financial condition and results of operations.
 
 Fluctuations in Interest Rates May Affect Profitability
 
  The Company's profitability may be directly affected by the level of and
fluctuations in interest rates because they affect the Company's ability to
earn a spread between interest received on its loans and leases and the costs
of its liabilities. While the Company monitors the interest rate environment
and employs a hedging strategy designed to reduce the impact of changes in
interest rates, there can be no assurance that the profitability of the
Company would not be adversely affected during any period of changes in
interest rates. In addition, an increase in interest rates may decrease the
demand for consumer or commercial credit. A substantial and
 
                                      29

 
sustained increase in interest rates could adversely affect the Company's
ability to purchase or originate loans or leases, reduce the average size of
loans and leases underwritten by the Company and reduce the gains recognized
by the Company upon their securitization and sale. A significant decline in
interest rates could decrease the size of the Company's securitized loan and
lease portfolio by increasing the level of loan and lease prepayments which
shortens the average life and impairs the value of the securitization related
assets. Fluctuating interest rates also may affect the net income earned by
the Company resulting from the difference between the yield to the Company on
loans and leases held pending sale and funds borrowed by the Company to
finance the origination or purchase of such loans and leases. In addition,
inverse or flattened interest yield curves could have an adverse impact on the
profitability of the Company because the loans or leases pooled and sold by
the Company are priced based on longer-term interest rates as compared to the
senior interests in the related trusts.
 
  To reduce risks associated with its originations and purchases of loans and
leases, the Company may enter into transactions designed to hedge interest
rate risks, including buying and selling of futures and forwards. The nature
and quantity of the hedging transactions is determined by management based on
various factors, including market conditions and the expected volume of
mortgage loan and equipment lease originations and purchases. No assurance can
be given that such hedging transactions will offset the risks of changes in
interest rates, and it is possible that there will be periods during which the
Company could incur losses after accounting for or resulting from its hedging
activities.
 
SECURITIZATION AND SALE OF LOANS AND LEASES MAY SUBJECT COMPANY TO CONTINGENT
OBLIGATIONS
 
  Although the Company sells a majority of the loans and leases which it
originates or purchases (other than those held for investment by SPB), the
Company retains some degree of risk on substantially all loans and leases
sold. During the period of time that loans or leases are held pending sale or
securitization, the Company is subject to various risks associated with the
lending business, including the risk of borrower default, the risk of
foreclosure and the risk that an increase in interest rates would result in a
decline in the value of such loans or leases. The documents governing the
Company's securitization programs generally require (i) the Company to
establish deposit accounts or (ii) the related trust or special purpose entity
to build overcollateralization levels by retaining excess cash flows or
applying excess cash flows to reduce the principal balances of the senior
interests issued by the trust or special purpose entity. These actions serve
as credit enhancement for the related trust or special purpose entity and are
therefore available to fund losses realized on loans or leases held by such
trust or special purpose entity. At December 31, 1997 and 1996, credit
enhancement amounts provided by the Company (in the form of deposit accounts
and overcollateralization levels) aggregated approximately $43.1 million and
$49.5 million, respectively. The Company is subject to the risks of default
and foreclosure following the sale of the loans or leases sold through
securitizations. In addition, documents governing the Company's securitization
programs require the Company to commit to repurchase or replace loans or
leases which do not conform to the representations and warranties made by the
Company at the time of the sale. When borrowers are delinquent in making
monthly payments on loans or leases included in a trust or special purpose
entity and serviced by the Company, the servicer is required to advance
interest and principal payments with respect to such delinquent loans or
leases. The Company may be required to fund such advances from the Company's
available capital resources, but such advances will have priority of repayment
from the succeeding month's payments.
 
LENDING TO CREDIT-IMPAIRED BORROWERS MAY AFFECT COMPANY PROFITABILITY
 
  In the Company's sub-prime lending businesses, such as AMN's sub-prime auto
loan business and certain of the Company's other businesses, the Company
markets some of its loan products specifically to credit-impaired borrowers.
Loans made to such borrowers may entail a higher risk of delinquency and
higher losses than loans made to more creditworthy borrowers. While the
Company believes that its underwriting policies and collection methods enable
it to control the higher risks inherent in loans made to credit-impaired
borrowers, no assurance can be given that such criteria or methods will afford
adequate protection against such risks. In the event that loans originated or
acquired by the Company, as the case may be, (whether held for investment or
serviced for others) experience higher delinquencies, foreclosures or losses
than anticipated, the Company's financial condition or results of operations
could be adversely affected.
 
                                      30

 
THE COMPANY'S OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATION
 
  The Company's operations are subject to regulation by federal, state and
local government authorities, as well as to various laws and judicial and
administrative decisions, that impose requirements and restrictions affecting,
among other things, the Company's loan originations, credit activities,
maximum interest rates, finance and other charges, disclosures to customers,
the terms of secured transactions, collection, repossession and claims-
handling procedures, multiple qualification and licensing requirements for
doing business in various jurisdictions, and other trade practices. Except as
set forth below, the Company believes that it is in compliance in all material
respects with applicable local, state and federal laws, rules and regulations.
There can be no assurance that more restrictive laws, rules or regulations
will not be adopted in the future that could make compliance much more
difficult or expensive, restrict the Company's ability to originate, purchase
or sell loans or leases, further limit or restrict the amount of interest and
other charges earned on loans originated or purchased by the Company, further
limit or restrict the terms of loan or lease agreements, or otherwise
adversely affect the business of the Company. In addition, changes in
government sponsored loan programs could adversely affect the Company's
business.
 
  SPB, as a California chartered industrial loan company with deposits insured
by the Bank Insurance Fund of the FDIC, is subject to extensive federal and
state governmental supervision, regulation and control, including regulation
by the FDIC and the California Department of Financial Institutions. Future
legislation and government policy could adversely affect the thrift and loan
industry, including SPB. The full impact of such legislation and regulation
cannot be predicted and future changes may alter the structure and competitive
relationship among financial institutions. In addition, federal and state laws
impose standards with respect to, and regulatory authorities have the power in
certain circumstances to limit or prohibit, transactions between ICII and SPB
and between SPB and any of ICII's other subsidiaries, the growth of SPB's
assets and liabilities and the payment of dividends from SPB to ICII, among
other things. SPB is also required to maintain capital ratios in accordance
with regulatory requirements. See "Business--Thrift and Loan Operations--
Recent Legislation."
 
  The FDIC and California Department of Financial Institutions ("DFI")
completed a joint examination of SPB for the period ending April 14, 1997. As
a result of the examination, the FDIC terminated a memorandum of
understanding, dated September 16, 1996 ("MOU"), acknowledging that SPB had
sufficiently satisfied most of the provisions of the MOU. As part of the
agreement for terminating the MOU, SPB's board of directors adopted a
resolution to address the issues remaining in the MOU, which include (i)
corrective actions to remedy the violations of law and regulations in the
FDIC's and DFI's most recent reports of examination and as were reflected in
the MOU, (ii) review by management of all existing written policies and
procedures and enhancement and augmentation of such procedures so as to assure
continued compliance with all applicable federal and state laws and
regulations, (iii) development of additional staff training to assure
continued compliance with federal and state laws and regulations by all
appropriate personnel, and (iv) senior management periodic updates to the
board of directors on all progress made.
 
  The FDIC examination report also noted certain violations of applicable law
and regulations for which SPB is required to take remedial action to correct.
The FDIC has the authority to take a variety of informal and formal remedial
and other enforcement actions with regard to violations of law, and unsafe and
unsound banking practices, including, among other things, the institution of
proceedings or actions imposing or seeking memoranda of understandings,
injunctions, cease and desist orders, criminal or civil penalties, removal
from office or the revocation of SPB's charter. Although the Company does not
believe that an enforcement action is warranted under the circumstances, any
such enforcement could have a material adverse effect on the Company.
 
COMPETITION IN THE BUSINESSES IN WHICH THE COMPANY OPERATES MAY ADVERSELY
AFFECT THE COMPANY'S OPERATIONS
 
  The businesses in which the Company operates are highly competitive. The
Company faces significant competition from other commercial and consumer
finance lenders, commercial banks, credit unions, thrift institutions and
securities firms, among others. Many of these competitors are substantially
larger and have more capital and other resources than the Company. Competition
can take many forms, including convenience in
 
                                      31

 
obtaining a loan or lease, customer service, marketing and distribution
channels and interest rates charged to borrowers. In addition, the current
level of gains realized by the Company and its competitors on the sale of
their loans and leases could attract additional competitors into these
markets, with the possible effect of lowering gains that may be realized on
the Company's future loan and lease sales.
 
  Wholesale originations are expected to remain a significant part of the
Company's loan and lease production programs. As a wholesale purchaser of
loans and leases, the Company is exposed to fluctuations in the volume and
cost of wholesale loans and leases resulting from competition with other
purchasers of such loans and leases, market conditions and other factors.
 
THE COMPANY'S OPERATIONS MAY BE SUBJECT TO ENVIRONMENTAL LIABILITIES
 
  In the course of its business, the Company has acquired, and may in the
future acquire, real property securing loans that are in default. There is a
risk that hazardous substances or waste, contaminants, pollutants or sources
thereof could be discovered on such properties after acquisition by the
Company. In such event, the Company might be required to remove such
substances from the affected properties at its sole cost and expense. There
can be no assurances that the cost of such removal would not substantially
exceed the value of the affected properties or the loans secured by such
properties or that the Company would have adequate remedies against the prior
owners or other responsible parties, or that the Company would not find it
difficult or impossible to sell the affected real properties either prior to
or following any such removal.
 
EFFECT OF FMC'S OPERATIONS MAY ADVERSELY AFFECT THE COMPANY'S INVESTMENT IN
FMC COMMON STOCK.
 
  During the fourth quarter of 1997, FMC completed an initial public offering
of 11,500,000 shares of common stock, including 1,500,000 shares sold pursuant
to the underwriters' over-allotment option. Of those shares, 6,828,125 shares
were sold by FMC, 3,568,175 shares were sold by ICII and 1,103,700 shares were
sold by another selling stockholder. Pursuant to the Reorganization, the
historical financial statements of FMAC have become those of FMC. Immediately
prior to the public offering, the Company owned 66.7% of the outstanding
shares of FMC common stock. As a result of the Company's participation in the
public offering, the Company's percentage ownership of FMC was reduced to
38.4%, consequently, the financial statements of FMAC are no longer
consolidated with those of ICII. ICII's investment in FMC is recorded on the
Company's financial statements as "Investment in Franchise Mortgage Acceptance
Company" and is accounted for pursuant to the equity method of accounting.
 
  Of the net income or loss of FMC, 38.4% will be recognized on a pre-tax
basis in the Company's financial statements. Any such recognized net loss may
adversely affect the Company's ability to conduct future activities under the
covenants of the Indenture and otherwise. As a small business leader, FMC is
or may be subject to many of the same risks set forth in "--The Success of the
Company's Business is Highly Dependent Upon the Members of the Senior
Management of the Company," "--Value of Securitization Related Assets Subject
to Fluctuation," "--Dependence on Securitization and Warehouse Facilities to
Finance Lending Activities May Create Liquidity Risks," "--The Company's
Profitability May be Adversely Affected by Cyclical Economic Conditions and
Fluctuations in Interest Rates," "--Securitization and Sale of Loans and
Leases May Subject the Company to Contingent Obligations," "--The Company's
Operations are Subject to Government Regulation," "--Competition in the
Businesses in Which it Operates May Adversely Affect the Company's Operations"
and "--Company Operations May be Subject to Environmental Liabilities." In
addition, FMAC is specifically subject to additional risks relating to the
following:
 
 Certain of FMC's Underwriting Requirements and Risks May Adversely Affect
Credit Quality.
 
  Business Valuation. FMC's loans are underwritten in accordance with FMC's
underwriting guidelines which permit borrowers to borrow up to a specified
percentage of the value of the business unit and, in certain instances, the
real estate pledged as collateral in connection with the loans. The value of
the business unit is derived from a formula based upon the business concept
and the revenues and cash flows generated by the business unit from its
operations, as well as a valuation for each loan is performed by an
independent third-party
 
                                      32

 
hired by FMC. However, there can be no assurance that FMC's valuations
actually reflect an amount that could be realized upon a current sale of a
borrower's business unit and related personal and real property. In addition,
in the event of a default by a particular borrower, there may be factors
present that reduce the revenues or cash flow derived at the location and the
value of the enterprise.
 
  Credit Risks Associated with Loans Not Securitized or Sold. Certain of FMC's
loans and leases may not be readily saleable or securitizable, or may be
saleable or securitizable only after the individual loan or lease portfolio
performance characteristics become apparent over time. To the extent that such
loans and leases are not sold or securitized, FMC must fund such assets with
borrowings or internally generated funds and bears the entire credit risk
associated with such assets. FMC's inability ultimately to sell or securitize
substantially all of the loans and leases it originates would have a material
adverse effect on FMC's business and results of operations.
 
  Franchise Termination; Nonrenewal. A borrower's franchise agreement may be
subject to termination in the event of default after applicable cure periods.
Default provisions under franchise agreements are generally drafted broadly,
and include, among other things, failure to meet operating standards, actions
which may threaten licensed intellectual property, and investments by
principals in a competitive business. There is no assurance that the borrowers
will not default under their respective franchise agreements, or that the
borrowers will be able to satisfy the requirements for renewal of the
franchise agreement for an additional term. In the event a franchise agreement
terminates, the related borrower would not be able to continue to operate the
business unit. The termination or nonrenewal of the franchise agreement likely
will result in a borrower's inability to satisfy its obligations under the
loan and a substantial decrease in the value of the collateral securing such
obligations. License agreements by borrowers on FMC's retail energy loans may
contain similar provisions.
 
  Balloon Payment at Maturity and Extension Increases Lender Risks. FMC may
from time to time originate loans with a balloon payment due at maturity. The
ability of a borrower to pay such amount will normally depend on its ability
to fully refinance the loan or sell the business unit and related property at
a price sufficient to permit the borrower to make balloon payments. The
ability of a borrower to refinance will be affected by a number of factors,
including, without limitation, the value of the related property, the
financial condition and operating history of the borrower and the related
property limitations on transfer imposed by franchise or license agreements,
the strength of the commercial real estate market, tax laws, and prevailing
general economic conditions.
 
FMC'S CONCENTRATION ON RESTAURANT, RETAIL ENERGY AND GOLF SECTORS MAY EXPOSE
FMC TO CONCEPT FAILURES, INDUSTRY CYCLES AND OTHER INDUSTRY SPECIFIC RISKS
 
  Risks Relating to Franchise Concepts. The ability of a borrower operating as
a franchisee to repay its loan is subject to general business risks typically
associated with operating a business and particularly with operating a quick
service restaurant/casual dining restaurant or other franchised business,
including, without limitation, (i) an increase in the cost of labor
(including, without limitation, mandatory increases in the minimum wage
payable to employees) or food products, (ii) a decrease in the consumer demand
for a particular product or class of products offered by a particular
franchise concept and (iii) adverse changes in the economy in the geographic
location in which a particular restaurant is located.
 
  Risks Relating to Retail Energy Concepts. Gasoline profit margins associated
with the sale of motor fuel have a significant impact on such borrowers and
are affected by numerous factors outside of each borrower's control, including
the supply and demand for motor fuel in retail markets, volatility in the
wholesale gasoline market and competitive pricing influences in each
borrower's local market area. Any sustained shortage of motor fuel from a
borrower's suppliers could substantially reduce the volume of motor fuel sold
by such borrower. A material decrease in either the volume of motor fuel sold
or the profit margin on such sales for an extended time period could have a
material adverse effect on the income of borrowers in the retail energy sector
and their ability to service loans from FMC.
 
  Risks Relating to Golf Loans. The amount spent by consumers on discretionary
activities, such as those offered by borrowers in the golf sector, has
historically been dependent upon levels of discretionary income
 
                                      33

 
which may be adversely affected by general economic conditions. A decrease in
consumer spending on golf-associated activities could have a material adverse
effect on the financial condition and results of operations of Borrowers in
the golf sector and their ability to repay FMC's loans. In addition, the
inherent seasonality of participation in golf and golf-related activities and
the effect of weather conditions generally result in greater revenues and
income during the second and third quarters as compared to the first and
fourth quarters of the year. Poor weather conditions and unforseen natural
events may result in reduced utilization of borrowers' golf facilities and
have an adverse effect on revenues of borrowers in the golf sector.
 
  Risks Relating to Equipment Loans and Leases. FMC retains a residual
interest in the equipment covered by its leases. The estimated fair market
value of the equipment at the end of the contract term of the lease, if any,
is reflected as an asset on FMC's balance sheet for leases held to maturity
and will be included as part of the gain on sale in any lease securitization
transaction. Any failure by FMC to realize aggregate recorded residual values
could have a material adverse effect on its business and results of
operations.
 
  Risks Relating to Equity Investments. FMC periodically makes passive equity
investments in companies operating in the sectors served by its lending and
leasing business. Equity investments involve a higher degree of risk than
loans or leases in that such companies generally have no contractual
obligation to repay amounts invested by the Company, the investment is not
secured and FMC bears the risk of loss of its entire investment. Generally,
FMC is unable to control the activities of these companies due to its minority
ownership interest and lacks representation in the management of such
companies.
 
 FMC's Limited History of Independent Operations and New Products Limit the
 Ability of FMC to Predict Future Performance
 
  FMC has experienced substantial growth in loan and lease originations and
total revenues since inception, and in particular since June 1995 when the
Company acquired the operations of FMAC. FMC had been unprofitable until 1996
and there can be no assurance that FMC will be profitable in the future or
that these rates of growth will be sustainable or indicative of future
results. Prior to FMC's initial public offering, FMC benefited from the
financial, administrative and other resources of FMC and Greenwich Capital
Financial Products, Inc., a prior owner of the operations of FMAC.
Accordingly, FMC's prospects must be evaluated in light of the risks, expenses
and difficulties it will encounter as an independent business. There can be no
assurance that FMC will develop the financial, management or other resources
necessary to operate successfully as an independent company. In light of FMC's
aforementioned growth in loan and lease originations, the historical
performance of FMC's earnings may be of limited relevance in predicting future
performance. Also, the loans originated by FMC and included in FMC's
securitizations have been outstanding for a relatively short period of time.
Consequently, the delinquency and loss experience of FMC's loans and leases to
date may not be indicative of results to be experienced in the future. It is
unlikely that FMC will be able to maintain delinquency and loss ratios at
current levels as the portfolio becomes more seasoned.
 
  FMC has recently expanded its product offerings to include leases and has
expanded its marketing efforts to include borrowers in the retail energy and
golf sectors. FMC has either limited or no experience with these new products
and markets, and there can be no assurance that FMC will be able to compete in
these markets successfully or that the return on FMC's investment in these new
products and markets will be consistent with FMC's historical financial
results.
 
 One-Time Deferred Income Tax Charge Will Reduce FMC's Earnings
 
  As a result of terminating FMAC's LLC status upon completion of its initial
public offering, FMC will be required to record a one-time non-cash charge
against earnings for deferred income taxes based upon the change from FMAC's
LLC status to C Corporation status. The charge for the quarter ended December
31, 1997, was $11.0 million.
 
                                      34

 
EFFECT OF SPFC'S OPERATIONS MAY ADVERSELY AFFECT THE COMPANY'S INVESTMENT IN
SPFC COMMON STOCK
 
  As of December 31, 1997, ICII owned 47.0% of SPFC's outstanding common
stock. ICII's investment in SPFC, which is recorded on the Company's financial
statements as "Investment in Southern Pacific Funding Corporation," accounted
for 3.1% of the Company's total assets and contributed 8.4% to the Company's
total revenue for the year ended December 31, 1997. Of the net income or loss
of SPFC, 47.0% is recognized on a pre-tax basis in the Company's financial
statements. Any such recognized net loss may adversely affect the Company's
ability to conduct future activities under the covenants of the Indenture and
otherwise. As an originator of non-conforming residential mortgage loans, SPFC
is or may be subject to many of the same risks set forth in "--The Success of
the Company's Business is Highly Dependent Upon the Members of the Senior
Management of the Company," "--Value of Securitization Related Assets Subject
to Fluctuation," "--Dependence on Securitization and Warehouse Facilities to
Finance Lending Activities May Create Liquidity Risks," "--The Company's
Profitability May be Adversely Affected by Cyclical Economic Conditions and
Fluctuations in Interest Rates," "--Securitization and Sale of Loans and
Leases May Subject Company to Contingent Obligations," "--Lending to Credit
Impaired Borrowers May Affect Company Profitability," "--The Company's
Operations are Subject to Government Regulation," "--Competition in the
Businesses in Which The Company Operates May Adversely Affect the Company's
Operations" and "--The Company's Operations May be Subject to Environmental
Liabilities." In addition, SPFC is specifically subject to additional risks
relating to the following:
 
 Limited History of Independent Operations of Limited Relevance in Predicting
Future Performance
 
  SPFC commenced operations in January 1993 as a division of SPB and became an
operating subsidiary of ICII in April 1995. Although SPFC has been profitable
for each year since inception and has experienced substantial growth in
mortgage loan originations and total revenues, there can be no assurance that
SPFC will be profitable in the future or that these rates of growth will be
sustainable or indicative of future results. Since inception in January 1993,
SPFC's growth in originating and purchasing loans has been significant. In
light of this growth, the historical financial performance of SPFC may be of
limited relevance in predicting future performance. Also, the loans originated
and purchased by SPFC and included in SPFC's securitizations have been
outstanding for a relatively short period of time. As of December 31, 1997,
SPFC's delinquency ratio (representing mortgage loans 30 days or more past
due) was 9.4%, with total foreclosures of $97.8 million. No assurance can be
given that future delinquencies will not increase or that any such increase
will not have a material adverse effect on SPFC. The delinquency and loss
experience of SPFC's loans to date may not be indicative of future results. It
is unlikely that SPFC will be able to maintain delinquency and loan loss
ratios at their present levels as SPFC's loan portfolio becomes more seasoned.
 
 Origination of Adjustable Rate Mortgage Loans May Adversely Affect Operations
 
  SPFC originates adjustable rate residential mortgage loans ("ARMs").
Substantially all such ARMs include a "teaser" rate, i.e., an initial interest
rate significantly below the fully-indexed interest rate at origination.
Although these loans are underwritten at the fully-indexed rate at
origination, credit-impaired borrowers may encounter financial difficulties as
a result of increases in the interest rate over the life of the loan.
 
 No Assurance of Planned Expansion
 
  SPFC's operations have substantially expanded since inception and SPFC
intends to continue to pursue a growth strategy for the forseeable future.
There can be no assurance that SPFC will anticipate and respond effectively to
all of the changing demands that its expanding operations will have on SPFC's
management, information and operating systems and cash reserves and the
failure of SPFC to meet challenges of any such expansion could have a material
adverse effect on SPFC's results of operations and financial condition. There
can be no assurance that SPFC will successfully achieve its planned expansion
or, if achieved, that the expansion will result in profitable operations.
 
                                      35

 
 Delinquency Ratings and Performance May be Affected by Contracted Servicing
 
  SPFC historically contracted for the servicing of the loans it originates,
purchases and holds for sale. As with any external service provider, SPFC is
subject to risks associated with inadequate or untimely services. Many of
SPFC's borrowers require notices and reminders to keep their loans current and
to prevent delinquencies and foreclosures. A substantial increase in SPFC's
delinquency rate or foreclosure rate could adversely affect its ability to
access profitably the capital markets for its financing needs, including
future securitizations. If any contract servicer were to be terminated either
by SPFC or by any outside third party in connection with a securitization, the
change in servicing may result in greater delinquencies and losses on the
related loans, which in turn would adversely impact the value of the interest-
only and residual certificates held by SPFC in connection with any
securitization.
 
FRAUDULENT CONVEYANCE LAWS MAY ADVERSELY AFFECT SUBSIDIARY GUARANTEES
 
  Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the Subsidiary Guarantors' issuance of the Subsidiary Guarantees.
To the extent that a court were to find that (x) a Subsidiary Guarantee was
incurred by a Subsidiary Guarantor with intent to hinder, delay or defraud any
present of future creditor or the Subsidiary Guarantor contemplated insolvency
with a design to prefer one or more creditors to the exclusion in whole or in
part of others or (y) a Subsidiary Guarantor did not receive fair
consideration or reasonably equivalent value for issuing its Subsidiary
Guarantee and such Subsidiary Guarantor (i) was insolvent, (ii) was rendered
insolvent by reason of the issuance of such Subsidiary Guarantee, (iii) was
engaged or about to engage in a business or transaction for which the
remaining assets of such Subsidiary Guarantor constituted unreasonably small
capital to carry on its business or (iv) intended to incur, or believed that
it would incur, debts beyond its ability to pay such debts as they matured,
the court could avoid or subordinate such Subsidiary Guarantee in favor of the
Subsidiary Guarantor's creditors. Among other things, a legal challenge of a
Subsidiary Guarantee on fraudulent conveyance grounds may focus on the
benefits, if any, realized by the Subsidiary Guarantor as a result of the
Company's issuance of the Debentures. The Indenture contains a savings clause,
which generally limits the obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee to the maximum amount as will, after giving effect to all
of the liabilities of such Subsidiary Guarantor, result in such obligations
not constituting a fraudulent conveyance. To the extent a Subsidiary Guaranty
of any Subsidiary Guarantor was avoided or limited as a fraudulent conveyance
or held unenforceable for any other reason, holders of the Debentures would
cease to have any claim against such Subsidiary Guarantor and would be
creditors solely of the Company and any Subsidiary Guarantor whose Subsidiary
Guarantee was not avoided or held unenforceable. In such event, the claims of
the holders of the Debentures against the issuer of an invalid Subsidiary
Guarantee would be subject to the prior payment of all liabilities (including
trade payables) of such Subsidiary Guarantor. There can be no assurance that,
after providing for all prior claims, there would be sufficient assets to
satisfy the claims of the holders of the Debentures relating to any avoided
portions of any of the Subsidiary Guarantees.
 
  The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally,
however, a Subsidiary Guarantor may be considered insolvent if the sum of its
debts, including contingent liabilities, is greater than the fair marketable
value of all of its assets at a fair valuation or if the present fair
marketable value of its assets is less than the amount that would be required
to pay its probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature. Based upon financial and
other information, the Company and the Subsidiary Guarantors believe that the
Subsidiary Guarantees are being incurred for proper purposes and in good faith
and that the Company and each Subsidiary Guarantor is solvent and will
continue to be solvent after issuing its Subsidiary Guarantee, will have
sufficient capital for carrying on its business after such issuance and will
be able to pay its debts as they
 
                                      36

 
mature. There can be no assurance, however, that a court passing on such
standards would agree with the Company. See "Description of Debentures--
Subsidiary Guarantees."
 
CHANGE OF CONTROL PROVISIONS MAY REQUIRE REPURCHASE OF DEBENTURES
 
  The Declaration provides that upon the occurrence of a Change of Control on
or prior to the Remarketing Settlement Date, each holder of Par Securities
will have the right to require the Trust to cause all or any part (equal to
$1,000 liquidation amount or any integral multiple thereof) of the Par
Securities to be exchanged for an equivalent principal amount of Debentures.
Promptly thereafter, such Debentures will be repurchased by the Company
pursuant to the Indenture (the "Change of Control Offer"), at an offer price
in cash equal to 101% of the aggregate principal amount thereof plus accrued
and unpaid interest thereon to the date of purchase. See "Description of
Securities--Change of Control."
 
  Certain future credit or other borrowing agreements may contain similar
restrictions. The Company's ability to pay cash to the holders of Debentures
upon a repurchase may prohibit the Company from purchasing any Debentures
prior to their stated maturity and may provide that certain Change of Control
events would constitute a default thereunder. See "Description of Debentures--
Certain Covenants of the Company."
 
  If a Change of Control were to occur, it is unlikely that the Company would
be able to both repurchase all of the Debentures and repay all of its
obligations under other indebtedness that would become payable upon the
occurrence of such Change of Control, unless it could obtain alternate
financing. There can be no assurance that the Company would be able to obtain
any such financing on commercially reasonable terms or at all, and
consequently no assurance can be given that the Company would be able to
purchase any of the Debentures issued in exchange for Securities tendered
pursuant to a Change of Control Offer.
 
EFFECT OF ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF SECURITIES
 
  If a Trust Enforcement Event occurs and is continuing, then the holders of
Par Securities would rely on, and in certain circumstances could cause, the
enforcement by the Property Trustee of its rights as a holder of the
Debentures against the Company. In addition, the holders of a majority in
liquidation amount of the Par Securities will have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Property Trustee or to direct the exercise of any trust or power
conferred upon the Property Trustee under the Declaration, including the right
to direct the Property Trustee to exercise the remedies available to it as a
holder of the Debentures. If the Property Trustee fails to enforce its rights
with respect to the Debentures held by the Trust, any holder of Par Securities
may institute legal proceedings directly against the Company to enforce the
Property Trustee's rights under such Debentures without first instituting any
legal proceedings against such Property Trustee or any other person or entity.
 
  If the Company were to default on its obligation to pay amounts payable
under the Debentures, the Trust would lack funds for the payment of
Distributions or amounts payable on redemption of the Par Securities or
otherwise, and, in such event, holders of the Par Securities would not be able
to rely upon the Trust Guarantee for payment of such amounts. However, in the
event the Company failed to pay interest on or principal of the Debentures on
the payment date on which such payment is due and payable, then a holder of
Par Securities may directly institute a proceeding against the Company for
enforcement of payment to such holder of the interest or Additional Interest
on, premium, if any, or principal of such Debentures having a principal amount
equal to the aggregate liquidation amount of the Par Securities of such holder
(a "Direct Action"). In connection with such Direct Action, the Company will
be subrogated to the rights of such holder of Par Securities under the
Declaration to the extent of any payment made by the Company to such holder of
Securities in such Direct Action. Except as set forth herein, holders of Par
Securities will not be able to exercise directly any other remedy available to
the holders of Debentures or assert directly any other rights in respect of
the Debentures. See "Description of Securities--Trust Enforcement Events,"
"Description of Trust Guarantee" and "Description of Debentures--Indenture
Events of Default." The Declaration provides that each holder of Par
Securities by acceptance thereof agrees to the provisions of the Trust
Guarantee and the Indenture.
 
                                      37

 
RANKING OF OBLIGATIONS UNDER THE DEBENTURES, THE TRUST GUARANTEE AND THE
SUBSIDIARY GUARANTEES OF NOTE TO INVESTORS
 
  Until the Remarketing Settlement Date, the Debentures and the Trust
Guarantee will be general unsecured obligations of the Company ranking on a
parity with all Indebtedness of the Company, if any, that is not subordinated
to the Debentures or Trust Guarantee and senior to any Indebtedness of the
Company that is subordinated to the Debentures or Trust Guarantee. Until the
Remarketing Settlement Date, when the Subsidiary Guarantees will be released,
the Subsidiary Guarantees will rank on a parity with all Indebtedness of the
Subsidiary Guarantors, if any, that is not subordinated to the Subsidiary
Guarantees, and senior to any Indebtedness of the Subsidiary Guarantors that
is subordinated to the Subsidiary Guarantees. Until the Remarketing Settlement
Date, the Debentures and the Trust Guarantee will be effectively subordinated
to all Indebtedness and other liabilities of SPB and the Special Purpose
Subsidiaries, and the Debentures, the Trust Guarantee and the Subsidiary
Guarantees will be effectively subordinated to secured Indebtedness of the
Company and the Subsidiary Guarantors. As of December 31, 1997, the Debentures
and Trust Guarantee would have been effectively subordinated to approximately
$1.3 billion of deposits and other borrowings at SPB and the Debentures, Trust
Guarantee and Subsidiary Guarantees would have been effectively subordinated
to approximately $109.8 million of secured Indebtedness of the Subsidiary
Guarantors.
 
  After the Remarketing Settlement Date, the Debentures and the Trust
Guarantee will be subordinated and junior in right of payment to all Senior
Debt of the Company, will be effectively subordinated to secured Indebtedness
of the Company and will be effectively subordinated to all Indebtedness and
other liabilities of all of the Subsidiaries of the Company. As of December
31, 1997, the Debentures and Trust Guarantee would have been subordinated to
approximately $219.8 million of Senior Debt of the Company and would have been
effectively subordinated to approximately $1.4 billion of Indebtedness of the
Company's subsidiaries (including approximately $1.2 billion of deposits,
$45.0 million of FHLB borrowings and $35.0 million of other borrowings at SPB
and $109.8 million of secured Indebtedness of the Company's Subsidiaries).
 
  ICII is a holding company that conducts substantially all of its business
operations through its subsidiaries. For the years ended December 31, 1997,
1996 and 1995, approximately 48.2%, 34.8% and 30.2%, respectively, of the
Company's total revenue was generated by the operations of ICII, with 51.8%,
65.2% and 69.8%, respectively, being generated by the Company's subsidiaries.
Consequently, the Company's operating cash flow and its ability to service its
Indebtedness, including the Debentures, are dependent upon the cash flow of
the Company's subsidiaries and the payment of funds by such subsidiaries to
ICII in the form of loans, dividends or otherwise. The Restricted Subsidiaries
are separate and distinct legal entities apart from ICII and each Subsidiary
Guarantor has agreed to guarantee payment of the Debentures on a senior
unsecured basis until the Remarketing Settlement Date.
 
  In addition, although a substantial portion of the Company's business is
conducted through SPB, SPB is not a Subsidiary Guarantor and SPB's ability to
pay dividends to ICII is dependent upon its ability to generate earnings and
is subject to a number of regulatory and other restrictions described below.
Because SPB will not execute a Subsidiary Guarantee, the Debentures will be
effectively subordinated to all indebtedness of SPB. As of December 31, 1997,
SPB had approximately $1.3 billion of deposits and other borrowings, all of
which would have been effectively senior to the Debentures. In addition, due
to these restrictions and SPB's rapid growth, SPB has retained most of its
internally generated earnings and has required the infusion of significant
amounts of additional capital by ICII. The Company expects such trends to
continue for the foreseeable future and has contributed approximately $35.0
million of the proceeds of the 9 7/8% Senior Notes offering to the capital of
SPB in the form of subordinated indebtedness. ICII may be required to make
additional capital contributions to SPB. There can be no assurance that the
Company's operations will generate sufficient cash flow to support payment of
interest or principal on the Debentures, or that dividend distributions will
be available from SPB or any ICII subsidiary to fund such payments.
 
  Certain provisions of the Federal Deposit Insurance Corporation Improvements
Act of 1991 ("FDICIA") generally prohibit any state nonmember bank (including,
for this purpose, SPB) from making a capital
 
                                      38

 
distribution (including payment of dividends) if it would cause the
institution to become "undercapitalized" (as defined for purposes of those
provisions). See "Business--Regulation--Thrift and Loan Operations." In
addition, the Federal Deposit Insurance Corporation (the "FDIC") has advised
insured institutions that the payment of cash dividends in excess of current
earnings from operations is inappropriate and may be cause for supervisory
action. As a result of this policy, 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.
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 to
ICII in some circumstances might constitute unsafe or unsound practices and
prohibit payment of dividends. Under California law, a thrift and loan is
subject to certain leverage limitations that are not generally applicable to
commercial banks or savings and loan associations. In particular, a financial
institution that has been in operation in excess of 60 months may have
outstanding at any time deposits not to exceed 20 times paid-up and unimpaired
capital and surplus as restricted by the institution's by-laws not to be
available for dividends, with the exact limitation subject to order by the
California Commissioner of Corporations (the "Commissioner"). The Commissioner
has issued an order to SPB authorizing the maximum 20 times leverage standard.
 
  Under California law, SPB is not permitted to declare dividends on its
capital stock unless it has at least $750,000 of unimpaired capital plus
additional capital stock of $50,000 for each branch office. In addition, no
distribution of dividends is permitted unless: (i) such distribution would not
exceed a thrift and loan's retained earnings, (ii) any payment would not
result in a violation of the approved minimum capital to thrift and loan
deposit leverage ratio and (iii) in the alternative, after giving effect to
the distribution, either (y) the sum of a thrift and loan's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would not be less than 125% of its liabilities (net of deferred taxes, income
and other credits), and (z) current assets would not be less than current
liabilities (except that if a thrift and loan's average earnings before taxes
for the last two years had been less than average interest expense, current
assets must be not less than 125% of current liabilities). A portion of SPB's
capital and surplus is currently restricted from the payment of dividends. As
of December 31, 1997, the amount SPB could dividend to ICII under California
law would be limited to $32.1 million.
 
EFFECT OF TENDER OF PAR SECURITIES IN THE REMARKETING; EFFECT OF ELECTION TO
RETAIN
 
  Any Notice of Election to retain or tender Par Securities for purchase in
the Remarketing will be irrevocable. In addition, if any holder of Par
Securities fails timely to deliver a Notice of Election, the Par Securities of
such holder will be deemed tendered for purchase in the Remarketing. See
"Description of Securities--Remarketing."
 
  If a holder of Par Securities makes a valid election to retain Par
Securities, following the Remarketing Settlement Date, the distribution rate
on such holder's retained Securities will be the Adjusted Distribution Rate
and the Distributions on such holder's retained Par Securities may be deferred
as described in "--Option to Extend Interest Payment Period; Tax
Consequences." In addition, the obligations of the Company under the Trust
Guarantee and under the Debentures will no longer be senior unsecured
obligations of the Company and will rank subordinate and junior in right of
payment to all Indebtedness of the Company. See "--Ranking of Obligations
under the Debentures, the Trust Guarantee and the Subsidiary Guarantees of
Note to Investors."
 
OPTION TO EXTEND INTEREST PAYMENT PERIOD; POTENTIAL ADVERSE TAX CONSEQUENCES
TO THE HOLDERS
 
  Following the Remarketing Settlement Date, the Company has the right under
the Indenture to defer the payment of interest on the Debentures at any time
or from time to time for a period not exceeding 10 consecutive semi-annual
periods, provided that no Extension Period may extend beyond the Stated
Maturity of the Debentures. As a consequence of any such deferral, semi-annual
Distributions on the Securities by the Trust will be deferred during such
Extension Period but would continue to accumulate at the Adjusted Distribution
Rate, compounded semi-annually during any such Extension Period. During any
such Extension Period, the Company
 
                                      39

 
may not, and may not permit any subsidiary of the Company to, (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or
(ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank on a parity
with or junior to the Debentures or make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any subsidiary of
the Company if such guarantee ranks on a parity with or junior to the
Debentures (other than (a) dividends or distributions in common stock of the
Company, (b) payments under the Trust Guarantee (c) any declaration of a
dividend in connection with the implementation of a stockholders' rights plan,
or the issuance of stock under any such plan in the future, or the redemption
or repurchase of any such rights pursuant thereto, and (d) purchases of common
stock related to the issuance of common stock or rights under any of the
Company's benefit plans). Prior to the termination of any such Extension
Period, the Company may further extend the Extension Period, provided that no
Extension Period may exceed 10 consecutive semi-annual periods or extend
beyond the Stated Maturity of the Debentures. Upon the termination of any
Extension Period and the payment of all amounts then due on any Interest
Payment Date, the Company may elect to begin a new Extension Period subject to
the above requirements. See "Description of Securities--Distributions" and
"Description of Debentures--Option to Extend Interest Payment Period."
 
  Should the Company defer payment of interest on the Debentures, a holder of
Par Securities will be required to accrue income (in the form of original
issue discount) for United States federal income tax purposes in respect of
its pro rata share of the Debentures held by the Trust. As a result, a holder
of Par Securities will include such interest income in gross income for United
States federal income tax purposes in advance of the receipt of cash
attributable to such interest income, and will not receive the cash related to
such income from the Trust if the holder disposes of the Par Securities prior
to the record date for the payment of Distributions with respect to such
Extension Period. See "United States Federal Income Tax Consequences--Interest
Income and Original Issue Discount" and "--Sales of Par Securities."
 
  The Company has no current intention of exercising its right, following the
Remarketing Settlement Date, to defer payments of interest by extending the
interest payment period on the Debentures. However, should the Company elect
to exercise such right in the future, the market price of the Par Securities
is likely to be adversely affected. A holder that disposes of its Par
Securities during an Extension Period, therefore, might not receive the same
return on its investment as a holder that continues to hold its Par
Securities. In addition, as a result of the existence of the Company's right
to defer interest payments, the market price of the Par Securities (which
represent undivided beneficial ownership interests in the Debentures),
following the Remarketing Settlement Date, may be more volatile than the
market prices of other similar securities where the issuer does not have such
right to defer interest payments.
 
SPECIAL EVENT REDEMPTION; SHORTENING OF STATED MATURITY
 
  Upon the occurrence and continuation of a Special Event, the Company will
have the right, if certain conditions are met, (i) to terminate the Trust and
cause the Debentures to be distributed to the holders of the Par Securities in
exchange therefor upon liquidation of the Trust, (ii) to shorten the Stated
Maturity of the Debentures, in the case of a Tax Event, to a date not earlier
than June 14, 2012 or (iii) after the Remarketing Settlement Date, to redeem
the Debentures in whole (but not in part) within 90 days following the
occurrence of such Special Event and thereby cause a mandatory redemption of
the Par Securities. See "Description of Securities--Redemption--Special Event
Redemption or Distribution of Debentures; Shortening of Stated Maturity."
 
  There can be no assurance as to the market prices for the Par Securities or
the Debentures that may be distributed in exchange for Par Securities if a
dissolution or liquidation of the Trust were to occur or if the Stated
Maturity of the Debentures is shortened. Because holders of Par Securities may
receive Debentures upon the occurrence of a Special Event, prospective
purchasers of Par Securities are also making an investment decision with
regard to the Debentures and should carefully review all the information
regarding the Debentures contained herein. See "Description of Securities--
Redemption--Special Event Redemption or Distribution of Debentures; Shortening
of Stated Maturity" and "Description of Debentures--General."
 
                                      40

 
LIQUIDATION DISTRIBUTION OF DEBENTURES
 
  Upon the occurrence and continuation of a Special Event, the Company will
have the right to terminate the Trust and cause the Debentures to be
distributed, after the satisfaction of liabilities to creditors (if any), to
the holders of the Trust Securities in liquidation of the Trust. In addition,
upon liquidation of the Trust and certain other events, the Debentures may be
distributed to such holders. Under current United States federal income tax
law and interpretations thereof and assuming, as expected, the Trust is
treated as a grantor trust for United States federal income tax purposes, a
distribution by the Trust of the Debentures pursuant to a liquidation of the
Trust will not be a taxable event to the Trust or to holders of the Par
Securities and will result in a holder of the Par Securities receiving
directly such holder's pro rata share of the Debentures (previously held
indirectly through the Trust). If, however, the liquidation of the Trust were
to occur because the Trust is subject to United States federal income tax with
respect to income accrued or received on the Debentures as a result of the
occurrence of a Tax Event or otherwise, the distribution of Debentures to
holders of the Par Securities by the Trust could be a taxable event to the
Trust and each holder, and holders of the Par Securities may be required to
recognize gain or loss as if they had exchanged their Par Securities for the
Debentures they received upon the liquidation of the Trust. See "United States
Federal Income Tax Consequences--Distribution of Debentures or Cash Upon
Liquidation of the Trust."
 
  There can be no assurance as to the market prices for Par Securities or
Debentures that may be distributed in exchange for Par Securities if a
liquidation of the Trust occurs. Accordingly, the Par Securities that an
investor may purchase, whether pursuant to the offer made hereby or in the
secondary market, or the Debentures that a holder of Par Securities may
receive on liquidation of the Trust, may trade at a discount to the price that
the investor paid to purchase the Par Securities offered hereby. Because
holders of Par Securities may receive Debentures on termination of the Trust,
prospective purchasers of Par Securities are also making an investment
decision with regard to the Debentures and should carefully review all the
information regarding the Debentures contained herein. See "Description of
Securities--Redemption--Special Event Redemption or Distribution of
Debentures; Shortening of Stated Maturity" and "Description of Debentures--
General."
 
  If the holders of Par Securities receive Debentures upon liquidation or
dissolution of the Trust, the Debentures will be subject to the remarketing
procedures that would have been applicable to the Par Securities. See
"Description of Securities--Remarketing."
 
HOLDERS OF PAR SECURITY WILL HAVE LIMITED VOTING RIGHTS
 
  Holders of Par Securities generally will have limited voting rights relating
only to the modification of the Par Securities and certain other matters
described herein. Holders of Par Securities will not be entitled to vote to
appoint, remove or replace any of the Trustees (as defined below), which
voting rights are vested exclusively in the holder of the Common Securities.
The Trustees and the Company may amend the Declaration without the consent of
holders of Par Securities to ensure that the Trust will be classified as a
grantor trust for United States federal income tax purposes, even if such
action adversely affects the interests of such holders. See "Description of
Securities--Voting Rights; Amendment of the Declaration."
 
LACK OF PUBLIC MARKET MAY AFFECT RESALE OF NEW PAR SECURITIES
 
  The New Par Securities are being offered to the holders of the Old Par
Securities. The Old Par Securities constitute a new class of securities with
no established trading market. The Old Par Securities are eligible for trading
in the PORTAL market. To the extent that Old Par Securities are tendered and
accepted in the Exchange Offer, the trading market for the remaining
untendered Old Par Securities could be adversely affected. There is no
existing trading market for the New Par Securities, and there can be no
assurance regarding the future development of a market for the New Par
Securities, or the ability of holders of the New Par Securities to sell their
New Par Securities or the price at which such holders may be able to sell
their New Par Securities. If such a market were to develop, the New Par
Securities could trade at prices that may be higher or lower than their
principal amount or purchase price, depending on many factors, including
prevailing interest rates, the Company's operating results and the market for
similar securities. The Initial Purchaser has advised the Company
 
                                      41

 
that it currently intends to make a market in the New Par Securities. The
Initial Purchaser is not obligated to do so, however, and any market-making
with respect to the New Par Securities may be discontinued at any time without
notice. Therefore, there can be no assurance as to the liquidity of any
trading market for the New Par Securities or that an active public market for
the New Par Securities will develop. The Company does not intend to apply for
listing or quotation of the New Par Securities on any securities exchange or
stock market unless requested to do so by the holders of a majority in
aggregate principal amount of the New Par Securities or the managing
underwriter, if any, only in connection with this registration of the New Par
Securities.
 
CONSEQUENCES OF FAILURE TO EXCHANGE OLD PAR SECURITIES
 
  Holders of Old Par Securities who do not exchange their Old Par Securities
for New Par Securities pursuant to the Exchange Offer will continue to be
subject to the restrictions on transfer of such Old Par Securities as set
forth in the legend thereon as a consequence of the issuance of the Old Par
Securities pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state
securities laws. In general, the Old Par Securities may not be offered or
sold, unless registered under the Securities Act and applicable state
securities laws. None of the Trust, the Company nor the Subsidiary Guarantors
(collectively, the "Registrants") currently anticipate that it will register
Old Par Securities under the Securities Act. Based on interpretations by the
Staff of the Division of Corporation Finance of the Commission, as set forth
in no-action letters issued to third parties, the Registrants believe that New
Par Securities issued pursuant to this Exchange Offer in exchange for Old Par
Securities may be offered for resale, resold and otherwise transferred by a
holder thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Par Securities are acquired in the
ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Par Securities. However, any holder of Old Par Securities who is an
"affiliate" of the Registrants (within the meaning of Rule 405 under the
Securities Act) or who intends to participate in the Exchange Offer for the
purpose of distributing New Par Securities, or any broker-dealer who purchased
Old Par Securities from the Trust to resell them pursuant to Rule 144A under
the Securities Act ("Rule 144A") or any other available exemption under the
Securities Act, (a) will not be able to rely on the interpretations of the
Staff of the Division of Corporation Finance of the Commission set forth in
the above-mentioned interpretive letters, (b) will not be permitted or
entitled to tender such Old Par Securities in the Exchange Offer and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Old Par
Securities unless such sale is made pursuant to an exemption from such
requirements. In addition, as described below, if any broker-dealer holds Old
Par Securities acquired for its own account as a result of market-making or
other trading activities and exchanges such Old Par Securities for New Par
Securities, then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Par Securities.
 
  Each holder of Old Par Securities who wishes to exchange Old Par Securities
for New Par Securities in the Exchange Offer will be required to represent
that (i) it is not an "affiliate" of the Registrants, (ii) any New Par
Securities to be received by it are being acquired in the ordinary course of
its business, (iii) it has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of
such New Par Securities, and (iv) if such holder is not a broker-dealer, such
holder is not engaged in, and does not intend to engage in, a distribution
(within the meaning of the Securities Act) of such New Par Securities. In
addition, the Registrants may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Registrants (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934 (the "Exchange Act")) on behalf of whom such holder holds
the Par Securities to be exchanged in the Exchange Offer. Each broker-dealer
that receives New Par Securities for its own account pursuant to the Exchange
Offer must acknowledge that it acquired the Old Par Securities for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Par Securities.
The Letter of Transmittal states that
 
                                      42

 
by so acknowledging and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the Staff of the Division of
Corporation Finance of the Commission in the interpretive letters referred to
above, the Registrants believe that broker-dealers who acquired Old Par
Securities for their own accounts, as a result of market-making activities or
other trading activities ("Participating Broker-Dealers") may fulfill their
prospectus delivery requirements with respect to the New Par Securities
received upon exchange of such Old Par Securities with this Prospectus, as it
may be amended or supplemented from time to time. Subject to certain
exceptions, the Registrants have agreed that this Prospectus, as it may be
amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of such New Par Securities for a
period ending one year after the Registration Statement of which this
Prospectus constitutes a part is declared effective. Any Participating Broker-
Dealer who is an "affiliate" of the Registrants (within the meaning of Rule
405 under the Securities Act) may not rely on such interpretive letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. See "The Exchange
Offer--Resales of New Par Securities" and "--Broker-Dealer Considerations."
 
  Any Old Par Securities not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Declaration
(except for those rights relating to the Exchange Offer which terminate upon
consummation of the Exchange Offer). Following consummation of the Exchange
Offer, the holders of Old Par Securities will continue to be subject to all of
the existing restrictions upon transfer thereof and none of the Registrants
will have any further obligation to such holders (other than under certain
limited circumstances) to provide for registration under the Securities Act of
the Old Par Securities held by them. Any Old Par Securities which have not
been exchanged for New Par Securities pursuant to the Exchange Offer will be
mandatorily redeemed by the Company on the Remarketing Settlement Date, as
described under "Description of the Securities--Redemption--Transfer
Restricted Security Redemption." To the extent that Old Par Securities are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Old Par Securities could be adversely affected. See "The Exchange
Offer--Consequences of a Failure to Exchange Old Par Securities." In addition,
to comply with the securities laws of certain jurisdictions, if applicable,
the New Par Securities may not be offered or sold unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and is complied with. The
Registrants have agreed, pursuant to the Registration Rights Agreement,
subject to certain limitations specified therein, to register or qualify the
New Par Securities for offer or sale under the securities laws of such
jurisdiction as any holder reasonably requests in writing. Unless a holder so
requests, the Registrants do not currently intend to register or qualify the
sale of the New Par Securities in any such jurisdictions. See "The Exchange
Offer."
 
                                USE OF PROCEEDS
 
  None of the Registrants will receive any cash proceeds from the issuance of
the New Par Securities offered hereby. The New Par Securities will be
exchanged for Old Par Securities in like liquidation amount, which will be
retired and canceled. The cash proceeds from the sale of the Old Par
Securities were used to purchase the Old Debentures.
 
                             ACCOUNTING TREATMENT
 
  For financial reporting purposes, the Trust is treated as a subsidiary of
the Company and, accordingly, the accounts of the Trust are included in the
consolidated financial statements of the Company. The Par Securities are
classified in the consolidated balance sheet of the Company as a liability
under the caption "Remarketed Par Securities" and appropriate disclosures
about the Par Securities will be included in the notes to the consolidated
financial statements. For financial reporting purposes, the Company will
record Distributions payable on the Par Securities as an expense in the
consolidated statements of income.
 
                                      43

 
                                CAPITALIZATION
 
  The following table sets forth the capitalization of the Company as of
December 31, 1997. See "Summary Historical and Pro Forma Consolidated
Financial and Other Data." In addition, at December 31, 1997, the Company had
other debt consisting of deposits ($1.2 billion) incurred in the ordinary
course of business. This table should be read in conjunction with the
consolidated financial statements of the Company, including the related notes
thereto.
 


                                                            AT DECEMBER 31,
                                                                  1997
                                                         ----------------------
                                                         (DOLLARS IN THOUSANDS)
                                                      
Cash....................................................        $ 50,597
Loans held for sale.....................................         162,571
Other borrowings........................................         144,841
Long-term debt:
  9 3/4% Senior Notes due 2004(1).......................          19,813
  9 7/8% Senior Notes due 2007..........................         200,000
  Debentures............................................          70,000
Shareholders' equity:
  Preferred Stock; 8,000,000 shares authorized; none
   issued and outstanding...............................             --
  Common Stock, no par value; 80,000,000 shares
   authorized; 38,791,439 shares issued and outstanding.         147,109
Retained earnings.......................................         174,898
Unrealized gain on securities available for sale, net...           1,926
                                                                --------
  Total shareholders' equity............................         323,933
                                                                --------
    Total capitalization................................        $613,746
                                                                ========

- --------
(1)  Represents approximately $20.2 million of the 9 3/4% Senior Notes not
     tendered pursuant to the Tender Offer net of discount of $361,000.
 
                                      44

 
                     SELECTED CONSOLIDATED FINANCIAL DATA
 
  The selected consolidated income statement data for each of the years in the
three-year period ended December 31, 1997 and the selected consolidated
balance sheet data as of December 31, 1997 and 1996 have been derived from
audited financial statements of the Company which, together with the notes
thereto and the related report of KPMG Peat Marwick LLP, independent certified
public accountants, are included in this Prospectus. The selected consolidated
balance sheet data as of December 31, 1995, 1994 and 1993 and the income
statement data for the years ended December 31, 1994 and 1993 are derived from
audited consolidated financial statements of the Company, which have been
audited by KPMG Peat Marwick LLP but are not included in this Prospectus.
 


                                             YEAR ENDED DECEMBER 31,
                                    --------------------------------------------
                                    1997(4)     1996     1995     1994    1993
                                    --------  -------- --------  ------- -------
                                                  (IN THOUSANDS)
                                                          
INCOME STATEMENT DATA:
Revenues:
 Gain on sale of loans and
  leases..........................  $ 67,723  $ 88,156 $ 39,557  $ 8,628 $18,149
                                    --------  -------- --------  ------- -------
 Interest on loans and leases.....   201,728   188,242  120,244   79,173  51,612
 Interest on investments..........    23,531    10,807    6,630    3,610   1,972
 Interest on other finance
  activities......................     2,678     8,422    2,608      --      --
                                    --------  -------- --------  ------- -------
   Total interest income..........   227,937   207,471  129,482   82,783  53,584
 Interest expense.................   126,594   135,036   95,728   61,674  29,811
                                    --------  -------- --------  ------- -------
   Net interest income............   101,343    72,435   33,754   21,109  23,773
 Provision for loan and lease
  losses..........................    38,951     9,773    5,450    5,150   2,350
                                    --------  -------- --------  ------- -------
   Net interest income after
    provision for loan and lease
    losses........................    62,392    62,662   28,304   15,959  21,423
 Loan servicing income............    10,743     1,680   12,718   16,332   6,785
 Gain on sale of servicing
  rights..........................       --      7,591    3,578   30,837  23,655
 Gains on sale of FMC stock.......    92,137       --       --       --      --
 Gains on sale of SPFC stock......     9,488    82,690      --       --      --
 Gain on sale of IMH stock........    11,496       --       --       --      --
 Equity in net income of SPFC.....    25,869       --       --       --      --
 Equity in net loss of FMC........    (3,050)      --       --       --      --
 Investment banking fees..........     7,702       --       --       --      --
 Gain on termination of REIT
  advisory agreement..............    19,046       --       --       --      --
 Other income.....................     6,014    14,154    1,152    1,048   1,414
                                    --------  -------- --------  ------- -------
   Total other income.............   179,445   106,115   17,448   48,217  31,854
                                    --------  -------- --------  ------- -------
   Total revenues.................   309,560   256,933   85,309   72,804  71,426
Expenses:
 Personnel expense................    60,830    48,355   34,053   33,477  24,520
 Other expenses...................    89,554    50,694   27,127   28,037  15,433
                                    --------  -------- --------  ------- -------
   Total expenses.................   150,384    99,049   61,180   61,514  39,953
                                    --------  -------- --------  ------- -------
   Income before income taxes,
    minority interest and
    extraordinary item............   159,176   157,884   24,129   11,290  31,473
Income taxes......................    58,747    69,874   10,144    4,685  13,055
Minority interest in income (loss)
 of consolidated subsidiaries.....    10,513    12,026     (208)     --      --
                                    --------  -------- --------  ------- -------
   Income before extraordinary
    item..........................    89,916    75,984   14,193    6,605  18,418
Extraordinary item net of income
 taxes............................    (3,995)      --       --       919     --
                                    --------  -------- --------  ------- -------
   Net income.....................  $ 85,921  $ 75,984 $ 14,193  $ 7,524 $18,418
                                    ========  ======== ========  ======= =======

 
                                      45

 


                                        YEAR ENDED DECEMBER 31,
                          ----------------------------------------------------------
                            1997       1996        1995        1994          1993
                          ---------  ---------  -----------  ---------    ----------
                             (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                           
BASIC INCOME PER
 SHARE(1):
 Income before
  extraordinary item....  $    2.33  $    2.11  $      0.45  $    0.21    $     0.58
 Extraordinary item--
  Loss on early
  extinguishment of
  debt, net of income
  taxes.................      (0.10)       --           --         --            --
 Extraordinary item--
  Repurchase of Senior
  Notes, net of income
  taxes.................        --         --           --        0.03           --
                          ---------  ---------  -----------  ---------    ----------
   Net income per common
    share...............  $    2.23  $    2.11  $      0.45  $    0.24    $     0.58
                          =========  =========  ===========  =========    ==========
DILUTED INCOME PER
 SHARE(1):
 Income before
  extraordinary item....  $    2.20  $    1.95  $      0.40  $    0.19    $     0.54
 Extraordinary item.....      (0.10)       --           --        0.03           --
                          ---------  ---------  -----------  ---------    ----------
   Net income...........  $    2.10  $    1.95  $      0.40  $    0.22    $     0.54
                          =========  =========  ===========  =========    ==========
 Weighted average fully
  diluted shares
  outstanding (000s)....     40,855     38,975       35,122     33,582        33,880
CASH FLOW DATA:
 Net cash provided by
  (used in)
  operating activities..  $  57,727  $ (31,262) $(1,173,703) $ 961,579    $ (903,050)
 Net cash (used in)
  provided by
  investing activities..   (355,124)   244,177      140,961   (796,638)     (145,701)
 Net cash (used in)
  provided by
  financing activities..    273,747   (177,834)   1,047,004   (177,314)    1,066,584
                          ---------  ---------  -----------  ---------    ----------
   Net change in cash...  $ (23,650) $  35,081  $    14,262  $ (12,373)   $   17,833
                          =========  =========  ===========  =========    ==========

                                        YEAR ENDED DECEMBER 31,
                          ----------------------------------------------------------
                            1997       1996        1995        1994          1993
                          ---------  ---------  -----------  ---------    ----------
                                         (DOLLARS IN MILLIONS)
                                                           
OPERATING AND FINANCIAL
 DATA(2):
 Loans originated:
   ICII.................  $     --   $     310  $     1,816  $   4,260    $    6,019
   ICW..................          1        --           --         --            --
   SPB..................        398        531          724         NA(3)         NA(3)
   SPFC(4)..............        --         790          288        190           --
   FMAC(4)..............        511        450          164        --            --
   IBC..................        171         87           36        --            --
   AMN(5)...............        151        --           --         --            --
                          ---------  ---------  -----------  ---------    ----------
     Total..............  $   1,232  $   2,168  $     3,028  $   4,450    $    6,019
                          =========  =========  ===========  =========    ==========
 Loans securitized:
   ICII.................  $     --   $     --   $       177  $     --     $      --
   SPB..................        203        277          511         46           --
   SPFC(4)..............        --         657          165        --            --
   FMAC.................        343        325          105        --            --
   IBC..................        214         87           85        --            --
   AMN(5)...............        159        --           --         --            --
                          ---------  ---------  -----------  ---------    ----------
     Total..............  $     919  $   1,346  $     1,043  $      46    $      --
                          =========  =========  ===========  =========    ==========
 Outstanding balance of
  loans and leases
  securitized (at end
  of period)(6).........     $1,277     $2,118       $1,047        $45         $ --
SELECTED RATIOS:
 Ratio of earnings to
  fixed charges(7)......        2.2x       2.2x         1.3x       1.2x          2.1x
 Pre-tax interest
  coverage ratio(8).....        7.1       17.0          3.9        2.4           --
 Ratio of indebtedness
  to total
  capitalization (at
  end of period)(9).....       47.2%      40.5%        46.1%      51.4%          -- %
 Average equity to
  average assets........      11.30       7.27         4.72       4.86          6.71
 Return on average
  common equity.........      34.95      45.55        17.59      10.57         31.76
 Return on average
  assets................       3.95       3.31         0.82       0.51          2.13
SPB REGULATORY CAPITAL
 RATIOS
 (AT END OF PERIOD):
 California leverage
  limitation(10)........      13.20%     13.50%       11.58%     11.50%         7.29%
 Risk-based--Tier 1.....       8.75       9.71        11.72      14.21         10.27
 Risk-based--Total......      12.25      10.87        13.18      15.13         10.73
 FDIC Leverage Ratio....       8.30       9.35         8.04       8.08          9.47
ASSET QUALITY RATIOS (AT
 END OF PERIOD):
 Non-performing assets
  as a percentage of
  total assets..........       4.31%      2.64%        1.55%      1.16%         0.64%
 Allowance for loan
  losses as a
  percentage of non-
  performing loans......      53.87      38.94        44.30      53.83         65.91
 Net charge-offs as a
  percentage of average
  total loans held for
  investment............       2.72       0.94         0.36       0.23          0.89

 
                                       46

 


                                             AT DECEMBER 31,
                          ------------------------------------------------------
                           1997 (4)     1996       1995       1994       1993
                          ---------- ---------- ---------- ---------- ----------
                                              (IN THOUSANDS)
                                                       
BALANCE SHEET DATA:
 Cash...................  $   50,597 $   74,247 $   39,166 $   24,904 $   37,277
 Interest bearing
  deposits..............     103,738      3,369    267,776     10,600     90,000
 Investment securities,
  including FHLB Stock..     234,277    101,448     28,713     18,817     18,000
 Loans held for sale....     162,571    940,096  1,341,810    263,807  1,238,006
 Loans held for
  investment, net.......   1,266,718  1,068,599    668,771  1,029,556    154,595
 Securitization related
  assets................      43,105    159,707     58,272      4,558        529
 Total assets...........   2,102,094  2,470,639  2,510,635  1,420,409  1,572,663
 Deposits...............  $1,156,022 $1,069,184 $1,092,989 $  934,621 $1,001,468
 Borrowings from FHLB...      45,000    140,500    190,000    295,000    320,000
 Other borrowings.......     144,841    694,352    987,810        --     147,611
 Senior notes (11)......     219,813     88,209     80,472     80,343        --
 Remarketed par
  securities............      70,000        --         --         --         --
 Total liabilities......   1,778,161  2,231,131  2,416,533  1,344,536  1,504,411
 Shareholders' equity...     323,933    239,508     94,102     75,873     68,253

- --------
 (1) Income per share and weighted average shares outstanding reflect 1-for-
     10, 1-for-10 and 1-for-19 stock dividends paid in 1996, 1993 and 1992,
     respectively, a 3-for-2 stock split effected in 1995 and a 2-for-1 stock
     split effected in 1996. All per share amounts reflect the adoption of
     SFAS No. 128.
 (2) Does not include loans originated or securitized by ICIFC. Excludes SPFC
     and FMAC loan origination and securitization activity for periods
     subsequent to their respective deconsolidations.
 (3) Information not available.
 (4) Commencing with the three months ended March 31, 1997, and December 31,
     1997, the financial statements of SPFC and FMAC, respectively, are no
     longer consolidated with those of ICII.
 (5)  Represents volume for the period from AMN's acquisition (March 14, 1997)
      through December 31, 1997.
 (6) Represents the outstanding balance of loans and leases securitized,
     excluding loans held for sale and investment.
 (7) For purposes of calculating the ratio of earnings to fixed charges,
     earnings consist of income before income taxes, plus fixed charges. Fixed
     charges represent interest expense on all indebtedness and the interest
     factor of rent expense estimated to be one-third of occupancy expense.
 (8) Ratio of (i) the sum of income before income taxes plus interest expense
     on non-funding indebtedness to (ii) interest expense on non-funding
     indebtedness.
 (9) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness
     plus total shareholders' equity.
(10) Ratio of (i) SPB's total shareholders' equity to (ii) total deposits.
(11) At December 31, 1997, represents $200.0 million of the 9 7/8% Senior
     Notes and approximately $20.2 million of the 9 3/4% Senior Notes not
     tendered pursuant to the Tender Offer, net of discount of $361,000
     related to the 9 3/4% Senior Notes.
 
                                      47

 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
 
GENERAL
 
 Organization
 
  Imperial Credit Industries, Inc. ("ICII"), incorporated in 1986 in the State
of California, is 23.0% owned by Imperial Bank as of December 31, 1997. In
1991, Imperial Bank recapitalized the Company to conduct a full service
mortgage banking operation.
 
  The consolidated financial statements include ICII, its significant wholly-
owned operating subsidiaries, significant majority-owned operating
subsidiaries and equity investments in two publicly traded companies
(collectively the "Company"). The significant wholly-owned subsidiaries
include: Southern Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"),
Imperial Credit Advisors, Inc. ("ICAI"), Auto Marketing Network ("AMN"),
Imperial Credit Commercial Asset Management Corporation ("ICCAMC") and
Imperial Credit Worldwide ("ICW"). The majority-owned significant operating
consolidated subsidiary is Imperial Capital Group ("ICG"), which is 60% owned
by the Company and 40% owned by ICG's management. The significant equity
investments in publicly traded companies are Southern Pacific Funding
Corporation ("SPFC") NYSE Symbol: SFC and Franchise Mortgage Acceptance
Company ("FMC") NASDAQ Symbol: FMAX. Both SPFC and FMC were former
consolidated subsidiaries of the Company. All material intercompany balances
and transactions with consolidated subsidiaries have been eliminated.
 
 Strategic Focus and Acquisitions
 
  Historically, the Company's primary business was the origination and sale of
conforming residential mortgage loans. This business experienced substantial
growth due to high levels of mortgage loan refinancing activity in 1992 and
1993, as interest rates dropped to historically low levels. However, as
interest rates increased and refinancing activity declined in 1994, conforming
residential mortgage loan originations on an industry-wide basis decreased
dramatically and pricing became increasingly competitive. The Company
recognized that the sub-prime residential mortgage loan market provided
greater opportunities for mortgage loan origination growth. As a result,
during 1995 and 1996, the Company directed additional capital and resources to
its sub-prime residential mortgage lending subsidiary, SPFC, and divested
substantially all of its conforming mortgage lending and servicing businesses.
At the same time, the Company entered or expanded its presence in higher
margin commercial and consumer lending markets. 1995 marked the first year for
the Company that included operations from both its historical operations and
newly acquired or recently started business lines.
 
  The Company now operates as a commercial and consumer finance company
providing loan and lease products in the following sectors: business finance
lending, commercial mortgage lending, consumer lending. The Company also is a
provider of other financial services and investment products.
 
  In 1995, the Company began to reposition, transform and diversify its core
business activities from the traditional mortgage banking operations of
originating and selling conforming residential mortgage loans to offering
higher margin loan, lease, investment and financial services products. The
Company's core business has remained consistent in that it originates loans
and leases funded primarily by warehouse lines of credit, repurchase
facilities, securitizations and whole loan sales in the secondary market. The
Company accomplished its diversification through a business strategy that
emphasizes:
 
  .  Investing in and managing businesses in niche segments of the financial
     services industry. The Company intends to retain a significant equity
     investment in the companies to provide a source of future earnings and
     cash flow for the Company.
 
  .  Conservative, disciplined underwriting and credit risk management.
 
  .  Loan and lease originations, where possible, on a wholesale basis.
 
  .  Securitization or sale in the secondary market of substantially all of
     the Company's loans and leases, other than those held by SPB for
     investment.
 
                                      48

 
  .  Maintaining business and financial flexibility to take advantage of
     changing market conditions with respect to specific financial services
     businesses.
 
  The Company diversified its loan and lease products by focusing on the
creation and acquisition of additional finance businesses in order to reduce
its dependency on residential mortgage lending. When acquiring new businesses
or targeting expansion opportunities, the Company seeks to retain existing
management and recruit additional experienced management to increase growth
and profitability and to reduce the risks associated with operating the newly
acquired entity. The Company, through its repositioning and diversification
process from the traditional mortgage banking operations of originating and
selling conforming residential loans to a more diversified financial services
company has accomplished that goal by its acquisitions of businesses in niche
segments of the financial services industry.
 
  For the years ended December 31, 1997, 1996 and 1995, the Company originated
or acquired $1.2 billion, $2.2 billion and $3.0 billion of loans and leases,
respectively. In addition, during the years ended December 31, 1997, 1996 and
1995, the Company completed securitization transactions totaling $919.1
million, $1.3 billion and $1.0 billion, respectively.
 
Impac Mortgage Holdings, Inc. and Impac Funding Corporation
 
  During 1995, the Company sold its mortgage conduit operations and SPB's
warehouse lending operations to Impac Mortgage Holdings, Inc. ("IMH") AMEX
Symbol: IMH, formerly Imperial Credit Mortgage Holdings. In exchange for these
assets, the Company received approximately 11.8% of the common stock of IMH.
Additionally, ICAI entered into a management agreement with IMH pursuant to
which ICAI advised upon the day-to-day operations of IMH and for which it was
paid a management fee. During 1997, the Company sold its common stock interest
in IMH, receiving proceeds of $12.0 million and recording a gain of
approximately $11.5 million.
 
  In December 1997, IMH and the Company negotiated a termination of the
management agreement (the "Termination Agreement"). The consideration received
by the Company pursuant to the Termination Agreement was comprised of
2,009,310 shares of IMH common stock and certain securitization-related
assets. Additionally, the Company agreed to cancel its note receivable from
ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is now
known as Impac Funding Corporation and is the origination unit of IMH., in the
amount of $29.1 million. The IMH common stock and the residual interests were
recorded by the Company at their estimated fair values of approximately $35.0
million and $13.1 million, respectively, for a total of $48.1 million. This
amount, when netted with the $29.1 million cancellation of the ICIFC note
receivable resulted in the gain on termination of the management agreement of
approximately $19.0 million.
 
  During the first quarter of 1997, the Company disposed of its common stock
interest in ICIFC, a wholly-owned subsidiary engaged in mortgage conduit
operations for IMH, resulting in a loss of $100,000. At December 31, 1996, the
Company owned 100% of the common stock of ICIFC which represented only a 1%
economic interest as IMH owned all of the non-voting preferred stock of ICIFC
which gave IMH a 99% economic interest in ICIFC. The Company's disposal of its
remaining economic interest in ICIFC concluded its exit from the former
mortgage banking operations.
 
Franchise Mortgage Acceptance Company
 
  On June 30, 1995, the Company completed the acquisition of certain net
assets from Greenwich Capital Financial Products, Inc. and formed FMAC, a
limited liability company, in which the Company had a 66.7% ownership
interest. The acquisition was accounted for as a purchase and the purchase
price of $7.6 million, which
included $3.8 million in contingent consideration for loans in the pipeline,
was allocated to the net assets acquired based on their fair value resulting
in goodwill of approximately $4.0 million. The Company's franchise lending
business was conducted through FMAC until November 1997, at which time FMAC
merged into FMC and FMC completed an initial public offering of its common
stock. The Company sold into FMC's initial public offering 3,568,175 shares at
$18.00 per share generating net proceeds of $59.7 million and a gain of
 
                                      49

 
$48.9 million. Additionally, the Company recognized a gain of $43.2 million
resulting from the adjustment in the basis of its investment in FMC due to the
offering and its reduced ownership percentage. Immediately after FMC's initial
public offering and at December 31, 1997, the Company's percentage ownership
of FMC common stock was 38.4%. Accordingly, FMC is no longer consolidated in
the Company's consolidated financial statements and the Company's investment
in FMC is accounted for under the equity method.
 
 Southern Pacific Funding Corporation
 
  During the first quarter of 1997, the Company sold 370,000 shares of SPFC
common stock at $16.63 per share generating net proceeds of $6.2 million and a
gain of $4.3 million. Such transaction reduced the Company's ownership
percentage in SPFC to 49.4% at March 31, 1997 from 51.2% at December 31, 1996.
Accordingly, SPFC's operating results are no longer consolidated with those of
the Company and the Company's investment in SPFC is accounted for under the
equity method. During the third quarter of 1997, the Company sold an
additional 500,000 shares of SPFC common stock generating net proceeds of $7.6
million and a gain of $5.2 million. At December 31, 1997, the Company's
ownership interest in SPFC was 47%. For the year ended December 31, 1996, a
substantial portion of the Company's operations were conducted through its
sub-prime residential lending subsidiary, SPFC. In June 1996, SPFC completed
an initial public offering of its common stock pursuant to which ICII was a
selling shareholder. SPFC and the Company sold 5.2 million shares and
3.5 million shares, respectively, at $11.33 per share. In a secondary offering
during 1996, the Company sold 1.5 million SPFC shares at $19.83 per share. The
Company recognized a gain on sale of the SPFC shares it owned of $51.2
million, which is net of offering expenses and the Company's cost basis in the
shares. The Company also recognized a gain of $31.4 million related to the
stock sold by SPFC. The gain related to the stock sold by SPFC is based on the
difference between the Company's equity ownership in SPFC after the sale and
such equity ownership prior to the sale, using the Company's respective SPFC
ownership percentages.
 
 Imperial Business Credit
 
  The Company expanded its commercial equipment leasing business conducted by
IBC through the acquisitions of substantially all of the assets of First
Concord Acceptance Corporation ("FCAC") for a purchase price of $21.4 million
in May 1995 and Avco Leasing Services, Inc. and Avco Financial Services of
Southern California, Inc. related to its business of originating and servicing
business equipment leases and agreed to assume certain liabilities in
connection therewith from Avco Financial Services, Inc. (the "Avco
Acquisition) for approximately $94.8 million in October 1996. These
acquisitions were accounted for as purchases and the purchase prices were
allocated to the net assets acquired based on their fair value resulting in
goodwill of $1.2 million and $12.5 million for the FCAC and Avco transactions,
respectively. IBC's lease originations were $151.3 million and $87.2 million,
and it securitized and sold $213.6 million and $87.0 million during the years
ended December 31, 1997, and 1996, respectively.
 
 Coast Business Credit
 
  In September 1995, the Company began making asset-based loans to middle
market companies located primarily in California by acquiring CoastFed
Business Credit. This business, now a division of SPB, was renamed Coast
Business Credit ("CBC").
 
  The acquisition was accounted for as a purchase and the purchase price of
$150 million was allocated to the net assets acquired based on their fair
value resulting in goodwill of approximately $16 million. At December 31, 1997
and 1996, CBC had total commitments of $803.3 million and $547.7 million, of
which $484.8 million and $288.5 million of loans were outstanding,
respectively.
 
 Imperial Capital Group
 
  During the fourth quarter of 1996, the Company continued to diversify and
strategically deploy its capital by announcing the closing of its investment
in Dabney/Resnick/Imperial LLC ("DRI") (formerly Dabney/Resnick, Inc.), an
investment banking firm. DRI was headquartered in Beverly Hills, California
with
 
                                      50

 
offices in Chicago, Illinois, Dallas, Texas, and Sun Valley, Idaho, and
offered full service investment banking, brokerage, and asset management
services. DRI managed and underwrote public offerings of securities, arranged
private placements and provided advisory and other services in connection with
mergers, acquisitions, restructurings, and other financial transactions. The
Company acquired a 1% interest in DRI and purchased a warrant to acquire an
additional 48% interest.
 
  In July 1997, the Company formed a new subsidiary, ICG, which includes a
registered broker/dealer and an asset management company offering individual
and corporate investors a wide range of investment products and services.
During the fourth quarter, in connection with the formation of ICG, the
Company recognized a pre-tax charge of $3.7 million relating to the
restructuring of its loan to DRI. As part of the DRI restructuring,
substantially all of the assets and personnel of DRI were acquired or hired by
ICG. During the fourth quarter of 1997, ICG raised $323 million for corporate
clients through private placement debt and equity offerings generating
investment banking fees of $7.7 million. The Company's ownership interest in
ICG is 60% as of December 31, 1997.
 
 Auto Marketing Network
 
  In March 1997, the Company acquired all the outstanding common stock of AMN,
a sub-prime auto lender engaged in the financing of new and used motor
vehicles on a national basis, for $750,000. As part of the acquisition, the
Company advanced $11.6 million to repay amounts owed pursuant to operating
lines of credit and for working capital purposes. The acquisition was recorded
using the purchase method of accounting. The purchase price was allocated to
the net assets acquired based on their fair value, and goodwill of
approximately $20.8 million was recorded. Since the March 1997 acquisition
date, AMN posted operating losses and experienced significant increases in
non-performing assets, loan charge-offs and loan loss provisions. In December
1997, the Company developed revised operating projections which indicated that
the goodwill resulting from the AMN acquisition was not recoverable.
Accordingly, the remaining goodwill balance of $20.1 million was written off
during the fourth quarter of 1997.
 
 PrinCap Mortgage Warehouse
 
  In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and
PrinCap Mortgage Backed, L.P. and contributed such assets to its PMW Mortgage
Warehouse, Inc. subsidiary ("PrinCap"). The acquisition was accounted for as a
purchase, and the purchase price of $123.7 million was allocated to the net
assets acquired based on their fair value resulting in goodwill of $6.8
million. PrinCap's primary business is residential mortgage warehouse lending
to medium-sized brokers and mortgage bankers on a national basis. At December
31, 1997, PrinCap had commitments outstanding and loans of $126.4 million and
$122.5 million, respectively.
 
 Imperial Credit Commercial Asset Management Corporation
 
  The Company formed ICCAMC, a wholly-owned subsidiary, to oversee the day to
day operations of ICCMIC, a real estate investment trust investing primarily
in performing multi-family and commercial real estate properties, loans and
mortgage-backed securities. In October 1997, ICCMIC completed its initial
public offering and sold approximately 34.5 million shares of common stock at
$15.00 per share resulting in net proceeds of approximately $481.2 million.
 
  The Company purchased 2,970,000 shares of ICCMIC common stock for $41.4
million in October 1997. In December 1997, the Company purchased an additional
100,000 shares of ICCMIC common stock for $1.5 million. The Company owned 8.9%
of the outstanding common stock of ICCMIC as of December 31, 1997.
 
YEAR 2000 COMPLIANCE
 
  The Company is aware of the issues associated with the "Year 2000" problem
concerning existing computer systems. The Year 2000 problem affects every
computer and subsystem the Company operates, both in-house and from
independent servicers and vendors. The issue is whether the Company's computer
systems
 
                                      51

 
will properly recognize the "00" date when the year changes to 2000. Computer
systems that do not properly recognize the "00" date could generate erroneous
data or cause a computer system to fail.
 
  The Company is utilizing both internal and external resources to correct,
reprogram and test the computer systems for the Year 2000 compliance. It is
anticipated that all reprogramming changes will be completed by December 31,
1998, allowing adequate time for testing all data from the Company's in-house,
independent servicers and vendor computer systems. Management has assessed the
Year 2000 compliance costs and does not believe such costs will have a
material effect on the Company's consolidated financial statements.
 
RESULTS OF OPERATIONS
 
 Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
REVENUE
 
 General
 
  The Company's consolidated net income for the year ended December 31, 1997
was $85.9 million or $2.10 diluted income per share as compared to $76.0
million or $1.95 diluted income per share for the year ended December 31,
1996. Basic consolidated income per share for the year ended December 31, 1997
was $2.23 per share as compared to $2.11 per share for the previous year.
Consolidated net income for the year ended December 31, 1997, includes an
extraordinary loss on early extinguishment of debt of $4.0 million, or $0.10
per common share, net of tax. The increase in net income is attributable to
several factors including: gains on sale of stock in SPFC, FMC and IMH; a gain
on the termination of a Real Estate Investment Trust ("REIT") advisory
agreement; an increase in net interest income; and an improved net interest
margin. These positive factors were partially offset by an increase in total
expenses and the provision for loan and lease losses.
 
 Gain on Sale of Loans and Leases
 
  Gain on sale of loans and leases decreased to $67.7 million for the year
ended December 31, 1997 from $88.2 million for 1996. Gain on sale of loans and
leases consists primarily of gains recorded upon the sale of loans and leases,
net of associated expenses, and to a lesser extent, fees received on the
origination of loans, and fees received for commitments to fund loans. Gains
on sale of loans and leases decreased during 1997 primarily as a result of the
impact of the deconsolidations of SPFC and ICIFC for the entire year of 1997
and the deconsolidation of FMAC for the fourth quarter of 1997 and a lower
volume of loan and lease securitizations as compared to 1996. During 1997, the
Company completed loan and lease securitizations totaling $919.1 million as
compared to $1.3 billion during 1996. For 1997 and 1996, total loan and lease
securitizations were as follows:
 


                                                                 1997    1996
                                                                ------ --------
                                                                 (IN MILLIONS)
                                                                 
       Nonconforming residential loans......................... $  --  $  656.9
       Multifamily and commercial loans........................  203.1    277.0
       Franchise loans.........................................  343.8    325.1
       Equipment leases........................................  213.6     87.0
       Auto loans..............................................  158.6      --
                                                                ------ --------
                                                                $919.1 $1,346.0
                                                                ====== ========

 
  The Company also completed two bulk loan sales of loans with total principal
of $197.8 million for the year ended December 31, 1997.
 
 Total Interest Income
 
  For the year ended December 31, 1997, total interest income increased to
$227.9 million from $207.5 million for the year ended December 31, 1996. The
increase in total interest income is primarily
 
                                      52

 
attributable to a 176 basis point or 18% increase in the average yield on
interest-earning assets offset by a $148.8 million or 7% decrease in the
average balance of interest-earning assets. The increase in the average yield
on interest-earning assets from 1996 is primarily attributable to increases in
the average yields on loans held for investment and sale reflecting a more
diversified and higher-yielding mix of loan products relative to 1996. The
decrease in the average balance of interest-earning assets compared to 1996 is
primarily due to a decrease in the average balance of loans held for sale of
$543 million offset by an increase in the average balance of loans held for
investment of $340 million. The comparison of total interest income for 1997
and 1996 is also impacted by the deconsolidations of SPFC, ICIFC and FMAC.
Excluding SPFC's and ICIFC's interest income for all of 1996 and FMAC's
interest income for the fourth quarter of 1996, total interest income for the
year ended December 31, 1996 would have been $158.0 million compared to actual
of $207.5 million.
 
 Total Interest Expense
 
  For the year ended December 31, 1997, total interest expense decreased to
$126.6 million from $135.0 million for the year ended December 31, 1996. The
decrease in total interest expense is primarily attributable to a $161.4
million or 8% decrease in the average balance of interest-bearing liabilities
offset by a 13 basis point or 2% increase in the average cost of interest-
bearing liabilities. The decrease in the average balance of interest-bearing
liabilities relative to 1996 resulted primarily from a decrease in the average
balance of borrowings due to the deconsolidations of SPFC and ICIFC. This
decrease was partially offset by an $154.3 million increase in average
deposits. The increase in the average cost of interest-bearing liabilities is
primarily attributable to the relatively higher borrowing costs associated
with the Company's Remarketed Par Securities issued during 1997. The
comparison of total interest expense for 1997 and 1996 is also impacted by the
deconsolidations of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's
interest expense for all of 1996 and FMAC's interest expense for the fourth
quarter of 1996, total interest expense for the year ended December 31, 1996
would have been $93.8 million compared to actual of $135.0 million.
 
 Net Interest Margin
 
  For the year ended December 31, 1997, the consolidated net interest margin
increased to 5.11%, an increase of 171 basis points, as compared to the
consolidated net interest margin of 3.40% for the year ended December 31,
1996. The increase in net interest margin is due primarily to the
aforementioned increases in the average yields on loans held for investment
and sale due to a more diversified and higher-yielding mix of loan products
relative to 1996.
 
 Provision for Loan and Lease Losses
 
  The provision for loan and lease losses increased to $39.0 million for the
year ended December 31, 1997, as compared to $9.8 million for the year ended
December 31, 1996. The large increase in the provision for loan losses is
primarily the result of an increase in total nonaccrual loans and net charge-
offs of $20.5 million and $22.5 million, respectively. The increase in total
nonaccrual loans and net charge-offs came mainly from the AMN loan portfolio
and are reflective of the continuing change in the composition of the overall
loan portfolio to higher yielding loan products that carry higher relative
credit risk. For further discussion see "Business--Loans Held for Investment"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Asset Quality".
 
 Loan Servicing Income
 
  Loan servicing income for the year ended December 31, 1997, increased to
$10.7 million as compared to $1.7 million for the year ended December 31,
1996. Loan servicing income increased primarily due to a decrease in the level
of foreclosure and liquidation costs associated with the Company's former
residential mortgage loan servicing portfolio and due to an increase in the
average outstanding balance of loans and leases serviced for others.
 
                                      53

 
 Equity in Net Income of SPFC
 
  Equity in the net income of SPFC for the year ended December 31, 1997 was
$25.9 million as compared to $0 for the year ended December 31, 1996, and
represents the Company's share of SPFC's net income based on the Company's
ownership percentage. The increase in the equity in net income of SPFC is due
to the difference in accounting methods used for the Company's investment in
SPFC at December 31, 1997 and 1996. At December 31, 1997, the Company's
ownership percentage in SPFC was 47.0%, and accordingly, the Company accounted
for its investment in SPFC using the equity method. At December 31, 1996, the
Company's ownership percentage in SPFC was 51.2%, and accordingly, SPFC's
operating results were consolidated with those of the Company.
 
 Equity in Net Loss of FMAC
 
  Equity in the net loss of FMAC was $3.1 million for the period commencing
October 1, 1997 through December 31, 1997, as compared to $0 for the year
ended December 31, 1996 and represents the Company's share of FMAC's net loss
for the quarter ended December 31, 1997, based on the Company's ownership
percentage. FMC's net loss resulted from the deferred tax charges associated
with converting to a fully taxable corporation from a limited liability
entity.
 
  The increase in the equity in net loss of FMAC is due to the difference in
accounting methods used for the Company's investment in FMAC at December 31,
1997 and 1996. At December 31, 1997, the Company's ownership percentage in
FMAC was 38.4%, and accordingly, the Company accounted for its investment in
FMAC using the equity method. At December 31, 1996, the Company's ownership
percentage in FMAC was 66.7%, and accordingly, FMAC 's operating results were
consolidated with those of the Company. In conjunction with the FMC initial
public offering during the fourth quarter of 1997 discussed below, the Company
included in its consolidated operating results nine months of FMAC's operating
results for 1997.
 
 Investment Banking Fees
 
  Investment banking fees were $7.7 million for the year ended December 31,
1997, compared to $0 for the year ended December 31, 1996. During the fourth
quarter of 1997, the Company formed a new subsidiary, ICG, which includes a
registered broker/dealer and an asset management company offering individual
and corporate investors a wide range of financial products and services.
During the fourth quarter of 1997, ICG raised $323 million for corporate
clients through private placement debt and equity offerings generating
investment banking fees of $7.7 million.
 
 Gain on Sale of Servicing Rights
 
  Gain on sale of servicing rights decreased to $0 for the year ended December
31, 1997, from $7.6 million for the year ended December 31, 1996. During 1996,
the Company sold mortgage loan servicing rights relating to $3.2 billion in
loans, resulting in pre-tax gains of $7.6 million. Gains on the sale of
servicing rights consist of the cash proceeds received on the "bulk" sale of
servicing rights, net of the related capitalized purchased or originated
servicing rights. The Company did not recognize any gain or loss on the sale
of servicing rights in 1997.
 
 Gain on Sale of FMC Stock
 
  The Company recognized a gain on sale of FMC stock of $92.1 million for the
year ended December 31, 1997, compared to $0 for the year ended December 31,
1996. The Company's franchise lending business was conducted through FMAC
until November 1997, at which time FMAC merged into FMC, a Delaware
corporation formed for the purpose of succeeding to the business of FMAC, and
FMC completed an initial public
offering of its common stock. The Company sold into FMC's initial public
offering 3.6 million shares at $18.00 per share generating net proceeds of
$59.7 million and a corresponding gain of $48.9 million. Additionally, the
Company recognized a gain of $43.2 million resulting from the adjustment in
the basis of its investment in FMC due to the offering and its reduced
ownership percentage. At the time of FMC's initial public
 
                                      54

 
offering and at December 31, 1997, the Company's percentage ownership of FMC
common stock was 38.4%. Accordingly, FMC is no longer consolidated and the
Company's investment in FMC is accounted for under the equity method.
 
 Gains on Sale of SPFC Stock
 
  The Company recognized a gain on sale of SPFC stock of $9.5 million for the
year ended December 31, 1997, compared to $51.2 million for the year ended
December 31, 1996. The Company's nonconforming residential lending business
was conducted through SPFC until June 1996, at which time SPFC completed an
initial public offering of its common stock pursuant to which the Company was
a selling shareholder. During the first quarter of 1997, the Company sold
370,000 shares of SPFC common stock at $16.63 per share generating net
proceeds of $6.2 million and a gain of $4.3 million. This transaction reduced
the Company's ownership percentage in SPFC from 51.2% at December 31, 1996, to
49.4% at March 31, 1997. Accordingly, SPFC is no longer consolidated and the
Company's investment in SPFC is accounted for under the equity method. During
the third quarter of 1997, the Company sold an additional 500,000 shares of
SPFC common stock generating net proceeds of $7.6 million and a gain of $5.2
million. This transaction further reduced the Company's ownership interest in
SPFC to 47% at December 31, 1997. During the year ended December 31, 1996, the
Company sold a total of 5.0 million shares of SPFC in two separate offerings
resulting in gains totaling $51.2 million.
 
  Additionally, during 1996, as part of its initial public offering, SPFC sold
5.2 million shares to the public, resulting in a corresponding gain to the
Company of $31.4 million based on the difference between the Company's equity
ownership in SPFC after the sale and such equity ownership prior to the sale,
using the Company's respective SPFC ownership percentages.
 
 Gain on Sale of IMH Stock
 
  The Company recognized a gain on sale of IMH stock of $11.5 million for the
year ended December 31, 1997, compared to $0 for the year ended December 31,
1996. During 1995, the Company sold its mortgage conduit operations and SPB's
warehouse lending operations to IMH. In exchange for these assets, the Company
received approximately 11.8% of the common stock of IMH. During 1997, the
Company sold its common stock in IMH resulting in a gain of $11.5 million.
 
 Gain on Termination of REIT Advisory Agreement
 
  The Company recognized a nonrecurring gain on termination of a REIT advisory
agreement of $19.0 million for the year ended December 31, 1997. In
conjunction with the aforementioned exchange of Company assets for IMH stock,
ICAI entered into a management agreement with IMH pursuant to which ICAI
advised upon the day-to-day operations of IMH and for which it was paid a
management fee. In December 1997, IMH and the Company negotiated a termination
of the management agreement (the "Termination Agreement"). The consideration
received by the Company pursuant to the Termination Agreement was comprised of
2,009,310 shares of IMH common stock and certain securitization-related
assets. Additionally, the Company agreed to cancel its note receivable from
ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is now
known as Impac Funding Corporation and is the origination unit of IMH, in the
amount of $29.1 million. The IMH common stock and the securitization-related
assets were recorded by the Company at their fair values of approximately
$35.0 million and $13.1 million, respectively, for a total of $48.1 million.
This amount, when netted with the $29.1 million cancellation of the ICIFC note
receivable resulted in the gain on termination of the management agreement of
approximately $19.0 million.
 
EXPENSES
 
  Personnel Expense
 
  Personnel expense increased to $60.8 million for the year ended December 31,
1997 as compared to $48.4 million for the year ended December 31, 1996. This
increase reflects the Company's acquisition and
 
                                      55

 
expansion activities. The comparison of personnel expense for 1997 and 1996 is
also impacted by the deconsolidations of SPFC, ICIFC and FMAC. Excluding
SPFC's and ICIFC's personnel expense for all of 1996 and FMAC's personnel
expense for the fourth quarter of 1996, total personnel expense for the year
ended December 31, 1996 would have been $29.8 million compared to actual of
$48.4 million.
 
 Amortization of PMSR's and OMSR's
 
  Amortization of PMSR's and OMSR's increased to $3.1 million for the year
ended December 31, 1997 as compared to $1.1 million for the year ended
December 31, 1996. The increase primarily resulted from an increase in
prepayment rates on the underlying serviced loan portfolio. The comparison of
amortization of PMSR's and OMSR's for 1997 and 1996 is also impacted by the
deconsolidation of ICIFC.
 
 Occupancy Expense
 
  Occupancy expense decreased to $4.3 million for the year ended December 31,
1997 as compared to $4.7 million for the year ended December 31, 1996. This
decrease is a result of the deconsolidations of SPFC, ICIFC and FMAC.
Excluding SPFC's and ICIFC's occupancy expense for all of 1996 and FMAC's
occupancy expense for the fourth quarter of 1996, total occupancy expense for
the year ended December 31, 1996 would have been $3.8 million compared to
actual of $4.7 million.
 
 Net Expenses of Other Real Estate Owned
 
  Net expenses of other real estate owned ("OREO") decreased to $6.5 million
for the year ended December 31, 1997 as compared to $7.0 million for the year
ended December 31, 1996. The decreases in net expenses of OREO resulted from a
corresponding decline in OREO losses and writedowns related to the Company's
former mortgage banking operations.
 
 Professional Services Expense
 
  Professional services expense increased to $10.3 million for the year ended
December 31, 1997 as compared to $9.6 million for the year ended December 31,
1996. This increase reflects the Company's acquisition and expansion
activities. The comparison of professional services expense for 1997 and 1996
is also impacted by the deconsolidations of SPFC, ICIFC and FMAC. Excluding
SPFC's and ICIFC's professional services expense for all of 1996 and FMAC's
professional services expense for the fourth quarter of 1996, total
professional services expense for the year ended December 31, 1996 would have
been $7.9 million compared to actual of $9.6 million.
 
 Restructuring Provision--Exit from Mortgage Banking Operations
 
  Restructuring charges regarding mortgage banking operations were $3.8
million for the year ended December 31, 1996. The charges recognized during
1996 represented those costs incurred in connection with the Company's exit
from the conforming mortgage banking business. During the first quarter of
1996, the Company committed itself to, and began the execution of, an exit
plan that specifically identified the necessary actions to be taken to
complete the exit from the origination, sale and servicing of conforming
residential mortgage loans. The exit plan was completed during 1997, and there
were no additional restructuring charges recognized during 1997 relative to
the Company's exit from this business.
 
 Loss on Restructuring of Dabney/Resnick/Imperial, LLC ("DRI")
 
  The Company recognized a loss on restructuring of its loan to DRI of $3.7
million for the year ended December 31, 1997, compared to $0 for the year
ended December 31, 1996. During the fourth quarter of 1996, the Company
announced the closing of its investment in DRI, an investment banking firm.
DRI offered full service investment banking, brokerage, and asset management
services. As discussed above, during the fourth quarter of 1997, the Company
formed a new subsidiary, ICG, which includes a registered broker/dealer and an
asset management company offering individual and corporate investors a wide
range of financial products and services. In connection with the formation of
ICG, the Company recognized a pre-tax charge of $3.7 million
 
                                      56

 
relating to the restructuring of its loan to DRI. As part of the DRI
restructuring, substantially all of the assets and personnel of DRI were
acquired or hired by ICG.
 
 Provision for Loss on Repurchase of Former Mortgage Banking Loans
 
  The Company recognized a provision for loss on repurchase of mortgage
banking loans of $5.4 million for the year ended December 31, 1997, compared
to $0 for the year ended December 31, 1996. During 1997, the Company completed
an analysis of its potential exposure from losses on the repurchase of those
loans still remaining from its former mortgage banking operations. The
completion of this analysis resulted in the aforementioned $5.4 million charge
being taken during the fourth quarter of 1997.
 
 Amortization of Goodwill
 
  The Company's amortization of goodwill was $23.3 million for the year ended
December 31, 1997, compared to $1.9 million for the year ended December 31,
1996. The increase in amortization of goodwill is primarily attributable to
the write off of AMN's goodwill totaling $20.1 million. Since the March 1997
acquisition date of AMN, AMN posted operating losses and experienced
significant increases in nonperforming assets, loan charge-offs and loan loss
provisions. In December 1997, the Company developed revised operating
projections which indicated that the goodwill resulting from the AMN
acquisition was not recoverable. Accordingly, the remaining balance of AMN
goodwill of $20.1 million was written off through accelerated amortization
during the fourth quarter of 1997.
 
 Other Expenses
 
  All other expenses (including data processing expense, FDIC insurance
premiums, telephone and other communications, and general and administrative
expense) for the year ended December 31, 1997 totaled $32.9 million compared
to $22.7 million for the year ended December 31, 1996. This increase reflects
the Company's acquisition and expansion activities. The comparison of other
expenses for 1997 and 1996 is also impacted by the deconsolidations of SPFC,
ICIFC and FMAC. Excluding SPFC's and ICIFC's other expenses for all of 1996
and FMAC's other expenses for the fourth quarter of 1996, total other expenses
for the year ended December 31, 1996 would have been $15.5 million compared to
actual of $22.7 million.
 
 Income Taxes
 
  The Company's effective tax rate was 39% and 44% for the years ended
December 31, 1997 and 1996, respectively. The decrease in the effective tax
rate for 1997 primarily reflects the recovery of deferred taxes related to the
FMC initial public offering. For further information see Note 21 to the
consolidated financial statements.
 
 Minority Interest in Income (Loss) of Consolidated Subsidiaries
 
  The Company's minority interest in income (loss) of consolidated
subsidiaries was $10.5 million for the year ended December 31, 1997, compared
to $12.0 million for the year ended December 31, 1996. The comparison of the
Company's minority interest in income (loss) of consolidated subsidiaries for
1997 and 1996 is also impacted by the deconsolidations of SPFC, ICIFC and
FMAC. Excluding the Company's minority interest in income (loss) of SPFC and
ICIFC for all of 1996 and FMAC for the fourth quarter of 1996, total minority
interest in income (loss) of consolidated subsidiaries for the year ended
December 31, 1996 would have been $2.1 million compared to actual of $12.0
million.
 
 Extraordinary Item--Loss on Early Extinguishment of Debt
 
  During the first quarter of 1997, the Company successfully completed a
$200.0 million offering of 9.875% Senior Notes due 2007 (the "9.875% Senior
Notes"). A portion of the proceeds from the offering were used to repurchase
$69.8 million of 9.75% Senior Notes due 2004 (the "9.75% Senior Notes") for
which the Company recorded an extraordinary after-tax charge of $4.0 million.
The Company engaged in the new issuance
 
                                      57

 
in order to obtain a more favorable debt covenant package and to raise new
capital to support its growing businesses.
 
 Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
 
  The Company's consolidated net income for the year ended December 31, 1996
was $76.0 million or $1.95 per diluted share as compared to $14.2 million or
$0.40 per diluted share for the previous year, an increase of 435%. The
increase in net income is attributable to several factors: gains on sale of
SPFC stock; a 123% increase in gain on sale of loans; a 115% increase in net
interest income; and an improved net interest margin. These positive factors
were partially offset by an increase in total expenses and the provision for
loan and lease losses.
 
  Revenues for the year ended December 31, 1996 increased 201% to $256.9
million as compared to $85.3 million for the same period of the previous year.
Expenses for the year ended December 31, 1996 increased 62% to $99.0 million
as compared to $61.2 million for the previous year.
 
  Total revenues for the Company included a pre-tax gain of $82.7 million from
the sale of SPFC's common stock through an initial public offering in August
1996 and a secondary offering in November 1996. Prior to the sale of SPFC
stock, SPFC was a wholly owned subsidiary of the Company specializing in sub-
prime residential mortgage lending. In the initial public offering, ICII sold
3.5 million shares, and recorded a gain of $30.6 million with SPFC selling 5.2
million primary shares to the public, resulting in a gain to the Company of
$31.5 million. In November 1996, ICII sold an additional 1.5 million shares of
SPFC common stock through a secondary offering in which ICII was the sole
selling shareholder resulting in a gain to the Company of $20.6 million. As a
result of this sale, ICII eventually reduced its ownership in SPFC to 51.2%.
 
  As a result of the Company's requirement to record income tax expense on its
ownership interest in SPFC's after tax income, the Company only retained
approximately 30% of SPFC's net income or loss.
 
  Gain on sale of loans increased 123% to $88.2 million for the year ended
December 31, 1996 as compared to $39.6 million for the previous year. Gain on
sale of loans consists primarily of gains recorded upon the sale of loans, net
of associated expenses, and to a lesser extent, fees received on the
origination of loans, and fees received for commitments to fund loans. The
increase was primarily the result of substantially increased volume and
profitability on the sale of various variable and fixed rate loan products
through securitizations.
 
  Gain on sale of loans included $55.4 million in gains recorded as the result
of the securitization of $657.4 million of the Company's sub-prime residential
mortgage loans at SPFC, $11.2 million in gains resulting from the
securitization of $277.0 million of commercial and multi-family loans at SPTL,
$3.6 million gain on sale of the Company's retained interest in the
securitization of $105.2 million of franchise loans at FMAC which were
accounted for as a financing at December 31, 1995 and a gain on sale of $13.7
million resulting from the securitization of $325.1 million of franchise loans
during the second and fourth quarters of 1996.
 
  During the year ended December 31, 1996, the Company wrote down the carrying
value of its capitalized excess servicing fees receivable by $4.7 million due
to performance results differing from excess cash flows estimated by the
Company.
 
  For the year ended December 31, 1996, net interest income, which consists of
interest income and fees net of interest expense, increased $38.6 million or
115% to $72.4 million as compared to $33.8 million for the previous year. The
increase in net interest income was due primarily to two factors. The increase
in interest income can be directly attributed to the acquisitions completed
throughout the last half of 1995, and the resultant change in the composition
of loans held for sale and investment from primarily conforming single family
residential mortgage loans to a more diversified mix of loan products. At
December 31, 1996, the product mix of the Company's interest earning assets
included a much larger percentage of higher-yielding loan and lease products
as compared to the previous year.
 
                                      58

 
  For the year ended December 31, 1996, interest income increased $78.0
million or 60% to $207.5 million from $129.5 million. The increase in interest
on loans was primarily attributable to an overall increase in the yield on
outstanding loan and lease products. Interest income also increased as a
result of the Company's loan and lease securitizations, which contributed
interest income of $8.4 million from the accretion of discounts on the
Company's capitalized excess servicing fees receivable.
 
  For the year ended December 31, 1996, interest expense increased $39.3
million or 41% to $135.0 million from $95.7 million for the year ended
December 31, 1995. The increase in interest expense for the quarter and for
the year primarily resulted from increased outstanding average balances of
warehouse lines of credit.
 
  For the year ended December 31, 1996, consolidated net interest margin
increased to 3.40%, an increase of 132 basis points as compared to 2.08% for
the year ended December 31, 1995. The improvement in net interest income and
margin is largely the result of the Company's repositioning itself with the
origination and acquisition of higher yielding loan and lease products.
 
  Acquisitions have added to the improvement in net interest income and net
interest margin. For the year ended December 31, 1996, net interest margin and
net income benefited from a full year of operation from the acquired CBCC as
well as the fourth quarter purchase of equipment leases totaling $85.0 million
with a weighted average interest rate of 15.5% pursuant to the Avco
Acquisition.
 
  Loan servicing income for the year ended December 31, 1996 decreased 87% to
$1.7 million as compared to $12.7 million for the previous year. The decrease
in loan servicing income was primarily due to a decreased average balance of
conforming residential mortgage loans serviced for others, primarily as a
result of the Company's sale or transfer of substantially all of its
conforming residential mortgage servicing rights in connection with the
Company's exit from the conforming mortgage banking business.
 
  Additionally, loan servicing income continues to be negatively affected by
increased direct servicing costs related to the loan foreclosure and property
liquidation process of the remaining delinquent conforming residential
mortgage servicing portfolio of the Company's former mortgage banking
operations.
 
  During 1996 and 1995, the Company sold mortgage loan servicing rights
relating to $3.2 billion and $957.2 million principal amount of loans,
resulting in pre-tax gains of $7.6 million and $3.6 million, respectively.
Gain on the sale of servicing rights consisted of the cash proceeds received
on the "bulk" sale of servicing rights, net of the related capitalized
purchased or originated servicing rights.
 
  The decline in profitability on the sale of the conforming residential
mortgage servicing rights was due to a lower average sales price and the
increased amounts of capitalized servicing rights on the portfolio sold during
the year ended December 31, 1996 as compared to the previous year as a result
of the Company's adoption of Statement of Financial Accounting Standards 122
("SFAS 122") in the first quarter of 1995. The decision to sell servicing
rights was based upon the Company's plan to exit the conforming mortgage
banking business.
 
  Other income for the year ended December 31, 1996 increased to $14.2 million
as compared to $1.2 million for the previous year. This increase was primarily
due to fee income generated from the Company's advisory contract with IMH and
dividend payments received by the Company on its investment in IMH.
Additionally, increasing other income was the resolution and recovery of $2.5
million of certain outstanding reconciling items at SPB.
 
  Personnel expenses increased 42% to $48.4 million for the year ended
December 31, 1996 as compared to $34.1 million for the previous year. This
increase was primarily the result of personnel expenses related to the
Company's acquisition and expansion activities throughout the second half of
1995, partially offset by reductions in personnel expense at the Company's
former mortgage banking operations.
 
  Amortization of PMSR's and OMSR's decreased 72% to $1.1 million for the year
ended December 31, 1996 as compared to $4.0 million for the previous year. The
decrease was the result of a decreased outstanding
 
                                      59

 
balance of PMSR's and OMSR's as a result of the Company's sale of servicing
rights on conforming residential mortgage loans generated by the former
mortgage banking operations.
 
  Occupancy expense increased 19% to $4.7 million for the year ended December
31, 1996 as compared to $3.9 million for the same period of the previous year.
The increase primarily reflected an increase in lease expenses as a result of
the Company's acquisition of FMAC, FCAC and CBCC in the second half of 1995,
as well as to the continued expansion of SPFC throughout 1996.
 
  Net expenses of OREO increased 267% to $7.0 million for the year ended
December 31, 1996 as compared to $1.9 million for the previous year. The
increase in net expense of OREO was primarily the result of the increase in
the volume of properties foreclosed on and liquidated by the Company's former
mortgage banking operations.
 
  FDIC insurance premiums decreased 71% to $327,000 for the year ended
December 31, 1996 as compared to $1.1 million for the previous year. FDIC
insurance premiums decreased primarily as a result of a decrease in the rate
of the insurance premium charged to SPB for FDIC deposit insurance.
 
  Restructuring charges of $3.8 million were recognized during the year ended
December 31, 1996. The charge represents those costs incurred in connection
with the Company's exit from the conforming mortgage banking business. During
the first quarter of 1996, the Company committed itself to, and began the
execution of, an exit plan that specifically identified the necessary actions
to be taken to complete the exit from the origination, sale and servicing of
conforming residential mortgage loans. During the year ended December 31,
1996, the Company incurred actual charges of approximately $3.2 million. The
Company has included in the restructuring provision those costs resulting from
the exit plan that are not associated with, nor would have benefit for, the
continuing operations of the Company.
 
  All other general and administrative expenses, including data processing,
professional services, and telephone and other communications, increased 109%
to $33.8 million for the year ended December 31, 1996 as compared to $16.2
million for the same period of the previous year. The increase in general and
administrative expenses was due primarily to the Company's acquisition of
FMAC, FCAC, and CBCC, as well as to the start up of ICAI in 1995, and the
continued expansion of SPFC throughout 1996.
 
  As a result of the growth in the loan portfolio and the change in its
product mix, the Company continued to add to the allowance for loan and lease
losses. For the year ended December 31, 1996, the provision for loan losses
increased $4.3 million to $9.8 million as compared to $5.5 million for the
year ended December 31, 1995.
 
  The increase in the loan and lease loss provision for the year ended
December 31, 1996 was primarily the result of an increase in nonaccrual loans
(specifically one purchased loan portfolio) and due to the continuing change
in the composition of the Company's investment loan portfolio to include
higher yielding loan products.
 
  At December 31, 1996, of the $50.1 million of nonaccrual loans, 89%, 3% and
8% were single family, multi-family and non-residential loans, respectively,
as compared to 76%, 18% and 6%, respectively, at December 31, 1995. The
increase in nonaccrual loans represented by residential loans was due to the
expansion of the investment loan portfolio with residential (one-to-four
family) loans originated by the Company's former mortgage banking operations.
The Company's non-residential loans were comprised of commercial mortgages,
commercial loans, indirect equipment leases and consumer loans.
 
  NPA's consist of nonaccrual loans, loans with modified terms and OREO. Total
NPA's increased 63% to $63.6 million at December 31, 1996, as compared to
$39.0 million at December 31, 1995.
 
  The ratio of the allowance for loan and lease losses to nonaccrual loans
decreased to 38.9% at December 31, 1996 from 44.3% at December 31, 1995. NPA's
as a percentage of total assets were 2.64% and 1.55% at December 31, 1996 and
1995, respectively.
 
                                      60

 
  The Company believes the overall increase in NPA's was primarily a result of
the acquisition of a portfolio of sub-prime residential mortgage loans by SPB
late in 1995. Nonaccrual loans in the acquired portfolio increased to $18.2
million from $0.6 million at December 31, 1996 and 1995, respectively.
Although the levels of nonaccrual loans has increased, actual losses from the
acquired portfolio have been minor at $337,000 and $0 in 1996 and 1995,
respectively. The Company considered the level of NPA's related to its other
lending activities to be acceptable due to the attractive yield on these
loans.
 
  The Company evaluated expected losses on nonaccrual loans in both periods on
a loan-by-loan basis and determined that the allowance was adequate to cover
both expected losses on nonaccrual loans and inherent losses in the remainder
of the Company's loans held for investment portfolio.
 
LIQUIDITY AND CAPITAL RESOURCES
 
 General
 
  The Company has an ongoing need for capital to finance its lending
activities. This need is expected to increase as the volume of the Company's
loan and lease originations and acquisitions increases. The Company's primary
cash requirements include the funding of (i) loan and lease originations and
acquisitions pending their pooling and sale, (ii) points and expenses paid in
connection with the acquisition of wholesale loans, (iii) fees and expenses
incurred in connection with its securitization programs, (iv)
overcollateralization or reserve account requirements in connection with loans
and leases pooled and sold, (v) ongoing administrative and other operating
expenses and (vi) the costs of the Company's warehouse credit and repurchase
facilities with certain financial institutions.
 
  The Company has financed its activities through warehouse lines of credit
and repurchase facilities with financial institutions, equity and debt
offerings in the capital markets, deposits or borrowings at SPB and
securitizations. The Company believes that such sources will be sufficient to
fund the Company's liquidity requirements for the foreseeable future. There
can be no assurance that the Company will have access to the capital markets
in the future or that financing will be available to satisfy the Company's
operating and debt service requirements or to fund its future growth.
 
  SPB historically obtained the liquidity necessary to fund the Company's
former residential mortgage banking operations and its own investing
activities through deposits and, if necessary through borrowings under lines
of credit and from the FHLB. At December 31, 1997 and 1996, SPB had maximum
FHLB borrowings available equal to $45.8 million and $212.7 million,
respectively. These borrowings must be fully collateralized by qualifying
mortgage loans and may be in the form of overnight funds or term borrowings at
SPB's option.
 
  The highest FHLB advance outstanding during the year ended December 31, 1997
was $140.5 million, with an average outstanding balance of $56.8 million. The
outstanding balance of FHLB advances was $45.0 million at December 31, 1997.
 
  The highest FHLB advance outstanding during the year ended December 31, 1996
was $338.0 million, with an average outstanding balance of $188.8 million. The
outstanding balance of FHLB advances was $140.5 million at December 31, 1996.
The FHLB advances are secured by the investment in FHLB stock and certain real
estate loans with a carrying value of $104.7 million and $228.5 million at
December 31, 1997 and 1996, respectively.
 
  During 1993 and 1994, ICII contributed $26.0 million and $25.0 million,
respectively, to SPB's capital in order to provide SPB with adequate capital
to increase its deposits and borrowings. Since December 31, 1991, SPB has
increased deposits as necessary so that deposits, together with cash, liquid
assets, intercompany borrowings, borrowing under warehouse lines and FHLB
borrowings have been sufficient to provide the funding for its loans held for
sale and investment.
 
  As of December 31, 1997, SPB's deposit portfolio which consists primarily of
certificate accounts increased approximately $100 million to $1.2 billion at
December 31, 1997 from $1.1 billion at December 31, 1996.
 
                                      61

 
  SPB has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Additionally, SPB maintains
liquidity in the form of cash and interest bearing deposits with financial
institutions. The Company tracks on a daily basis all new loan applications by
office and, based on historical closing statistics, estimates expected
fundings. Cash management systems at SPB allow SPB to anticipate both funding
and sales and adjust deposit levels and short-term investments against the
demands of the Company's lending activities. For a further description of
SPB's deposit generating activities and available funding, see Item 1,
"Business--Funding and Securitizations."
 
  In addition to warehouse lines of credit and SPB borrowings, the Company has
also accessed the capital markets to fund its operations. In the second
quarter of 1992, the Company completed its initial public offering of
8,750,211 shares, raising net proceeds of $15.9 million. In April 1996, the
Company completed a stock offering of 4,879,808 shares of its common stock at
$13.00 per share for net proceeds of $59.2 million.
 
  In January 1994, the Company issued $90.0 million principal amount of the
9.75% Senior Notes. In October 1994, the Company repurchased $8.5 million of
said notes. As of December 31, 1995, the Company was not in compliance with
certain debt covenants related to these notes. Subsequent to December 31,
1995, these defaults were corrected. In March 1996, the Company reissued the
$8.5 million of the notes which it purchased in October 1994. At December 31,
1996, $90.0 million of these notes were outstanding.
 
  In January 1997, the Company issued $200.0 million principal amount of the
9.875% Senior Notes and used a portion of the proceeds to purchase
approximately $69.8 million of the 9.75% Senior Notes. The Company contributed
$35.0 million of the proceeds to SPB in the form of subordinated indebtedness.
 
  In June 1996, SPFC completed an initial public offering of its common stock
pursuant to which the Company was a selling shareholder. SPFC and the Company
received net proceeds from such offering of approximately $53.8 million and
$35.9 million, respectively. In November 1996, (i) SPFC issued $75.0 million
of convertible subordinated notes due 2006 and (ii) the Company sold 1.0
million shares of SPFC common stock held by the Company for net proceeds of
approximately $28.0 million.
 
  During the first quarter of 1997, the Company sold 370,000 shares of the
common stock of SPFC at $16.63 per share, generating net proceeds of $6.2
million, resulting in a gain of $4.3 million, reducing its ownership of SPFC
from 51.2% at December 31, 1996 to 49.4% at March 31, 1997. Therefore, the
results of SPFC operations are now accounted for in the Company's financial
statements under the equity method of accounting. During the third quarter
ending September 30, 1997, the Company sold an additional 500,000 shares of
SPFC common stock, generating net proceeds of $7.6 million and resulting in a
gain of $5.2 million, further reducing its ownership percentage to 47.0%. As
of December 31, 1997, the Company's ownership in SPFC common stock was 47.0%,
excluding shares issuable upon exercise of options granted or to be granted
pursuant to SPFC's stock option plans and shares issuable upon conversion of
the $75.0 million of convertible subordinated notes, mentioned above.
 
  During the second quarter of 1997, ICII issued $70.0 million of Senior Notes
under a proprietary product known as "ROPES." These securities can be redeemed
at par upon their maturity or remarketed as 30 year capital instruments. Under
current tax law, the interest payments on these securities are tax-deductible.
The proceeds from the offering are being used for capital contributions to
subsidiaries, strategic acquisitions, investments and general corporate
purposes.
 
  During the fourth quarter of 1997, FMC completed an initial public offering
of its common stock pursuant to which ICII was a selling stockholder. FMC and
ICII and another selling stockholder received net proceeds from such offering
of approximately $114.3 million, $59.7 million and $18.5 million,
respectively. As of December 31, 1997, the Company's ownership percentage in
FMC was 38.4%.
 
 Limitations on Dividends
 
  Under the California Industrial Loan Law, a thrift and loan may declare
dividends on its capital stock only if it has at least $750,000 of unimpaired
capital stock plus additional capital stock of $50,000 for each branch
 
                                      62

 
office. In addition, no distribution of dividends is permitted unless: (i)
such distribution would not exceed a thrift and loan's retained earnings, (ii)
any payment would not result in a violation of the approved minimum capital to
thrift and loan certificate of deposit ratio and (iii) after giving effect to
the distribution, either (y) the sum of a thrift and loan's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes,
deferred income and other deferred credits), and (z) current assets would be
not less than current liabilities (except that if a thrift and loan's average
earnings before taxes for the last two fiscal years had been less than average
interest expense, current assets must be not less than 125% of current
liabilities).
 
  Under California law, in order for capital (including surplus) of an
institution to be included in calculating the leverage limitation described
above, thrift institutions must amend their by-laws to restrict such capital
from the payment of dividends. The amount of restricted capital maintained by
a thrift also provides the basis for establishing the maximum amount that a
thrift may lend to one single borrower. As of December 31, 1997 and December
31, 1996, $125.0 million and $80.5 million, respectively, of SPB's capital was
so restricted.
 
  The FDIC has advised insured institutions that the payment of cash dividends
in excess of current earnings from operations is inappropriate and may be
cause for supervisory action. As a result of this policy, thrift and loans may
find it difficult to pay dividends out of retained earnings from historical
periods prior to the most recent fiscal year or to take advantage of earnings
generated by extraordinary items.
 
  Under the Financial Institutions Supervisory Act and FIRREA, federal
regulators also have authority to prohibit financial institutions from
engaging in business practices which are considered to be unsafe or unsound.
It is possible, depending upon the financial condition of a thrift and other
factors, that such regulators could assert that the payment of dividends in
some circumstances might constitute unsafe or unsound practices and prohibit
payment of dividends even though technically permissible.
 
  Pursuant to FDICIA, SPB is prohibited from paying dividends if the payment
of such dividends would cause the institution to become "undercapitalized."
These limitations on the payment of dividends may restrict the Company's
ability to utilize cash from SPB which may have been otherwise available to
the Company for working capital.
 
 Lines of Credit and Warehouse Facilities
 
  The Company is dependent upon its ability to access warehouse lines of
credit and repurchase facilities, in addition to its ability to continue to
pool and sell loans and leases in the secondary market, in order to fund new
originations and purchases. The Company has warehouse lines of credit and
repurchase facilities under which it had available an aggregate of
approximately $435 million in financing at December 31, 1997.
 
 Securitizations
 
  The Company currently pools and sells through securitization a substantial
portion of the loans and leases which it originates or purchases, other than
loans sold in whole loan sales and loans held by SPB for investment.
Accordingly, adverse changes in the securitization market could impair the
Company's ability to originate, purchase and sell loans or leases on a
favorable or timely basis. Any such impairment could have a material adverse
effect upon the Company's business and results of operations. In addition, the
securitization market for many types of assets is relatively undeveloped and
may be more susceptible to market fluctuations or other adverse changes than
more developed capital markets. Finally, any delay in the sale of a loan or
lease pool could cause the Company's earnings to fluctuate from quarter to
quarter.
 
  In a securitization, the Company recognizes a gain on sale of the loans or
leases securitized upon the closing of the securitization but does not receive
all of the cash representing such gain until it receives cash flows generated
by the subordinate bonds or residual interests retained, which are payable
over the actual life of the loans or leases securitized. As a result, such
transactions may not generate cash flows to the Company for an extended
period.
 
                                      63

 
  In addition, in order to gain access to the secondary market for loans and
leases, the Company has relied on monoline insurance companies to provide
guarantees on outstanding senior interests in the special purpose entities to
which such loans and leases are sold to enable it to obtain investment grade
ratings for such interests. To a limited extent, the Company also relies on
overcollateralization to support outstanding senior interests.
 
  However, any unwillingness of the monoline insurance companies to guarantee
the senior interests in the Company's loan or lease pools could have a
material adverse effect on the Company's financial position and results of
operations.
 
  The pooling and servicing agreements that govern the distribution of cash
flows from the loans included in securitizations require either (i) the
establishment of a reserve account that may be funded with an initial cash
deposit by the Company or (ii) the overcollateralization of the senior
interests by using interest receipts on the loans to reduce the outstanding
principal balance of the senior interests.
 
  The Company's interest in each reserve account and overcollateralized amount
is reflected in the Company's financial statements as Retained Interest in
Loan and Lease Securitizations. To the extent that a loss is realized on the
loans, the loss will either be paid out of the reserve account or the
overcollateralization amount or will be reduced to the extent that funds are
available and will result in a reduction in the value of the any subordinate
bonds or residual interests retained.
 
  The Company may be required either to repurchase or to replace loans which
do not conform to the representations and warranties made by the Company in
the pooling and servicing agreements entered into when the loans are pooled
and sold through securitizations.
 
 Business Finance Lending.
 
  IBC primarily funds its lease originations through the use of an interim
bank warehouse facility and a permanent revolving securitization facility. The
securitization facility utilizes a trust structure and has a five-year
revolving period, which expires in November 2002, and a three and one-half
year amortization period.
 
  The IBC Lease Receivables Trust 1997-2 ("1997-2 Trust") was created pursuant
to a pooling and servicing agreement among IBC, as originator, IBC Funding
Corp. ("IFC"), IBC's wholly-owned special purpose subsidiary, as seller, and
Norwest Bank Minnesota, as trustee and back-up servicer. IBC sells its lease
originations to IFC under a sale and contribution agreement ("IBC Agreement"),
which simultaneously assigns its rights in the leases to the Trust in exchange
for trust certificates. The Class A certificates are sold to Triple-A One
Funding Corp., a special purpose corporation administered by Capital Markets
Assurance Corporation ("CAPMAC"), which issues commercial paper to fund its
acquisitions. The Class A purchase limit under the facility is $250 million
and as of December 31, 1997, there was approximately $173.9 million of Class A
Certificates outstanding.
 
  IFC assigns all receivables acquired pursuant to the IBC Agreement to the
1997-2 Trust. The transactions are accounted for as sales for reporting
purposes under generally accepted accounting principles ("GAAP") and as
financings for tax purposes. IFC assigns all its rights, title and interest in
the leases, together with a security interest in the underlying leased
equipment, which ownership and security interests have been perfected under
the Uniform Commercial Code. Payments of the purchase price are made directly
from payments by lessees on the lease receivables.
 
  IBC leases business equipment, including copying, data processing,
communication, printing and manufacturing equipment, exclusively to business
users. IBC was formed in May 1995 to combine the Company's existing leasing
business with the assets acquired from FCAC. In October 1996, IBC expanded its
business through the Avco Acquisition. For the years ended December 31, 1997
and December 31, 1996, IBC originated $151.3 million and $87.2 million of
leases and securitized $213.6 million and $87.0 million of leases,
respectively.
 
                                      64

 
 Commercial Mortgage Lending.
 
  During the years ended December 31, 1997 and 1996, SPB securitized $203.1
million and $277.0 million of IPLD multi-family and commercial mortgage loans,
respectively.
 
 Auto Marketing Network.
 
  AMN has a warehouse lending agreement with Greenwich Capital Financial
Products ("GCFP") whereby GCFP provides warehouse funding for AMN's
receivables and obligations. AMN's receivables and obligations are guaranteed
by ICII. The warehouse lending agreement generally allows borrowings from GCFP
in respect of eligible receivables. To the extent that the receivable becomes
delinquent greater than 60 days or is defaulted on, the loan in respect of
such receivable must generally be repaid. The warehouse lending agreement is
AMN's principal source of financing. During the year ended December 31, 1997,
AMN securitized $158.6 million of auto loans.
 
 Inflation
 
  The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike industrial companies, nearly all of
the assets and liabilities of the Company are monetary in nature.
 
  As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Inflation
affects the Company primarily through its effect on interest rates, since
interest rates normally increase during periods of high inflation and decrease
during periods of low inflation.
 
ASSET QUALITY
 
  The provision for loan and lease losses increased to $39.0 million for the
year ended December 31, 1997, as compared to $9.8 million and $5.5 million for
the years ended December 31, 1996 and 1995, respectively. The increase in the
provision for loan losses was primarily the result of an increase in
nonaccrual loans and net charge-offs at AMN as well as the continuing change
in the composition of the investment loan portfolio to higher-yielding loan
products.
 
  Total nonaccrual loans increased to $70.6 million at December 31, 1997, as
compared to $50.1 million and $31.0 million at December 31, 1996 and 1995,
respectively. Total nonaccrual loans as a percentage of loans held for
investment were 5.36%, 4.55%, and 4.50% at December 31, 1997, 1996, and 1995,
respectively. The following table summarizes net charge-offs by loan type.
 


                                                     YEARS ENDED DECEMBER 31,
                                                     --------------------------
                                                       1997     1996     1995
                                                     --------  -------  -------
                                                          (IN THOUSANDS)
                                                               
       Residential mortgage......................... $ (5,920) $(2,485) $(2,013)
       Multifamily..................................     (420)  (1,095)    (334)
       Commercial...................................     (955)    (465)    (169)
       Leases.......................................   (3,920)  (3,142)    (461)
       Consumer.....................................  (19,262)    (816)    (118)
                                                     --------  -------  -------
         Net charge-offs............................ $(30,477) $(8,003) $(3,095)
                                                     ========  =======  =======

 
                                      65

 
  The allocation of the Company's allowance for loan and lease losses and the
percentage of loans and leases by loan type to total loans and leases as of
December 31, 1997 is as follows:
 


                                                                 PERCENTAGE OF
                                                                LOANS AND LEASES
                                                      ALLOCATED  TO TOTAL LOANS
                                                      ALLOWANCE    AND LEASES
                                                      --------- ----------------
                                                          
      Loans secured by real estate:
        Single family 1-4............................  $ 8,077        18.6%
        Multi-family.................................      779         1.3
        Commercial...................................      312         0.1
                                                       -------       -----
                                                         9,168        20.0
      Leases.........................................      124         0.6
      Installment loans..............................   15,437        11.8
      Franchise loans................................      634         4.7
      Asset based loans..............................    4,840        36.8
      Commercial loans...............................    3,656        26.1
                                                       -------       -----
                                                        24,691        80.0
      Unallocated....................................    4,188         --
                                                       -------       -----
                                                       $38,047       100.0%
                                                       =======       =====

 
  Although the above table allocates the allowance for loan and lease losses
by loan types, the total allowance is available to absorb losses on all loans
and leases.
 
  The ratio of the allowance for loan and lease losses to total loans held for
investment was 2.89%, 1.82%, and 1.99% at December 31, 1997, 1996, and 1995,
respectively. The ratio of the allowance for loan losses to nonaccrual loans
was 53.9%, 38.9%, and 44.3% at December 31, 1997, 1996, and 1995,
respectively. Although nonaccrual loans increased for the year ended December
31, 1997 from December 31, 1996, the Company evaluated expected losses on
nonaccrual loans on a loan-by-loan basis and determined that the allowance was
adequate to cover both expected losses on nonaccrual loans and inherent losses
in the remainder of the Company's loans held for investment portfolio. The
Company considers the allowance for loan and lease losses to be adequate.
 
  The percentage of the allowance for loan and lease losses to nonaccrual
loans does not remain constant due to the nature of the Company's portfolio of
loans. The collateral for each nonperforming mortgage loan is analyzed by the
Company to determine potential loss exposure, and in conjunction with other
factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan and lease losses. On an ongoing basis,
management monitors the loan portfolio and evaluates the adequacy of the
allowance for loan losses.
 
  In determining the adequacy of the allowance for loan and lease losses,
management considers such factors as historical loan loss experience,
underlying collateral values, evaluations made by bank regulatory authorities,
assessment of economic conditions and other appropriate data to identify the
risks in the loan portfolio. Loans deemed by management to be uncollectible
are charged to the allowance for loan losses.
 
  Recoveries on loans previously charged off are credited to the allowance.
Provisions for loan losses are charged to expense and credited to the
allowance in amounts deemed appropriate by management based upon its
evaluation of the known and inherent risks in the loan portfolio. Future
additions to the allowance for loan losses may be necessary. For further
information, see "Item 1 Business--Loans Held for Investment."
 
                                      66

 
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
 
 General
 
  The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
 
  A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of falling interest rates, the net earnings of an institution with a
positive gap theoretically may be adversely affected due to its interest-
earning assets repricing to a greater extent than its interest-bearing
liabilities.
 
  Conversely, during a period of rising interest rates, theoretically, the net
earnings of an institution with a positive gap position may increase as it is
able to invest in higher yielding interest-earning assets at a more rapid rate
than its interest-bearing liabilities reprice.
 
  In addition, a positive gap may not protect an institution with a large
portfolio of ARMs from increases in interest rates for extended time periods
as such instruments generally have periodic and lifetime interest rate caps.
 
  The Company's ARMs are predominantly tied to LIBOR. Interest rates and the
resulting cost of funds increases in a rapidly increasing rate environment
could exceed the cap levels on these loan products and negatively impact net
interest income.
 
  The Company has managed portfolio interest rate risk through the aggressive
marketing and funding of adjustable rate loans, which generally reprice at
least semi-annually and are generally indexed to LIBOR. As a result of this
strategy, at December 31, 1997, the Company's total interest-earning assets
maturing or repricing within one year exceeded its total interest-bearing
liabilities maturing or repricing in the same time by $306.2 million,
representing a positive cumulative gap ratio of 124.46%. The Company closely
monitors its interest rate risk as such risk relates to operational
strategies. The Company's cumulative gap position is at a level satisfactory
to management and the Company is currently attempting to maintain a positive
gap position in light of the current interest rate environment. However, there
can be no assurances that the Company will be able to maintain its positive
gap position or that its strategies will not result in a negative gap position
in the future. The level of the movement of interest rates, up or down, is an
uncertainty and could have a negative impact on the earnings of the Company.
 
 Hedging
 
  The Company has implemented various hedging strategies with respect to its
origination of loans and leases for sale. To date, this has included selling
short comparable maturity United States Treasury securities and preselling
loans through prefunding accounts in its securitizations. The Company is
subject to the risk of rising interest rates between the time it commits to
fund or purchase loans at a fixed price and the time it sells or securitizes
those loans.
 
  To mitigate this risk, the Company enters into transactions designed to
hedge interest rate risks, including mandatory and optional forward selling of
mortgage-backed securities or United States Treasury securities, and buying
and selling of futures on United States Treasury securities. The nature and
quantity of these hedging transactions is and will be determined by the
management of the Company based on various factors including market conditions
and the expected volume of mortgage loan originations and purchases.
 
                                      67

 
  The Company believes that it has implemented a cost-effective hedging
program to provide a level of protection against interest rate risks. However,
an effective hedging strategy is complex and no hedging strategy can
completely insulate the Company from interest rate risks. In addition, hedging
involves transaction and other costs which could increase as the period
covered by the hedging protection increases. Such costs could also increase in
periods of risk and fluctuating interest rates. Therefore, the Company may be
prevented from effectively hedging its interest rate risks, without
significantly reducing the Company's return on equity.
 
  The Company does not currently engage in the speculative use of trading
activities, including derivatives and synthetic instruments or hedging
activities in controlling interest rate risk on its portfolio of loans held
for investment.
 
 Forward Contracts
 
  The Company sells mortgage-backed securities through forward delivery
contracts with major dealers in such securities. At December 31, 1997, 1996,
and 1995, the Company had $0, $143 million, and $279.2 million, respectively,
in outstanding commitments to sell mortgage loans through mortgage-backed
securities. These commitments allow the Company to enter into mandatory
commitments when the Company notifies the investor of its intent to exercise a
portion of the forward delivery contracts. The Company was obligated under
mandatory commitments to deliver loans to such investors at December 31, 1997,
1996, and 1995 in the amounts of $0, $0, and $97.0 million, respectively.
 
  The credit risk of forward contracts relates to the counterparties' ability
to perform under the contract. The Company evaluates counterparties based on
their ability to perform prior to entering into any agreements.
 
 Options
 
  The Company may purchase put options to hedge against adverse movements in
the value of the loans held for sale portfolio. The Company will realize a
gain or loss upon the expiration or closing of the option transaction.
 
  When an option is exercised, the proceeds on sales for a written call
option, the purchase cost for a written put option or the cost of the security
for a purchased put or call option is adjusted by the amount of premium
received or paid. The risk in buying an option is limited to the cost of the
premium.
 
  The Company had $0, $70 million, and $20 million notional amount of written
call option contracts outstanding at December 31, 1997, 1996, and 1995,
respectively. The Company received $0, $366,000, and $82,600 in premiums
related to the options outstanding at December 31, 1997, 1996, and 1995,
respectively. There were no option contracts exercised during the years ended
December 31, 1997, 1996, and 1995.
 
 Total Rate of Return Swaps
 
  During the year ended December 31, 1997, the Company has entered into total
rate of return swap contracts for investment purposes with various investment
bank counterparties, the provisions of which entitle the Company to receive
the total return on various commercial loans in exchange for a floating
payment of one month LIBOR plus a spread. As of December 31, 1997, the Company
is party to total rate of return swap contracts with a total notional amount
of $150.6 million, under which the Company was obligated to pay one month
LIBOR plus a weighted average spread of 0.78%. The weighted average remaining
life of these contracts was 37.1 months as of December 31, 1997. These
contracts are off-balance sheet instruments. For the year ended December 31,
1997, the Company recognized $448,000 of interest income on total return
swaps.
 
 Risk Management and Market Sensitive Instruments
 
  Interest rate risk is managed within a tight duration band, and credit risk
is managed by maintaining high average quality ratings and diversified sector
exposure within the securities and loan portfolios. In connection with its
investment and risk management objectives, the Company also uses financial
instruments whose market
 
                                      68

 
value is at least partially determined by, among other things, levels of or
changes in domestic interest rates (short-term or long-term), prepayment
rates, equity markets or credit ratings/spreads.
 
  Using financial modeling and other techniques, the Company regularly
evaluates the appropriateness of investments relative to its management-
approved investment guidelines and the business objective of the portfolios.
The Company operated within these investment guidelines by maintaining a mix
of loans and investments that diversifies its assets.
 
  The following discussion about the Company's risk management activities
includes "forward-looking statements" that involve risk and uncertainties. Set
forth below are management's projections of hypothetical net losses in fair
value of shareholders' equity of the Company's market sensitive financial
instruments if certain assumed changes in market rates and prices were to
occur (sensitivity analysis). While the Company believes that the assumed
market rate changes are reasonably possible in the near term, actual results
may differ, particularly as a result of any management actions that would be
taken to mitigate such hypothetical losses in fair value of shareholders'
equity. Based on the Company's overall exposure to interest rate risk and
equity price risk, the Company believes that these changes in market rates and
prices would not materially affect the consolidated near-term financial
position, results of operations or cash flows of the Company.
 
  Interest Rate Risk. Assuming immediate increases of 100 and 200 basis points
in interest rates the net hypothetical loss in fair value of shareholders'
equity related to financial and derivative instruments is estimated to be $3.9
million and $8.1 million (after tax), or 1.2% and 2.5%, of total shareholders'
equity, respectively, at December 31, 1997. The Company believes that an
interest rate shift of this magnitude represents a moderately adverse
scenario.
 
  The effect of interest rate risk on potential near-term net income, cash
flow and fair value was determined based on commonly used models. The models
project the impact of interest rate changes on a wide range of factors,
including duration, prepayment, put options and call options. Fair value was
estimated based on the net present value of cash flows or duration estimates,
using a representative set of likely future interest rate scenarios.
 
  Equity Price Risk. The Company's available for sale equity securities
includes the common stock of ICCMIC and IMH. Assuming an immediate decrease of
10% in equity prices for such equity securities, the hypothetical loss in fair
value of shareholder's equity related equity securities is estimated to be
$4.7 million after tax, (1.4% of total shareholders' equity at December 31,
1997).
 
                                      69

 
REPRICING/MATURITY OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
 
  The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, which are
anticipated by the Company to reprice or mature in each of the future time
periods shown. The amount of assets and liabilities shown which reprice or
mature during a particular period were determined in accordance with the
earlier of term to repricing or the contractual terms of the asset or
liability.
 


                                                              AT DECEMBER 31, 1997
                                     ---------------------------------------------------------------------------
                                                                        MORE THAN  MORE THAN
                                      MORE THAN   MORE THAN  MORE THAN   3 YEARS    5 YEARS     MORE      NON
                          3 MONTHS   3 MONTHS TO 6 MONTHS TO 1 YEAR TO     TO         TO        THAN    INTEREST
                          OR LESS     6 MONTHS     1 YEAR     3 YEARS    5 YEARS   10 YEARS   10 YEARS  BEARING     TOTAL
                         ----------  ----------- ----------- ---------  ---------  ---------  --------  --------  ----------
                                                                                       
Interest-earning
 assets:
 Cash..................  $   50,597   $     --    $     --   $    --    $    --    $     --   $    --   $    --   $   50,597
 Interest earning
  deposits.............     103,738         --          --        --         --          --        --        --      103,738
 Trading securities....     120,904         --          --        --         --          --        --        --      120,904
 Securities available
  for sale.............     107,727         --          --        --         --          --        --        --      107,727
 FHLB stock............       5,646         --          --        --         --          --        --        --        5,646
 Mortgage loans held
  for sale.............     162,571         --          --        --         --          --        --        --      162,571
 Loans held for
  investment, net of
  unearned discount and
  deferred loan
  fees(1)..............     930,616      60,715      15,237   135,765     53,663      16,838    62,052    29,879   1,304,765
                         ----------   ---------   ---------  --------   --------   ---------  --------  --------  ----------
 Total interest-earning
  assets...............   1,481,799      60,715      15,237   135,765     53,663      16,838    62,052    29,879   1,855,948
Less:
 Allowance for loan
  losses...............         --          --          --        --         --          --        --    (38,047)    (38,047)
                         ----------   ---------   ---------  --------   --------   ---------  --------  --------  ----------
 Net interest-earning
  assets...............   1,481,799      60,715      15,237   135,765     53,663      16,838    62,052    (8,168)  1,817,901
 Non-interest-earning
  assets...............         --          --          --        --         --          --        --    284,193     284,193
                         ----------   ---------   ---------  --------   --------   ---------  --------  --------  ----------
 Total assets..........  $1,481,799   $  60,715   $  15,237  $135,765   $ 53,663   $  16,838  $ 62,052  $276,025  $2,102,094
                         ==========   =========   =========  ========   ========   =========  ========  ========  ==========
Interest-bearing
 liabilities:
 Deposits..............  $  408,146   $ 345,418   $ 308,157  $ 86,566   $     24   $     --   $  7,711  $    --   $1,156,022
 Borrowings from FHLB..      45,000         --          --        --         --          --        --        --       45,000
 Other borrowings......     144,841         --          --        --         --          --        --        --      144,841
 Senior Notes..........         --          --          --        --         --      219,813       --        --      219,813
 Remarketed Par
  Securities...........         --          --          --        --      70,000         --        --        --       70,000
                         ----------   ---------   ---------  --------   --------   ---------  --------  --------  ----------
 Total interest-bearing
  liabilities..........     597,987     345,418     308,157    86,566     70,024     219,813     7,711       --    1,635,676
 Non-interest bearing
  liabilities..........         --          --          --        --         --          --        --    142,485     142,485
 Shareholders' equity..         --          --          --        --         --          --        --    323,933     323,933
                         ----------   ---------   ---------  --------   --------   ---------  --------  --------  ----------
 Total liabilities and
  shareholders' equity.  $  597,987   $ 345,418   $ 308,157  $ 86,566   $ 70,024   $ 219,813  $  7,711  $466,418  $2,102,094
                         ==========   =========   =========  ========   ========   =========  ========  ========  ==========
 Interest rate
  sensitivity gap(2)...  $  883,812   $(284,703)  $(292,920) $ 49,199   $(16,361)  $(202,975) $ 54,341  $ 29,879  $  220,272
 Cumulative interest
  sensitivity gap......  $  883,812   $ 599,109   $ 306,189  $355,388   $339,027   $ 136,052  $190,393  $220,272
 Cumulative interest
  sensitivity gap as a
  percentage of total
  assets...............       42.04%      28.50%      14.57%    16.91%     16.13%       6.47%     9.06%
 Cumulative net
  interest earning
  assets as a percent
  of interest bearing
  liabilities..........      247.80%     163.50%     124.46%   126.56%    124.08%     108.36%   111.64%               113.47%

- -------
(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.
 
                                      70

 
  Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates.
 
  Additionally, certain assets, such as ARMs, have features which restrict
changes in interest rates on a short term basis and over the life of the
asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those
reflected in the table. Finally, the ability of many borrowers to service
their ARMs may decrease in the event of an interest rate increase.
 
AVERAGE BALANCE SHEET
 
  The following tables set forth certain information relating to the Company
for the year ended December 31, 1997, 1996, and 1995. The yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown except where noted otherwise.
Average balances are derived from average month-end balances. Management does
not believe that the use of average monthly balances instead of average daily
balances has caused any material differences in the information presented. The
average balance of loans receivable includes loans on which the Company has
discontinued accruing interest. The yields and costs include fees which are
considered adjustments to yields.
 


                                                        YEAR ENDED DECEMBER 31,
                          -------------------------------------------------------------------------------------
                                     1997                         1996                         1995
                          ---------------------------  ---------------------------  ---------------------------
                                              YIELD/                       YIELD/                       YIELD/
                           AVERAGE            AVERAGE   AVERAGE            AVERAGE   AVERAGE            AVERAGE
                           BALANCE   INTEREST  COST     BALANCE   INTEREST  COST     BALANCE   INTEREST  COST
                          ---------- -------- -------  ---------- -------- -------  ---------- -------- -------
                                                        (DOLLARS IN THOUSANDS)
                                                                             
        ASSETS:
        ------
Interest-earning assets:
 Investments and
  interest-earning
  deposits..............  $  225,122 $ 22,912  10.18%  $  143,067 $  9,862   6.89%  $  131,277 $  5,641   4.30%
 FHLB stock.............      10,334      619   5.99       15,853      945   5.96       19,720      989   5.02
 Loans held for sale....     597,519   75,082  12.57    1,140,790  101,170   8.87      361,156   16,286   4.51
 Loans held for
  investment, net(1)....   1,119,940  126,646  11.31      779,522   87,072  11.17    1,091,536  103,958   9.52
 Capitalized excess
  servicing fees
  receivable and
  retained interest.....      30,619    2,678   8.75       53,052    8,422  15.87       22,257    2,608  11.72
                          ---------- --------          ---------- --------          ---------- --------
   Total interest-
    earning assets......   1,983,534  227,937  11.49    2,132,284  207,471   9.73    1,625,946  129,482   7.96
                          ---------- --------          ---------- --------          ---------- --------
Non interest-earning
 assets.................     191,573                      163,055                       45,167
                          ----------                   ----------                   ----------
   Total assets.........  $2,175,107                   $2,295,339                   $1,671,113
                          ==========                   ==========                   ==========
    LIABILITIES AND
    ---------------
 SHAREHOLDERS' EQUITY:
 --------------------
Interest-bearing
 liabilities:
 Deposits...............  $1,218,123 $ 71,014   5.83%  $1,063,799 $ 60,999   5.73%  $  867,162 $ 51,565   5.95%
 Borrowings from
  Imperial Bank.........         --       --     --         3,311      302   9.12          --       --     --
 Borrowings from FHLB...      57,154    3,327   5.82      201,693   12,055   5.98      310,425   19,420   6.26
 Other borrowings.......     327,076   26,277   8.03      645,313   52,050   8.07      251,684   16,363   6.50
 Senior Notes...........     209,672   21,671  10.34       88,365    8,955  10.13       81,500    8,380  10.28
 Remarketed Par
  Securities............      39,101    4,305  11.01          --       --     --           --       --     --
 Convertible
  subordinated
  debentures............         --       --     --        10,068      675   6.70          --       --     --
                          ---------- --------          ---------- --------          ---------- --------
   Total interest-
    bearing
    liabilities(2)......   1,851,126  126,594   6.84    2,012,549  135,036   6.71    1,510,771   95,728   6.34
                          ---------- --------          ---------- --------          ---------- --------
Non interest-bearing
 liabilities............      78,117                      115,962                       88,306
Shareholders' equity....     245,864                      166,828                       72,036
                          ----------                   ----------                   ----------
   Total liabilities and
    shareholders'
    equity..............  $2,175,107                   $2,295,339                   $1,671,113
                          ==========                   ==========                   ==========
Net interest rate
 spread.................             $101,343   4.65%             $ 72,435   3.02%             $ 33,754   1.62%
                                     ========                     ========                     ========
Net interest margin(2)..                        5.11%                        3.40%                        2.08%
Ratio of interest-
 earning assets to
 interest-bearing
 liabilities............                      107.15%                      105.95%                      107.62%

- -------
(1) Net of deferred income and the allowance for loan losses, includes
    nonaccrual loans.
(2) Average interest cost and net interest margin excluding the interest
    expense from the Senior Notes held at ICII and the convertible
    subordinated debentures held at SPFC during the years ended December 31,
    1997, 1996 and 1995 were 6.39% and 6.21%, 6.55% and 3.85%, 6.11% and
    2.59%, respectively.
 
                                      71

 
ANALYSIS OF NET INTEREST INCOME
 
  Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income also depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
 
 Rate/Volume Analysis
 
  The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's net interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to (i) changes attributable to changes in volume (changes in
volume multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), (iii) changes in interest due to
both rate and volume and (iv) the net change.
 


                                                   YEAR ENDED DECEMBER 31,
                                                   -----------------------
                                    1997 OVER 1996                           1996 OVER 1995
                         ---------------------------------------  ---------------------------------------
                          VOLUME    RATE    RATE/VOLUME  TOTAL     VOLUME    RATE    RATE/VOLUME  TOTAL
                         --------  -------  ----------- --------  --------  -------  ----------- --------
                                                       (IN THOUSANDS)
                                                                         
Increase/(decrease) in:
 Investments and
  interest-bearing
  deposits.............. $  5,654  $ 4,707   $  2,689   $ 13,050  $    507  $ 3,400    $   314   $  4,221
 FHLB stock.............     (329)       5         (2)      (326)     (194)     185        (35)       (44)
 Loans held for sale....  (48,188)  42,209    (20,109)   (26,088)   35,161   15,746     33,977     84,884
 Loans held for
  investment, net.......   38,025    1,091        458     39,574   (29,704)  18,010     (5,192)   (16,886)
 Capitalized excess
  servicing fees
  receivable............   (3,560)  (3,777)     1,593     (5,744)    3,609      924      1,281      5,814
                         --------  -------   --------   --------  --------  -------    -------   --------
   Total interest
    income..............   (8,398)  44,235    (15,371)    20,466     9,379   38,265     30,345     77,989
                         --------  -------   --------   --------  --------  -------    -------   --------
 Deposits...............    8,843    1,064        108     10,015    11,700   (1,908)      (358)     9,434
 Borrowings from
  Imperial Bank.........     (302)     --         --        (302)      302      --         --         302
 FHLB borrowings........   (8,643)    (323)       238     (8,728)   (6,807)    (869)       311     (7,365)
 Other borrowings.......  (25,682)    (258)       167    (25,773)   25,586    3,951      6,150     35,687
 Senior Notes...........   12,288      186        242     12,716       706     (122)        (9)       575
 Remarketed Par
  Securities............    4,305      --         --       4,305       --       --         --         --
 Convertible Notes......     (675)     --         --        (675)      675      --         --         675
                         --------  -------   --------   --------  --------  -------    -------   --------
   Total interest
    expense.............   (9,866)     669        755     (8,442)   32,162    1,052      6,094     39,308
                         --------  -------   --------   --------  --------  -------    -------   --------
Change in net interest
 income................. $  1,468  $43,566   $(16,126)  $ 28,908  $(22,783) $37,213    $24,251   $ 38,681
                         ========  =======   ========   ========  ========  =======    =======   ========

 
RECENT ACCOUNTING PRONOUNCEMENTS
 
  The Company adopted a new accounting standard on January 1, 1997, and
adopted additional accounting and disclosure standards on either December 31,
1997 or January 1, 1998. For a description of these standards and the effect,
if any, adoption has had or will have on the Company's consolidated financial
statements, see "Note 3 of Notes to Consolidated Financial Statements."
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Asset/Liability Management and Market Risk."
 
                                      72

 
                                   BUSINESS
 
  The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
 
GENERAL
 
  Imperial Credit Industries, Inc. (the "Company" or "ICII"), with
consolidated assets of $2.1 billion as of December 31, 1997, is a diversified
commercial and consumer lending, financial services and investment holding
company, organized in 1986 with its headquarters located in Torrance,
California. Its principal business activities consist of the operation of six
significant wholly owned operating subsidiaries: Southern Pacific Bank
("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Advisors, Inc.
("ICAI"), Auto Marketing Network Inc. ("AMN"), Imperial Credit Commercial
Asset Management Corporation ("ICCAMC") and Imperial Credit Worldwide, Ltd.
("ICW"), one significant majority owned consolidated operating subsidiary,
Imperial Capital Group, LLC ("ICG") and significant equity investments in two
publicly traded companies, Southern Pacific Funding Corporation ("SPFC") NYSE
Symbol: SFC and Franchise Mortgage Acceptance Company ("FMC") NASDAQ Symbol:
FMAX.
 
  The Company and its subsidiaries and affiliates offer a wide variety of
financial services and investment products nationwide. Equity investments in
publicly traded companies are defined as investments accounted for by the
Company pursuant to the equity method of accounting which requires a minimum
of 20% ownership in the voting common stock of the investee company. The
Company's major business activities consist of the following subsidiaries,
investments and equity investments in publicly traded companies:
 
                SIGNIFICANT WHOLLY-OWNED OPERATING SUBSIDIARIES
 
Southern Pacific Bank........  An industrial loan company specializing in
                               asset-based lending, loan participations,
                               lending to small businesses and consumers, and
                               income property lending. In October 1997,
                               Southern Pacific Thrift and Loan changed its
                               name to Southern Pacific Bank.
 
Imperial Business Credit,      
Inc..........................  A commercial leasing company specializing in 
                               equipment leasing to small businesses.        

Auto Marketing Network,        
Inc..........................  A company providing sub-prime auto financing. 
 
Imperial Credit Advisors,      
Inc..........................  A company providing management advisory 
                               services.                                

Imperial Credit Worldwide,     
Ltd..........................  Majority owner of Credito Imperial Argentina, a
                               mortgage banking company conducting business in
                               Argentina.                                      
 
Imperial Credit Commercial
Asset Management
Corporation..................  A company that manages the day to day
                               operations of Imperial Credit Commercial
                               Mortgage Investment Corporation ("ICCMIC")
                               NASDAQ Symbol: ICMI, a publicly traded real
                               estate investment trust with investments in
                               multifamily and commercial properties, loans,
                               and securities. As of December 31, 1997, the
                               Company owned 8.9% of ICCMIC's common stock.
 
                SIGNIFICANT MAJORITY-OWNED OPERATING SUBSIDIARY
 
Imperial Capital Group, LLC..  The holding company for a registered investment
                               broker/dealer providing investment
                               opportunities and research to individuals and
                               institutional investors. The Company owns 60%
                               of ICG's equity.
 
                                      73

 
          SIGNIFICANT EQUITY INVESTMENTS IN PUBLICLY TRADED COMPANIES
 
Franchise Mortgage
Acceptance Company...........  A franchise lending company specializing in
                               lending to the restaurant and retail energy
                               industries. As of December 31, 1997, the
                               Company owned 38.4% of FMC's common stock.
 
Southern Pacific Funding       
Corporation..................  A sub-prime mortgage banking company. As of   
                               December 31, 1997, the Company owned 47.0% of 
                               SPFC's common stock.                           

BUSINESS STRATEGY
 
  In 1995, the Company began to reposition, transform and diversify its core
business activities from the traditional mortgage banking operations of
originating and selling conforming residential mortgage loans to offering
higher margin loan, lease, investment and financial services products. The
Company's core business has remained consistent in that it originates loans
and leases funded primarily by warehouse lines of credit, repurchase
facilities, securitizations and whole loan sales in the secondary market. The
Company accomplished its diversification through a business strategy that
emphasizes:
 
  .  Investing in and managing businesses in niche segments of the financial
     services industry. The Company intends to retain a significant equity
     investment in the companies to provide a source of future earnings and
     cash flow for the Company.
 
  .  Conservative, disciplined underwriting and credit risk management.
 
  .  Loan and lease originations, where possible, on a wholesale basis.
 
  .  Securitization or sale in the secondary market of substantially all of
     the Company's loans and leases, other than those held by SPB for
     investment.
 
  .  Maintaining business and financial flexibility to take advantage of
     changing market conditions with respect to specific financial services
     businesses.
 
 Strategic Focus and Acquisitions
 
  The Company diversified its loan and lease products by focusing on the
creation and acquisition of additional finance businesses in order to reduce
its dependency on residential mortgage lending. When acquiring new businesses
or targeting expansion opportunities, the Company seeks to retain existing
management and recruit additional experienced management to increase growth
and profitability and to reduce the risks associated with operating the newly
acquired entity. The Company, through its repositioning and diversification
process from the traditional mortgage banking operations of originating and
selling conforming residential loans to a more diversified financial services
company has accomplished that goal by its acquisitions of businesses in niche
segments of the financial services industry.
 
  For the years ended December 31, 1997, 1996 and 1995, the Company originated
or acquired $1.2 billion, $2.2 billion and $3.0 billion of loans and leases,
respectively. Such amounts include loan and lease originations through the
third quarter ended September 30, 1997 for Franchise Mortgage Acceptance
Company, LLC ("FMAC"). In August 1997, FMAC incorporated FMC, for the purpose
of succeeding to the business of FMAC. Immediately prior to FMC's initial
public offering of its common stock, FMAC merged into FMC (the
"Reorganization"). As of the fourth quarter ended December 31, 1997, FMAC is
no longer a majority owned subsidiary of the Company.
 
  In addition, during the years ended December 31, 1997, 1996 and 1995, the
Company completed securitization transactions totaling $919.1 million, $1.3
billion and $1.0 billion, respectively.
 
  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
 
                                      74

 
existing businesses and commenced several new businesses, including sub-prime
residential mortgage banking, commercial mortgage banking, business finance
lending and consumer lending.
 
  The Company provides loan and lease products primarily in the following
sectors: sub-prime residential mortgage banking; commercial mortgage banking
income producing property loans; business lending--equipment leasing, loan
participations and asset-based lending; consumer lending--sub-prime auto loans
and Title I home improvement lending. The Company solicits loans and leases
from brokers on a wholesale and portfolio basis and originates loans directly
from borrowers. The majority of the Company's loans and leases, other than
those held by SPB for investment, are sold in secondary markets through
securitizations and whole loan sales.
 
  During 1995, the Company sold its mortgage conduit operations and SPB's
warehouse lending operations to Impac Mortage Holdings, Inc. ("IMH") AMEX
Symbol IMH, formerly Imperial Credit Mortgage Holdings, Inc. In exchange for
these assets, the Company received approximately 11.8% of the common stock of
IMH. Additionally, ICAI entered into a management agreement with IMH pursuant
to which ICAI advised upon the day-to-day operations of IMH and for which it
was paid a management fee. During 1997, the Company sold its common stock
interest in IMH, receiving proceeds of $12.0 million and recording a gain of
approximately $11.5 million.
 
  In December 1997, IMH and the Company negotiated a termination of the
management agreement (the "Termination Agreement"). The consideration received
by the Company pursuant to the Termination Agreement was comprised of
2,009,310 shares of IMH common stock and certain securitization-related
assets. Additionally, the Company agreed to cancel its note receivable from
ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is now
known as Impac Funding Corporation and is the origination unit of IMH, in the
amount of $29.1 million. The IMH common stock and the securitization-related
assets were recorded by the Company at their fair values of approximately
$35.0 million and $13.1 million, respectively, for a total of $48.1 million.
This amount, when netted with the $29.1 million cancellation of the ICIFC note
receivable resulted in the gain on termination of the management agreement of
approximately $19.0 million.
 
  During the first quarter of 1997, the Company disposed of its common stock
interest in ICIFC, resulting in a loss of $100,000. At December 31, 1996, the
Company owned 100% of the common stock of ICIFC which represented only a 1%
economic interest as IMH owned all of the non-voting preferred stock of ICIFC
which gave IMH a 99% economic interest in ICIFC. The Company's disposal of its
remaining economic interest in ICIFC concluded its exit from the former
mortgage banking operations.
 
 Franchise Mortgage Acceptance Company
 
  On June 30, 1995, the Company completed the acquisition of certain net
assets from Greenwich Capital Financial Products, Inc. and formed FMAC, a
limited liability company, in which the Company had a 66.7% ownership
interest. The acquisition was accounted for as a purchase and the purchase
price of $7.6 million, which included $3.8 million in contingent consideration
for loans in the pipeline, was allocated to the net assets acquired based on
their fair value resulting in goodwill of approximately $4.0 million. The
Company's franchise lending business was conducted through FMAC until November
1997, at which time FMAC merged into FMC, a Delaware corporation formed for
the purpose of succeeding to the business of FMAC, and FMC completed an
initial public offering of its common stock. The Company sold into FMC's
initial public offering 3,568,175 shares at $18.00 per share generating net
proceeds of $59.7 million and a gain of $48.9 million. Additionally, the
Company recognized a gain of $43.2 million resulting from the adjustment in
the basis of its investment in FMC due to the offering and its reduced
ownership percentage. At the time of FMC's initial public offering and at
December 31, 1997, the Company's percentage ownership of FMC common stock was
38.4%. Accordingly, FMC's operating results are no longer consolidated with
those of the Company and the Company's investment in FMC is accounted for
under the equity method.
 
                                      75

 
 Southern Pacific Funding Corporation
 
  For the year ended December 31, 1996, a substantial portion of the Company's
operations were conducted through its sub-prime residential lending
subsidiary, SPFC. In June 1996, SPFC completed an initial public offering of
its common stock pursuant to which ICII was a selling shareholder. SPFC and
the Company sold 5.2 million shares and 3.5 million shares, respectively, at
$11.33 per share. In a secondary offering during 1996, the Company sold 1.5
million SPFC shares at $19.83 per share. The Company recognized a gain on sale
of the SPFC shares it owned of $51.2 million, which is net of offering
expenses and the Company's cost basis in the shares. The Company also
recognized a gain of $31.4 million related to the stock sold by SPFC. The gain
related to the stock sold by SPFC is based on the difference between the
Company's equity ownership in SPFC after the sale and such equity ownership
prior to the sale, using the Company's respective SPFC ownership percentages.
During the first quarter of 1997, the Company sold 370,000 shares of SPFC
common stock at $16.63 per share generating net proceeds of $6.2 million and a
gain of $4.3 million. Such transaction reduced the Company's ownership
percentage in SPFC from 51.2% at December 31, 1996, to 49.4% at March 31,
1997. Accordingly, SPFC's operating results are no longer consolidated with
those of the Company and the Company's investment in SPFC is accounted for
under the equity method. During the third quarter of 1997, the Company sold an
additional 500,000 shares of SPFC common stock generating net proceeds of $7.6
million and a gain of $5.2 million. At December 31, 1997, the Company's
ownership interest in SPFC was 47%.
 
 Imperial Business Credit
 
  IBC leases business equipment, including copying, data processing,
communication, printing and manufacturing equipment, exclusively to business
users. The Company expanded its commercial equipment leasing business
conducted by IBC through the acquisitions of substantially all of the assets
of First Concord Acceptance Corporation ("FCAC") for a purchase price of $21.4
million in May 1995 and all of the assets of Avco Leasing Services, Inc. and
Avco Financial Services of Southern California, Inc. (together "Avco") for
approximately $94.8 million in October 1996. These acquisitions were accounted
for as purchases and the purchase prices were allocated to the net assets
acquired based on their fair value resulting in goodwill of $1.2 million and
$12.5 million for the FCAC and Avco transactions, respectively. For the years
ended December 31, 1997 and December 31, 1996, IBC originated $151.3 million
and $87.2 million of leases and securitized $213.6 million and $87.0 million
of leases, respectively.
 
 Coast Business Credit
 
  Coast Business Credit ("CBC") is an asset-based lender specializing in
lending to middle market manufacturing, distributing and high-technology
businesses. In September 1995, the Company began making asset-based loans to
middle market companies located mainly in California by acquiring CoastFed
Business Credit ("CBCC"), from Coast Federal Bank, a financial services
company engaged primarily in the asset-based commercial lending business. This
entity, now a division of SPB, was renamed CBC. The acquisition was accounted
for as a purchase and the purchase price of $150 million was allocated to the
net assets acquired based on their fair value resulting in goodwill of
approximately $16 million. At December 31, 1997 and 1996, CBC had total
commitments of $803.3 million and $547.7 million, of which $484.8 million and
$288.5 million of loans were outstanding, respectively.
 
 Imperial Capital Group
 
  During the fourth quarter of 1996, the Company continued to diversify and
strategically deploy its capital by announcing the closing of its investment
in Dabney/Resnick/Imperial LLC ("DRI") (formerly Dabney/Resnick, Inc.), an
investment banking firm.
 
  DRI was headquartered in Beverly Hills, California with offices in Chicago,
Illinois, Dallas, Texas, and Sun Valley, Idaho, and offered full service
investment banking, brokerage, and asset management services. DRI managed and
underwrote public offerings of securities, arranged private placements and
provided advisory and other services in connection with mergers, acquisitions,
restructurings, and other financial transactions. The Company acquired a 1%
interest in DRI and purchased a warrant to acquire an additional 48% interest.
 
                                      76

 
  During the fourth quarter of 1997, the Company formed a new subsidiary, ICG,
which includes a registered broker/dealer and an asset management company
offering individual and corporate investors a wide range of financial products
and services. In connection with the formation of ICG, the Company recognized
a pre-tax charge of $3.7 million relating to the restructuring of its loan to
DRI. As part of the DRI restructuring, substantially all of the assets and
personnel of DRI were acquired or hired by ICG. During the fourth quarter of
1997, ICG raised $323 million for corporate clients through private placement
debt and equity offerings generating investment banking fees of $7.7 million.
At December 31, 1997, the Company's ownership interest in ICG is 60%.
 
 Auto Marketing Network
 
  In March 1997, the Company acquired all the outstanding common stock of AMN,
a sub-prime auto lender engaged in the financing of new and used motor
vehicles on a national basis, for $750,000. As part of the acquisition, the
Company advanced $11.6 million to repay amounts owed pursuant to operating
lines of credit and for working capital purposes. The acquisition was recorded
using the purchase method of accounting. The purchase price was allocated to
the net assets acquired based on their fair value and goodwill of
approximately $20.8 million was recorded. Since the March 1997 acquisition
date, AMN posted operating losses and experienced significant increases in
non-performing assets, loan charge-offs and loan loss provisions. In December
1997, the Company developed revised operating projections which indicated that
the goodwill resulting from the AMN acquisition was not recoverable.
Accordingly, the remaining goodwill balance of $20.1 million was written off
during the fourth quarter of 1997.
 
 PrinCap Mortgage Warehouse
 
  In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and
PrinCap Mortgage Backed, L.P. (collectively, "PrinCap") and contributed such
assets to a subsidiary. The acquisition was accounted for as a purchase, and
the purchase price of $123.7 million was allocated to the net assets acquired
based on their fair value resulting in goodwill of $6.8 million.
 
  PrinCap's primary business is residential mortgage warehouse lending to
medium-sized brokers and mortgage bankers on a national basis. At December 31,
1997, PrinCap had commitments outstanding and loans of $124.6 million and
$122.5 million, respectively.
 
 Imperial Credit Commercial Asset Management Corporation
 
  The Company formed ICCAMC, a wholly-owned subsidiary, to oversee the day to
day operations of ICCMIC, a real estate investment trust intending to invest
primarily in performing multi-family and commercial real estate loans and
mortgage-backed securities. In October 1997, ICCMIC completed its initial
public offering and sold approximately 34.5 million shares of common stock at
$15.00 per share resulting in net proceeds of approximately $481.2 million.
The Company purchased 2,970,000 shares of ICCMIC common stock in the offering
and an additional 100,000 shares in December 1997. As of December 31, 1997,
the Company owned 8.9% of the common stock of ICCMIC.
 
LOAN AND LEASE PRODUCTS
 
  The Company offers loan and lease products and provides other services in
the following sectors:
 
  .  BUSINESS FINANCE LENDING. Business finance lending is conducted through
     IBC and three divisions of SPB: Coast Business Credit ("CBC"), the Loan
     Participation and Investment Group ("LPIG") and the Auto Lend Group
     ("Auto Lend").
 
  .  COMMERCIAL MORTGAGE LENDING. The Company conducts its commercial
     mortgage lending operations through the Income Property Lending Division
     ("IPLD") of SPB.
 
                                      77

 
  .  CONSUMER LENDING. The Company conducts consumer lending operations
     through the Auto Lending Division ("ALD") and Consumer Credit Division
     ("CCD") of SPB and through AMN.
 
  .  ADVISORY, INVESTMENT AND OTHER ACTIVITIES. The Company conducts advisory
     services through its ICAI, ICCAMC, and ICG subsidiaries and has
     substantial equity investments in SPFC, a publicly traded sub-prime
     residential mortgage lender, and FMC, a publicly traded specialty
     commercial finance company.
 
BUSINESS FINANCE LENDING
 
  The Company, through IBC, and SPB's CBC, LPIG and Auto Lend divisions,
engages in business finance lending, which consists of commercial equipment
leasing, asset based lending, loan participations and automobile inventory
financing for auto dealers.
 
IMPERIAL BUSINESS CREDIT, INC.
 
 General
 
  In May 1995, the Company expanded its existing commercial equipment leasing
business conducted by its wholly-owned subsidiary, IBC, through the
acquisition of the assets and the assumption of certain liabilities of FCAC, a
Colorado corporation engaged in the origination, acquisition and servicing of
business equipment leases. The sale was effectuated pursuant to an asset
purchase agreement among the Company, FCAC and Oren L. Benton, FCAC's majority
shareholder ("Benton"). In connection with the purchase of FCAC's assets, the
Company or its affiliates also purchased 100% of the partnership interests of
three partnerships controlled by Benton that were formed for the purpose of
securitizing certain of FCAC's lease receivables. The acquisition was
accounted for as a purchase and the purchase price of $21.4 million was
allocated to the net assets acquired based on their fair value resulting in
goodwill of approximately $1.2 million.
 
  In October 1996 pursuant to the Avco Acquisition, IBC acquired substantially
all of the assets of Avco Leasing Services, Inc. and all of the assets of Avco
Financial Services of Southern California, Inc. related to its business of
originating and servicing business equipment leases and agreed to assume
certain related liabilities in connection therewith from Avco Financial
Services, Inc. The Avco Acquisition was accounted for as a purchase, and the
purchase price of $94.8 million was allocated to the net assets acquired based
on their fair value, resulting in goodwill of approximately $12.5 million.
 
  IBC's corporate headquarters are located in Rancho Bernardo, California. IBC
carries out its business equipment leasing operations from both its
headquarters and its sales offices in Irvine, California, Denver, Colorado and
Atlanta, Georgia.
 
  IBC's lease originations totaled $151.3 million and $87.2 million for the
years ended December 31, 1997 and December 31, 1996, respectively. During the
years ended December 31, 1997 and December 31, 1996, IBC securitized $213.6
million and $87.0 million of leases, respectively.
 
 Lease Finance Operations
 
  IBC is in the business of leasing equipment, including copying, data
processing, communication, printing and manufacturing equipment, exclusively
to business users. Initial lease terms typically range from 24 months
to 60 months. IBC will commit to purchase this equipment only when it has a
signed lease with a lessee who satisfies its credit and funding requirements.
Substantially all the leases written by IBC are full-payout ("direct
financing") leases that allow IBC to sell or re-lease the equipment upon
termination of the lease.
 
  IBC also purchases small portfolios of existing equipment leases from
brokers with whom it has established relationships. These portfolios are
evaluated on an individual basis according to IBC's established credit policy.
The Company believes that these acquisitions allow IBC to grow with greater
efficiency than usual at a level of decreased risk due to the portfolio aging
that has occurred on the books of the originating broker. IBC uses an
 
                                      78

 
established computer system and related software systems to process lease
applications, book leases, post lease payments, and closely monitor credit
processing and collections. These systems have in part been developed by IBC
management.
 
  Upon expiration of the initial lease terms of its direct-financing leases,
IBC expects, on average, to realize slightly more than the "residual value" at
which the leased equipment is carried on IBC's books. IBC's ability to recover
the recorded estimated residual value depends on the accuracy of initial
estimates of the equipment's useful life, the market conditions for used
equipment when leases expire, and the effectiveness of IBC's program for re-
leasing or otherwise disposing of leased equipment. Residual recovery,
however, is not required for IBC to achieve a profitable return on its
investment. The residual is usually worth 1% to 2% of the gross yield
depending upon the original lease term, further mitigating against the
residual risk inherent in the portfolio.
 
  The following table sets forth IBC's lease originations by equipment type
for the period presented.
 


                             YEAR ENDED DECEMBER 31, 1997       YEAR ENDED DECEMBER 31, 1996
                          ---------------------------------- ----------------------------------
                          NUMBER OF  PRINCIPAL               NUMBER OF  PRINCIPAL
                            LEASES     AMOUNT    % OF TOTAL    LEASES     AMOUNT    % OF TOTAL
                          ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS
                          ---------- ---------- ------------ ---------- ---------- ------------
                                                 (DOLLARS IN THOUSANDS)
                                                                 
Computers...............    1,981     $ 39,270      26.0%        857     $21,331       24.5%
Manufacturing/Machine
 work...................      441       12,001       7.9         380      11,289       13.0
Restaurant..............    1,047       13,072       8.6         395       6,238        7.2
Furniture and fixtures..      984       18,407      12.2         242       5,963        6.8
Automotive..............    1,843       15,879      10.5         475       4,279        4.9
Heavy equipment.........      430        9,449       6.2         163       3,938        4.5
Radio television
 production equipment...      374        7,869       5.2         202       3,838        4.4
Print/Typeset equipment.      136        3,423       2.3         141       3,251        3.7
Health/Sports equipment.      152        4,005       2.6         125       3,069        3.5
Dry cleaning/Washing....      102        2,385       1.6         102       2,387        2.7
Clothing manufacture....       38        1,451       1.0          59       2,373        2.7
Other...................    1,251       24,057      15.9       1,204      19,251       22.1
                            -----     --------     -----       -----     -------      -----
  Total.................    8,779     $151,268     100.0%      4,345     $87,207      100.0%
                            =====     ========     =====       =====     =======      =====

 
  IBC uses a non-cancelable lease, the terms and conditions of which vary only
slightly from transaction to transaction. In substantially all of the leases,
lessees are obligated to: (i) remit all rents due, regardless of the
performance of the equipment, (ii) operate the equipment in a careful and
proper manner compliance with governmental rules and regulations, (iii)
maintain and service the equipment, (iv) insure the equipment against casualty
losses and public liability, bodily injury and property damage and (v) pay
directly, or reimburse IBC for, any taxes associated with the equipment, its
use, possession or lease, except those relating to net income derived by IBC
therefrom.
 
  The lease provides that IBC, in the event of a default by a lessee, may
declare the entire unpaid balance of rentals due and payable immediately, and
may seize and remove the equipment for subsequent sale, re-lease or other
disposition.
 
 Underwriting
 
  IBC maintains written credit policies that IBC believes are prudent and
customary within the lease finance industry. Such policies form the basis for
IBC's standardized lease forms and approval processes. On occasion, IBC will
make exceptions to its written credit policy for lease brokers with whom IBC
has had past positive experience. In general, IBC's credit policies encourage
leasing of income-generating equipment. Within these guidelines, there are few
specific equipment or industry prohibitions.
 
                                      79

 
  IBC's credit policies allow it to accept credit investigations provided by
select brokers and has generated a database of brokers with whom it does
business. IBC also maintains a written collection policy to provide standard
collection guidelines. In those instances when a portfolio of leases is
acquired, documentation provided by the originating lessor is checked for
compliance with IBC's documentation standards before accepting the portfolio
for purchase.
 
 Marketing
 
  IBC markets its equipment lease products through its own in-house sales
force and through its network of professional equipment lease brokers. IBC's
20 person in-house sales force solicit end user customers and vendors to
market their equipment lease transactions. In the future, IBC intends to
expand its marketing efforts to include more vendors. The sales force also
calls on IBC's network of professional equipment lease brokers to solicit
these professionals to send their lease transactions to IBC.
 
  IBC's broker advisory panel consists of a group of its most productive
brokers who are brought together on an annual basis, so that they may have an
open interchange of ideas and information regarding IBC and the leasing
marketplace. IBC believes the advisory panel serves a multi-purpose function
by allowing IBC to reward those brokers that provide a profitable base of
business to IBC, and also providing IBC the opportunity to market new ideas
and concepts to those brokers before a general release to the leasing
community. IBC believes that it benefits by obtaining information on how the
brokers work with IBC's competitors (such as special programs and market
trends), and this information can then be used to drive future marketing
plans.
 
COAST BUSINESS CREDIT
 
 General
 
  CBC is a senior secured asset-based lender located in Los Angeles,
California, which has historically conducted its lending business activities
in the Western United States. During 1996 CBC executed an expansion plan which
increased its customer base outside of California.
 
  CBC now operates four loan production centers in California and additional
loan production centers in Atlanta, Baltimore, Boston, Chicago, Cleveland,
Minneapolis, Phoenix, Portland, Providence and Seattle. At December 31, 1997
and December 31, 1996, CBC had outstanding loans totaling $484.8 million and
$288.5 million, respectively.
 
  CBC had unused loan commitments of $318.4 million and $259.2 million at
December 31, 1997 and 1996, respectively.
 
  CBC's principal business is asset-based lending to small-to medium-sized
businesses with annual revenues ranging from approximately $10 million to $100
million. At December 31, 1997 and 1996, CBC had outstanding loans to
technology companies totaling $201.8 million and $115.6 million, respectively.
 
  At December 31, 1997 and December 31, 1996, CBC's loan portfolio represented
lending relationships with 142 and 105 customers, with an average outstanding
loan balance per customer of $3.4 million and $2.8 million, respectively. The
Company believes that CBC's relationships with venture capital investors and
its industry expertise contribute to CBC's ability to distinguish itself from
its competitors and grow its lending relationships.
 
  The Company believes that CBC's loan pricing is competitive with pricing
charged by other commercial finance companies. In addition, CBC attempts to be
flexible in the structuring of its revolving credit lines and to provide
prompt service in order to gain an advantage over its competitors. When CBC
competes against more traditional lenders, it competes less on price and more
on flexibility, speed of funding and the relative simplicity of its
documentation. CBC strives to fund its initial loan advance under a loan to an
approved client within three weeks of CBC's receipt of required information
with respect to the client, and strives to fund future advances generally by
the next business day after CBC's receipt of required documentation.
 
                                      80

 
 Loan Products and Originations
 
  CBC's loans are categorized based on the type of collateral securing the
loan. CBC makes revolving loans primarily secured by accounts receivable and
secondarily by inventory. It also makes term loans secured by real property,
equipment or other fixed assets.
 
  CBC also periodically enters into participations with other commercial
finance companies. CBC's loans typically have maturities of two to five years,
providing borrowers with greater flexibility to manage their borrowing needs.
These loans have an automatic renewal for a one year period at the end of such
contract term unless terminated by either party (usually requiring 60 days
written notice prior to the end of such term). Equipment loans are term loans
typically with three- to five-year amortization periods, but are due and
payable upon termination of the master loan and security agreement.
 
  Accounts receivable loans are revolving lines of credit that are
collateralized principally by accounts receivable. Each borrower's customers
normally remit their accounts receivable payments directly to CBC, usually on
a daily basis. CBC deposits the payments daily and applies the funds to the
borrowers' loan balances. CBC typically lends up to 80% of the principal
balance of accounts receivable that meet CBC's eligibility requirements. CBC's
auditors conduct quarterly audits of the collateral and financial condition of
each borrower.
 
  Inventory loans are revolving lines of credit collateralized by eligible
inventory that is restricted to raw materials and finished goods. Inventory
loans are generally made in conjunction with accounts receivable loans to
qualifying borrowers. Borrowers are required to provide CBC with monthly
inventory designations that are supported by a physical listing or a copy of a
perpetual computer listing. These reports are compared to the borrower's
financial statements for accuracy, and CBC advances the loan proceeds as a
percentage of the eligible inventory value. Inventory loans are primarily
structured as revolving lines of credit, but under certain circumstances may
be structured to incorporate monthly amortization.
 
  Participation loans consist of term loans or revolving lines of credit in
which CBC and other lenders (banks or other asset-based lenders) jointly lend
to borrowers when the loan amount exceeds the lending limits of an individual
lender.
 
  Set forth below is a table showing the principal amount of CBC's outstanding
loans as of December 31, 1997 and December 31, 1996, and the percentage of
CBC's portfolio comprised of each loan type as of such date.
 


                                            AT DECEMBER 31,    AT DECEMBER 31,
                                                 1997               1996
                                           -----------------  -----------------
                                           OUTSTANDING % OF   OUTSTANDING % OF
                                             BALANCE   TOTAL    BALANCE   TOTAL
                                           ----------- -----  ----------- -----
                                                 (DOLLARS IN THOUSANDS)
                                                              
Accounts receivable loans.................   $344.2     71.0%   $208.1     72.1%
Inventory loans...........................     55.1     11.4      34.9     12.1
Participation loans(1)....................     85.5     17.6      45.5     15.8
                                             ------    -----    ------    -----
  Total...................................   $484.8    100.0%   $288.5    100.0%
                                             ======    =====    ======    =====

- --------
(1) Participation loans include $85.5 million purchased at December 31, 1997
    and $48.4 million purchased and $2.9 million sold at December 31, 1996.
 
  The weighted average yield on CBC's loans outstanding was 12.79% and 12.41%
at December 31, 1997 and December 31, 1996, respectively.
 
  CBC had commitments to make additional fundings on lines of credit with
existing borrowers totaling approximately $318.4 million and $259.2 million at
December 31, 1997 and December 31, 1996, respectively; however, each
additional funding is contingent upon the borrowers maintaining both
sufficient collateral and compliance with the terms and conditions of the loan
documents.
 
                                      81

 
 Underwriting
 
  Before a credit line proposal letter is issued and a line of credit is
established, CBC policy requires a review of the prospective client, its
principals, business and customer base, including a review of financial
statements and other financial records, legal documentation, samples of
invoices and related documentation, operational matters, accounts receivable
and payable.
 
  In addition, CBC confirms certain matters with respect to the prospective
client's business and the collectibility of the client's commercial
receivables and other potential collateral by conducting public record
searches for liens, conducting credit reviews of the prospective client and
its principals, contacting major customers and suppliers to identify potential
problems, and conducting an on-site audit of the prospective client's invoice,
bookkeeping and collection procedures to verify that they are properly
conducted and operationally compatible with CBC's operations. For high
technology borrowers, particular emphasis is placed on comprehending the
underlying value of the technology itself, including the value of the
borrowers intangible assets.
 
  After the preliminary review and due diligence, CBC requires the prospective
borrower to provide a deposit for fees and orders appraisals if lending
against inventory, equipment or real estate and schedules an audit. CBC's
auditing staff conducts an audit generally consisting of a due diligence
review of the prospective borrower's accounting and financial records,
including a statistical review of accounts receivable and charge-off history.
CBC auditors then submit their audit reports and work papers to CBC's credit
committee for review prior to the extension of credit.
 
  In making a decision to approve a credit line, CBC establishes credit limits
under the revolving credit line and analyzes the prospective client's customer
base to assure compliance with CBC's policies generally limiting CBC's overall
exposure to account debtors, especially with respect to privately held or non-
investment grade borrowers. When deemed necessary for credit approval, CBC may
obtain guarantees or other types of security from a client or its affiliates
and may also obtain subordination and intercreditor agreements from the
borrower's other lenders.
 
  Although CBC's underwriting guidelines specify a review of the factors
described above, CBC does not apply a rigid scoring system to prospective
borrowers. Decisions to enter into a relationship with a prospective client
are made on a case-by-case basis.
 
  CBC's underwriting guidelines and policies provide that, prior to each loan
funding, the account executive assigned to the borrower (i) obtains the
original or a copy of the invoice to be sent to the borrower and the purchase
order (if one is required by CBC) related to such invoice, (ii) confirms the
validity and accuracy of a representative sampling of invoices and (iii) mails
a letter, on the borrower's letterhead, to the new borrower's customer which
introduces CBC and requests that payment be made directly to CBC.
 
 Credit Monitoring and Controls
 
  An assigned CBC account executive monitors each borrower's credit,
collateral and advances. All account executives are required to meet with each
of their assigned borrowers at least quarterly to monitor the borrower's
business, physically inspect the borrower's facilities and equipment, and
discuss any potential problems the borrower may be experiencing.
 
  CBC monitors borrowers' accounts receivable using three forms. The first
form is an accounts receivable aging analysis report prepared monthly by the
loan processor and reviewed by the account executive, and which includes,
among other things, details pertaining to account concentrations and aging
trends. The second is an accounts receivable activity summary prepared weekly
by the loan processor and reviewed by the account executive, summarizing
borrowings, repayments and pledged collateral. The third is a daily report
prepared by the borrower and reviewed by the account executive to determine
credit availability for a particular day.
 
                                      82

 
  In addition to the foregoing monitoring procedures, interim audits of all
borrowers are scheduled as deemed appropriate. Also, each account is reviewed
on its anniversary date and revolving lines are reviewed and reconciled on a
monthly basis.
 
  Where liquidation is required for repayment of an outstanding loan, CBC
attempts to effect a consensual possession of the subject collateral property
and joint collection of accounts receivable. In certain instances, court
action may be required to ensure collection of receivables and possession of
pledged assets. CBC has not experienced any loan losses since its acquisition
by the Company.
 
 Marketing
 
  CBC obtains business through referrals from banks, venture capitalists,
accounting firms, management consultants, existing borrowers, other finance
companies and independent brokers. CBC's marketing officers call on CBC's
referral sources to identify and receive introductions to potential clients
and to identify potential clients from database searches. CBC currently
compensates its marketing personnel with what it believes are competitive base
salaries and commissions based on funded transactions in order to motivate and
reward the creation of new business and the renewal of existing business. Such
commissions can be a significant portion of the total compensation paid to
CBC's marketing personnel. CBC's marketing personnel have no credit decision
authority.
 
  The Company believes that CBC's marketing strengths are its rapid response
time and high level of service. The Company believes that, based on CBC's
experience with technology credits and valuation of their associated tangible
and intangible assets, CBC is able to quickly evaluate potential borrowers,
thus providing it with a competitive advantage over other lenders with less
experience providing loans to high technology companies.
 
  The Company also believes that CBC's ability to quickly evaluate credit
requests and provide loans to borrowers who, for various reasons, have not
established relationships with traditional lenders, has resulted in a loyal
customer base.
 
 LOAN PARTICIPATION AND INVESTMENT GROUP
 
  LPIG was formed by SPB in September 1995 to invest in and purchase
syndicated commercial loan participations in the secondary market originated
by commercial banks. As of December 31, 1997 and December 31, 1996, LPIG had
total loan commitments of $483.7 million and $267.1 million, of which
$196.4 million and $160.7 million of loans were outstanding, respectively. At
December 31, 1997 and December 31, 1996, none of LPIG's loan participations
were 30 days or more delinquent.
 
  The principal types of loans acquired by LPIG are senior secured bank loans
consisting of: (i) revolving lines of credit which allow the borrower to
borrow and repay proceeds as needed for working capital purposes, (ii) long-
term loans with a specific amortization schedule which requires the borrower
to repay the borrowed loans over time, usually on a quarterly basis or (iii)
letters of credit which are normally funded as a sublimit under the revolving
line of credit commitment.
 
  The loans are generally secured by a first priority lien on all of the
borrower's property including accounts receivable, inventory and furniture,
fixtures and equipment, as well as liens on owned real estate. At December 31,
1997 and December 31, 1996, loan participations held by LPIG ranged in size
from approximately $575,000 to $24.0 million and $900,000 to approximately
$15.0 million, respectively.
 
  LPIG believes that its purchase of senior secured loan participations allows
it to build and maintain a loan portfolio without costly direct customer loan
servicing and loan origination costs. In addition, such purchases facilitate
the maintenance of a portfolio which is diversified both geographically and by
industry.
 
  LPIG's loan underwriting policy requires an analysis of the borrower's
ability to repay its debts, as well as an evaluation of the effects of general
economic and industry trends and various competitive factors affecting the
borrower.
 
                                      83

 
  LPIG's commitments/outstandings by industry type at December 31, 1997 are as
follows:
 


                                              % OF TOTAL             % OF TOTAL
                                   COMMITMENT COMMITMENT OUTSTANDING OUTSTANDING
                                     AMOUNT     AMOUNT     AMOUNT      AMOUNT
                                   ---------- ---------- ----------- -----------
                                              (DOLLARS IN THOUSANDS)
                                                         
   Manufacturing..................  $ 93,384     19.3%    $ 34,470       17.5%
   Hotels.........................    50,338     10.4       12,359        6.3
   Waste disposal services........    36,712      7.6       13,588        6.9
   Outdoor advertising............    31,600      6.5       20,568       10.5
   Automobile rentals.............    25,000      5.2          --         --
   Radio broadcasting.............    24,000      5.0       18,780        9.6
   Air carrier....................    23,000      4.8        7,820        4.0
   Defense........................    22,530      4.7        6,541        3.3
   Automobile parts...............    21,646      4.5        1,646        0.8
   Food processing................    20,000      4.1        9,948        5.1
   Food distribution..............    16,441      3.4          --         --
   Party goods distribution.......    15,000      3.1        3,000        1.5
   Rail transportation............    14,520      3.0       14,520        7.4
   Telecommunications.............    14,440      3.0        5,036        2.6
   Equipment rentals..............    12,600      2.6        5,216        2.7
   Healthcare.....................    10,750      2.2        6,615        3.4
   Chemicals......................    10,522      2.2        7,379        3.7
   Collection services............    10,275      2.1        8,067        4.1
   Park management................    10,000      2.1        7,000        3.6
   Television broadcasting........     5,000      1.0        3,575        1.8
   Garment........................     5,000      1.0        1,400        0.7
   Supermarkets...................     4,900      1.0        4,900        2.5
   Paper..........................     3,030      0.6        1,010        0.5
   Restaurants....................     2,982      0.6        2,982        1.5
                                    --------    -----     --------      -----
     Total........................  $483,670    100.0%    $196,420      100.0%
                                    ========    =====     ========      =====

 
 Auto Lend Group
 
  Auto Lend was established in September 1996 as a division of SPB, to provide
automobile inventory financing for automobile dealers. The principal types of
loans originated are fixed-rate lines of credit. Auto Lend had $62.4 million
and $28.8 million of commitments and $14.1 million and $4.6 million of loans
outstanding at December 31, 1997 and December 31, 1996 respectively.
 
  SPB believes that Auto Lend's products offer synergistic opportunities, when
offered in connection with SPB's sub-prime auto lending ability, to provide
car dealers a complete financing package. See "--Consumer Lending--Auto
Lending Division."
 
COMMERCIAL MORTGAGE LENDING
 
 Income Property Lending Division
 
  The Company conducts its commercial mortgage lending operations through the
Income Property Lending Division ("IPLD") of SPB. IPLD was formed in February
1994 to expand the Company's apartment and commercial property lending
business.
 
  The focus of IPLD's lending activities is the small loan market (consisting
of loans typically less than $2.5 million) for multi-family apartments and
commercial buildings. For the years ended December 31, 1997 and 1996, IPLD
funded approximately $295.9 million and $260.9 million in loans, respectively.
 
                                      84

 
  During the year ended December 31, 1997 and the year ended December 31,
1996, SPB completed securitizations of approximately $203.1 million and $277.0
million of multi-family and commercial mortgage loans originated or purchased
by IPLD, respectively. At December 31, 1997 and December 31, 1996, $497,000
and $1.9 million or 0.8% and 1.1%, respectively, of IPLD's outstanding loans
were 30 days or more delinquent.
 
  At December 31, 1997 and December 31, 1996, $500,000 and $4.4 million,
respectively, of IPLD originated loans were held for investment by SPB. IPLD
generally seeks to make 70% of its loans secured by apartment buildings and
30% of its loans secured by other commercial properties. Most of IPLD's
business is generated through in-house loan representatives who market the
loans directly to mortgage brokers and borrowers. Most of IPLD's loans have
been secured by properties in California.
 
  SPB believes that IPLD employs conservative underwriting criteria, which
include a maximum loan-to-value ratio of 70% and minimum debt coverage ratio
of 1.2x on all loans. Loans secured by income properties entail additional
risk as compared to single family residential lending. The payment experience
on such loans is generally dependent on the successful operation of the
related commercial or multi-family property and can be greatly impacted by
adverse conditions in local real estate markets or in the economy.
 
  All of IPLD's loan programs include 30-year adjustable rate loans tied to
the 6-month LIBOR, 1-year Treasury, or Bank of America prime indexes. Margins
vary depending on product type, property location and credit history of the
borrower. With respect to apartment loans, IPLD uses standard government
agency documentation and approved independent appraisers.
 
CONSUMER LENDING
 
  Through ALD and CCD, which are divisions of SPB, and AMN, the Company also
makes consumer loans consisting of sub-prime automobile finance loans, home
improvement loans and other consumer credit.
 
 Auto Lending Division
 
  ALD was formed in October 1994 to finance new and used automobile purchase
contracts. ALD's borrowers are generally credit-impaired and therefore are
unable to access traditional sources of financing from banks and captive
automobile finance companies. ALD seeks to offset the increased risk of
default in its portfolio with higher yields and aggressive servicing and
collection activities.
 
  During the year ended December 31, 1997 and December 31, 1996, ALD
originated approximately $74.2 million and $35.0 million, respectively, in
automobile loans. SPB currently generates automobile loans through three
Northern California retail offices.
 
 Consumer Credit Division
 
  CCD was formed in early 1994 to offer loans primarily to finance home
improvements and consumer goods. CCD's business is developed through a network
of retailers and contractors throughout California and out of state. All loans
are centrally processed, approved and funded at CCD's headquarters in Irvine,
California.
 
  Home improvement loans offered by CCD range from $5,000 to $350,000 and
include major remodeling projects that are sometimes coupled with
refinancings.
 
  CCD's typical loan is secured by a junior lien. In addition, CCD purchases
unsecured installment sales contracts to finance certain home improvements
such as air conditioning, roofing, kitchen or bathroom remodeling.
 
  During the years ended December 31, 1997 and December 31, 1996, CCD
originated $19.8 million and $22.0 million in loans, respectively, all of
which are held for investment. At December 31, 1997 and December 31, 1996,
$900,000 or 1.9% and 2.4%, respectively, of CCD's outstanding loans were 30
days or more delinquent.
 
                                      85

 
 Auto Marketing Network, Inc.
 
  AMN was acquired on March 14, 1997 to finance on a nationwide basis the
purchase of new and used automobiles primarily to sub-prime borrowers. At
December 31, 1997, AMN was headquartered in Tulsa, Oklahoma and had certain
business development and administrative activities located in its Florida
office. For the period from its acquisition through December 31, 1997, AMN
originated $170.6 million and securitized $158.6 million in sub-prime auto
loans. Since the March 1997 acquisition date, AMN has posted operating losses
and experienced significant increases in non-performing assets, loan charge-
offs and loan loss provisions. In December 1997, the Company developed revised
operating projections which indicated that the goodwill resulting from the AMN
acquisition was not recoverable. Accordingly, the remaining goodwill of
$20.1 million was written off through accelerated amortization during the
fourth quarter of 1997.
 
 General
 
  AMN is engaged primarily in the indirect origination of sub-prime motor
vehicle receivables. As of December 31, 1997, AMN's receivables are originated
through a network of approximately 819 participating dealers. Approximately
87% of all originating dealers are new car franchised dealers or their
affiliates and the others are independent dealers.
 
  AMN's direct dealer relationships generally begin with AMN's area dealer
representative contacting a dealer to explain AMN's financing program. AMN's
representative presents the dealer with a sales package, including promotional
material containing current rates being offered by AMN to dealerships, copies
of AMN's dealer agreement, information regarding AMN's special finance
training schools and samples of AMN's documentation requirements. A dealer
that decides to participate in AMN's financing program must enter into a non-
exclusive dealer agreement with AMN. As a condition to entering into an
agreement, a dealer must provide certain business information to AMN. A dealer
must also make representations and warranties to AMN with respect to the
receivables to be assigned. Upon execution of the dealer agreement, AMN's area
dealer representative provides the dealership with necessary documentation for
origination of receivables and conducts a two-day in-house training session at
the dealership for personnel responsible for the use of such documentation. In
addition, dealers are encouraged to send staff members to AMN's Alternative
Finance Training School within the first four months after their enrollment in
AMN's program. Since its formation, AMN has purchased receivables from dealers
generally at a 10% discount from the financed amount. AMN is in the process of
developing a risk-based tiered pricing program which AMN anticipates will be
implemented during 1998.
 
  The program includes a wholesale advance rate (rather than a retail advance
rate currently used by AMN), and includes acquisition fees, annual percentage
rates and other criteria that differ depending upon the creditworthiness of
the borrowers. In addition, AMN has retained certain consultants to assist in
the development of a credit scoring model and a bankruptcy scorecard predictor
and in the development of portfolio risk management procedures associated with
its risk-based tiered pricing program.
 
  In addition, in June 1997, AMN entered into an agreement with Auction
Finance Group, Inc. pursuant to which AMN may obtain referral business from
certain independent used car dealers from whom AMN currently purchases
receivables from time to time at a 12% discount from the financed amount. All
dealers are obligated to repurchase any receivable identified by AMN if that
dealer's representations and warranties prove to have been false at the time
AMN purchased the receivable. The sales by the dealers of installment sale
contracts to AMN do not generally provide for recourse to the dealer for
unpaid amounts in the event of a default by a borrower thereunder, other than
in connection with the breach of the foregoing representations and warranties.
The dealers also indemnify and hold harmless AMN for any liabilities and costs
(including attorney fees) arising from any act or omission by the dealer
required to be performed under the dealer agreement for any receivable.
 
 Underwriting
 
  The credit guidelines applied by AMN in acquiring receivables are
considerably less stringent with respect to the credit of the obligor than
those generally applied by other lenders, such as banks and savings and loans
 
                                      86

 
associations. The obligors on the acquired receivables are individuals who are
not typically able to obtain financing from such other lenders due to prior
credit problems, which may include bankruptcies, repossessions, foreclosures,
charge-offs, judgements or collection problems (or to a lessor extent,
qualifying first time borrowers). However, the prospective obligor is required
to be currently performing on all outstanding obligations reported to AMN
which AMN deems significant. Due to the lower credit quality of the obligors
and the resulting higher risks of loss, receivables have been originated with
Annual Percentage Rates ("APR's") which are higher than would be available to
prime borrowers. The following procedures describe AMN in underwriting retail
installment contracts secured by motor vehicles.
 
  .  AMN purchases retail installment sale contracts secured by new and used
     automobiles, vans and light duty trucks from dealers who participate in
     its motor vehicle financing program. The receivables purchased by AMN
     were originated by dealers in accordance with AMN's requirements under
     existing agreements with such dealers.
 
  .  Applications submitted to AMN are required to list sufficient
     information to process the application, including the applicants'
     income, employment status, residential status, monthly mortgage or rent
     payment and other personal information. Upon receipt of an application,
     AMN obtains at least one credit report from an independent credit
     bureau. If no report is available due to insufficient credit or other
     factors, the application is automatically denied. Each credit report is
     reviewed by AMN to determine the applicant's current credit status and
     past credit performance. Factors considered negative generally include
     past due credit, repossessions, foreclosures, loans charged off by other
     lenders, judgements and previous bankruptcy. Positive factors such as
     amount of credit and favorable payment history are also considered.
     Other considerations include income requirements and the ratio of total
     debt to income and of monthly auto payment to income.
 
  .  Although AMN will consider various criteria in evaluating a loan
     application. including but not limited to borrower's employment and
     residence, ability to make loan payments and credit history, the amount
     of the down payment , the value of the financed vehicle, the mileage of
     the financed vehicle and the amount of the loan in relation to the value
     of the vehicle, AMN may approve a loan application even if it has made
     an evaluation that one or more of such criteria has not been met or
     exceeded if in its judgement there are countervailing factors.
 
  .  Thus AMN may, in some cases, approve a loan even though its evaluation
     of a borrowers' record of employment or ability to make loan payments,
     or a borrowers' credit history, are different from its standard
     underwriting guidelines
 
  In June 1997, internal exception tolerances were tightened, which affected
most guideline limits in the program. AMN also implemented an internal audit
system whereby its internal auditor reviews a sample of each week's
originations for compliance with its underwriting guidelines. Furthermore, in
September 1997, several key guideline limits were changed.
 
  These included an increase in minimum income requirements for qualified
credit applicants, an increase in the minimum required credit score, and
decreases in allowable debt-to-income and payment-to-income ratios. Other
minor changes at that time included a limit on fees charged by dealers and a
reduction in allowable additions to vehicle value for options. The changes AMN
made to its underwriting guidelines were the result of its Credit Committee's
review of an analysis of all defaulted loans originated by AMN since April
1995.
 
  In addition, AMN is in the process of developing a risk-based tiered pricing
program designed to improve further the credit quality of the receivables it
originates. There can be no assurance, however, that the tightening of AMN's
credit standards and implementation of the risk-based tiered pricing program
will result in improved credit quality in AMN's receivables portfolio.
 
 Insurance on Financed Vehicles
 
  AMN's retail installment sale contract requires that borrowers maintain
specific levels and types of insurance coverage, including physical damage
insurance, to protect the related financed vehicle against loss. At
 
                                      87

 
the time of purchase, the borrower signs a statement which indicates the
customer has or will have the necessary insurance, and which shows the name
and address of the insurance company along with a description of the type of
coverage. Although each receivable requires the related obligor to maintain
insurance covering physical damage to the financed vehicle, since the obligors
may select their own insurers to provide the requisite coverage, specific
terms and conditions of their policies may vary. A failure by an obligor to
maintain such physical damage insurance will constitute a default under the
related receivable, but will not cause such receivable to become a delinquent
receivable.
 
 Guidelines and Procedures for Credit Evaluation
 
  AMN's underwriting guidelines are designed to provide financing to people
with impaired credit, which may include bankruptcies, repossessions,
foreclosures, charge-offs, judgements and collection accounts. To a lesser
extent, AMN will purchase receivables from qualifying first-time borrowers.
AMN's underwriters will evaluate suitability based on their assessment of all
elements of the proposed credit (e.g. the borrower's credit, the deal
structure and the collateral). An underwriter may reject a contract in which
all of the elements of the proposed credit meet only the minimum requirements,
or the underwriter may grant conditional approval on the prospective borrowers
ability to meet additional conditions, such as a higher down payment, a lower
advance or purchase of a different vehicle. The underwriter may waive certain
requirements or grant exceptions, generally with the approval of the regional
credit manager. All credit decisions are made at the discretion of AMN.
 
 Approval Process
 
  When AMN approves the purchase of a finance contract, AMN notifies the
dealer by facsimile or telephone. Such notice specifies certain pertinent
information relating to the terms of the approval, including the maximum
monthly payment and the stipulations required for funding. Generally, a
borrower is required to make a down payment (which includes cash and/or
vehicle trade-in value) of at least 10% of the sales price.
 
  Subject to limited exceptions, AMN's guidelines and procedures currently
require that the total amount financed cannot exceed 115% of the retail value
of the financed vehicle. Under the risk-based tiered pricing program, the
advance rate will vary depending upon the creditworthiness of the individual
borrower.
 
 Receivable Purchase
 
  Upon final confirmation of the terms by the borrower, the dealer completes
the sale of the automobile and the loan to the borrower. AMN receives all
funding packages from courier services or local delivery and sorts them for
pick up by appropriate departments. Data entry clerks in the contract
processing department then log each new or returned funding package into AMN's
database for tracking. The clerks then print the credit bureau reports
reviewed by AMN's underwriters for approval.
 
  The credit bureau reports are placed in the loan files and such files are
distributed to the appropriate territorial processor. The territory to which a
dealer's contracts are assigned is determined based upon the state in which
the dealer's business is located.
 
  Contract processors sort the documentation received from the dealers and
check the items for authenticity and acceptability according to company
standards. Although pre-funding verifications of employment and insurance are
currently performed and obligors are contacted for completion of a collateral
audit, a substantial percentage of the receivables are verified using a book-
out sheet procedure requiring signature of the dealer and the obligor. After
the dealer delivers all required loan documentation to AMN, AMN purchases the
finance contract and remits the funds to the dealer, generally within 72
hours. Upon purchase of the finance contract, AMN acquires a perfected
security interest in the financed vehicle. Each finance contract requires that
the automobile be properly insured and AMN named as a loss payee. Compliance
with these requirements is verified prior to the remittance of funds to the
dealer. After the purchase of the finance contract, AMN contacts the borrower
to explain payment procedures.
 
                                      88

 
 Management Information Systems
 
  AMN relies heavily upon its loan processing system to purchase contracts.
AMN's loan processing system enables AMN to handle a significant volume of
applications while maintaining integrity in the area of data entry, contract
processing, and underwriting procedures. The system is serviced on a monthly
basis, and daily data backup procedures are in place.
 
ADVISORY, INVESTMENT AND OTHER ACTIVITIES
 
  The Company conducts advisory services through its ICAI, ICCAMC and ICG
subsidiaries and has substantial equity investments in SPFC, a publicly traded
sub-prime residential mortgage lender, FMC, a publicly traded specialty
commercial finance company, ICCMIC, a publicly traded REIT engaged in
commercial finance activities, IMH, a publicly traded REIT engaged in non
conforming residential mortgage lending and ICW, a holding company for
international finance activities.
 
 Imperial Credit Advisors, Inc.
 
  ICAI provides capital markets, portfolio management and research services to
the Company's subsidiaries and affiliates. Prior to December 1997, ICAI
oversaw the day-to-day operations of IMH pursuant to a management agreement,
recently terminated as more fully described in Item 13--"Certain Relationships
and Certain Transactions--Relationships with IMH--Other Arrangements and
Transactions with IMH." For the years ended December 31, 1997, 1996 and 1995,
ICAI earned $4.9 million, $3.3 million and $38,000, respectively, in
management fees and incentive payments pursuant to the management agreement.
 
 Imperial Credit Commercial Asset Management Corporation
 
  ICCAMC was formed in the third quarter of 1997 and oversees the day-to-day
operations of ICCMIC pursuant to a management agreement more fully described
in Item 13--"Certain Relationships and Certain Transactions--Relationships
with ICCMIC--ICCMIC Management Agreement." For the year ended December 31,
1997, ICCAMC earned $940,000 in management fees pursuant to the management
agreement.
 
 Imperial Capital Group, LLC
 
  ICG is a majority owned subsidiary formed in July 1997. ICG, together with
its subsidiaries Imperial Capital, LLC and Imperial Asset Management, LLC,
offer individual and institutional investors financial products and services.
Imperial Capital, LLC, is a registered broker/dealer with the United States
Securities and Exchange Commission and is a member of the National Association
of Securities Dealers, Inc. Imperial Capital, LLC, provides investment
opportunities and research to individual and institutional investors, raises
private and public capital for middle market companies, and trades debt,
equity and asset backed securities. Imperial Asset Management, LLC, is an
investment advisor registered with the United States Securities and Exchange
Commission, and provides investment management services to high net worth
individuals and institutional clients.
 
  When ICG was initially capitalized in September 1997, the Company's
ownership percentage was 80%. Subsequently, on December 5, 1997, the Company's
ownership percentage was reduced to 60% in a restructuring of its loan to DRI
and the purchase of substantially all of the assets of DRI.
 
 Southern Pacific Funding Corporation
 
  SPFC is a publicly traded sub-prime mortgage banking company which
originates, purchases and sells high yielding, single family sub-prime
mortgage loans. Substantially all of SPFC's loans are secured by first or
second mortgages on owner occupied single family residences. The majority of
the originated and purchased loans are made to borrowers who do not qualify
for or are unwilling to obtain financing from conventional mortgage sources.
As of December 31, 1997, ICII owned 9,742,500 shares of SPFC common stock,
representing 47.0% of the outstanding common stock of SPFC, which, commencing
with the three months ended March 31, 1997, is reflected on the Company's
consolidated balance sheet as "Investment in Southern Pacific Funding
Corporation"
 
                                      89

 
and is accounted for pursuant to the equity method of accounting. ICII's
investment in SPFC constituted 3.1% of the Company's total assets and
contributed 8.4% of the Company's total revenue for the year ended
December 31, 1997.
 
 Franchise Mortgage Acceptance Company
 
  FMC is a publicly traded specialty commercial finance company engaged in the
business of originating and servicing loans and equipment leases to small
businesses, with a primary focus on established national and regional
franchise concepts. More recently, FMC has expanded its focus to include
retail energy licensees (service stations, convenience stores, truck stops,
car washes and quick lube businesses), funeral homes, cemeteries and golf
operating businesses (golf courses and golf practice facilities).
 
  FMC originates long-term fixed and variable rate loan and lease products and
sells such loans and leases either through securitizations or whole loan sales
to institutional purchasers on a servicing retained basis. FMC also
periodically makes equity investments or receives contingent equity
compensation as part of its core lending and leasing business. For the nine
months ended September 30, 1997 and year ended December 31, 1996, FMAC
originated or acquired $510.8 million and $449.3 million of franchise loans
and securitized, $343.8 million and $325.1 million of loans, respectively.
 
  During the fourth quarter of 1997, FMC completed an initial public offering
of its common stock pursuant to which ICII was a selling stockholder. As a
result of the Company's participation in the public offering, the Company's
percentage ownership of FMC was reduced to 38.4%.
 
  Consequently, commencing with the quarter ended December 31, 1997, the
financial statements of FMC are no longer consolidated with those of ICII.
ICII's investment in FMC is reflected on the Company's consolidated balance
sheet as "Investment in Franchise Mortgage Acceptance Company" and is
accounted for pursuant to the equity method of accounting. ICII's investment
in FMAC constituted 2.5% of the Company's total assets as of December 31,
1997.
 
 Imperial Credit Commercial Mortgage Investment Corporation
 
  In October 1997, the Company completed a public offering of the common stock
of ICCMIC. ICCMIC invests primarily in performing multifamily and commercial
loans and mortgage-backed securities. The Company purchased 2,970,000 shares
of ICCMIC common stock for $41.4 million in October 1997. In December 1997,
the Company purchased an additional 100,000 shares of ICCMIC common stock for
$1.5 million. The Company owned 8.9% of the outstanding common stock of ICCMIC
as of December 31, 1997.
 
 Impac Mortgage Holdings, Inc.
 
  Simultaneously with IMH's initial public offering in November 1995, the
Company contributed certain operating assets of ICII's mortgage conduit
operations and SPB's warehouse lending operations for 500,000 shares of IMH's
common stock. IMH is a publicly traded specialty finance company which
operates three businesses: (i) long-term investment operations which invests
primarily in nonconforming residential mortgage loans and securities backed by
such loans, (ii) warehouse lending operations which provides short-term lines
of credit to originators of mortgage loans and (iii) conduit operations,
through its affiliate ICIFC, which primarily purchases and sells or
securitizes non-conforming mortgage loans. As of September 30, 1997, the
Company sold its common stock interests in IMH. However, pursuant to a
termination agreement (the "Termination Agreement") entered into in December
of 1997, related to the management agreement between ICAI and IMH, the Company
received shares of IMH common stock and other consideration as more fully
described in "Item 13--Certain Relationships and Certain Transactions--
Relationships with IMH--Other Arrangements and Transactions with IMH."
 
 Imperial Credit Worldwide, Ltd.
 
  ICW is a holding company for the Company's international finance activities
and is a majority owner of Credito Imperial Argentina, a mortgage banking
company conducting residential mortgage business in Argentina.
 
                                      90

 
 LOANS HELD FOR INVESTMENT
 
  The following table sets forth certain information regarding the Company's
loans held for investment. Substantially all of the Company's loans held for
investment are held by SPB:
 


                                           AT DECEMBER 31
                         ------------------------------------------------------
                            1997        1996       1995       1994       1993
                         ----------  ----------  --------  ----------  --------
                                           (IN THOUSANDS)
                                                        
Loans secured by real
 estate:
One to four family...... $  244,588  $  375,476  $228,721  $  897,494  $ 73,636
Multi-family............     17,261       2,527     7,028      82,004    61,908
Commercial..............      1,085      11,011   133,189      30,287    21,663
                         ----------  ----------  --------  ----------  --------
                            262,934     389,014   368,938   1,009,785   157,207
Leases..................      7,745      99,717     7,297      23,667     2,969
Installment loans.......    154,919      34,248     1,900       4,290        12
Franchise loans.........     62,219     115,910    46,766         --        --
Asset based loans.......    484,832     288,528   154,252         --        --
Commercial loans........    344,882     173,932   110,104       5,882       247
                         ----------  ----------  --------  ----------  --------
                          1,317,531   1,101,349   689,257   1,043,624   160,435
Unearned income.........     (7,850)     (6,336)   (5,217)     (5,900)   (1,406)
Deferred loan fees......     (4,916)     (6,415)   (1,540)     (1,114)   (1,180)
                         ----------  ----------  --------  ----------  --------
                          1,304,765   1,088,598   682,500   1,036,610   157,849
Allowance for loan
 losses.................    (38,047)    (19,999)  (13,729)     (7,054)   (3,254)
                         ----------  ----------  --------  ----------  --------
  Total................. $1,266,718  $1,068,599  $668,771  $1,029,556  $154,595
                         ==========  ==========  ========  ==========  ========

 
  The Company's loans held for investment are primarily comprised of first and
second lien mortgages secured by residential and income producing real
property in California, leases secured by equipment, installment loans to
consumers, loans to experienced franchisees of national and regional
restaurant franchises, asset-based loans to middle market companies mainly in
California and syndicated commercial loan participations. As a result, the
loan portfolio has a high concentration in the same geographic region.
Although the Company has a diversified portfolio, a substantial portion of its
debtors' ability to honor their contracts is dependent upon the economy of
California. With respect to loans held for investment at SPB, a decline in
California real estate values may adversely affect the underlying loan
collateral. In order to reduce the Company's risk of loss on any one credit,
the Company has historically sought to maintain a fairly low average loan size
within the portfolio of loans held for investment. The average loan size and
single largest loan, excluding loans originated by CBC, of the loans
originated by and held for investment at SPB at December 31, 1997 and
December 31, 1996 were $122,000 and $18.8 million, and $100,000 and $11.0
million, respectively. The largest loan held for investment at December 31,
1997 and December 31, 1996 was a performing real estate loan secured by a
first deed of trust.
 
  Non-performing assets ("NPA's") consist of nonaccrual loans, loans with
modified terms, other real estate owned ("OREO") and other repossessed assets.
The Company's policy is to place all loans 90 days or more past due on
nonaccrual. Any mortgage loans held for sale, originated or acquired as part
of the Company's former mortgage banking operations which are held more than
90 days after origination are classified as mortgage loans held for investment
and are transferred at the lower of carrying value or market value. Such loans
may be unsalable for a variety of reasons, including documentation
deficiencies, payment defaults or borrower misrepresentations. The former
mortgage banking operations' OREO arises primarily through foreclosure on
mortgage loans repurchased from investors, typically due to a breach of
representations or warranties. The Company incurred losses of approximately
$4.5 million and $5.0 million related to activities of its former mortgage
banking operations during the years ended December 31, 1997 and December 31,
1996, respectively. During the years ended December 31, 1997 and 1996, the
impact of loans repurchased as the result of borrower misrepresentations was
not material. In the fourth quarter of 1997, the Company recorded a provision
of $5.4 million for future losses on repurchases of former mortgage banking
loans.
 
                                      91

 
  The following table sets forth the amount of NPA's attributable to the
Company's former mortgage banking operations and to all of its other lending
activities:
 


                                                                  AT DECEMBER 31,
                   -------------------------------------------------------------------------------------------
                           1997                   1996                   1995                   1994
                   ---------------------- ---------------------- ---------------------- ---------------------
                                 FORMER                 FORMER                 FORMER                FORMER
                   ALL OTHER    MORTGAGE  ALL OTHER    MORTGAGE  ALL OTHER    MORTGAGE  ALL OTHER   MORTGAGE
                    LENDING     BANKING    LENDING     BANKING    LENDING     BANKING    LENDING    BANKING
                   ACTIVITIES  OPERATIONS ACTIVITIES  OPERATIONS ACTIVITIES  OPERATIONS ACTIVITIES OPERATIONS
                   ----------  ---------- ----------  ---------- ----------  ---------- ---------- ----------
                                                              (DOLLARS IN THOUSANDS)
                                                                           
Nonaccrual loans:
 One to four
 family..........  $   27,573   $ 6,874   $   24,711   $19,928   $    2,652   $ 20,990   $  4,012  $    5,697
 Commercial
 property........       5,058       --         3,052       --         1,824        --       2,201         --
 Multi-family
 property........       1,837       --         1,421       --         5,522        --       1,195         --
 Leases and
 installment.....      29,289       --           997       --           --         --         --          --
                   ----------   -------   ----------   -------   ----------   --------   --------  ----------
Total nonaccrual
loans............      63,757     6,874       30,181    19,928        9,998     20,990      7,408       5,697
                   ----------   -------   ----------   -------   ----------   --------   --------  ----------
OREO:
 One to four
 family..........       2,552     5,774        6,639     3,508        1,937      4,173      1,217       1,277
 Commercial
 property........       2,526       --         1,200       --           211        --         445         --
 Multi-family
 property........          53       --           867       --           858        --         329         --
                   ----------   -------   ----------   -------   ----------   --------   --------  ----------
Total OREO.......       5,131     5,774        8,706     3,508        3,006      4,173      1,991       1,277
                   ----------   -------   ----------   -------   ----------   --------   --------  ----------
Loans with
modified terms:
 One to four
 family..........         --        --           800       --           870        --          76         --
 Commercial
 property........         --        --           456       --           --         --         --          --
 Multi-family
 property........         --        --           --        --           --         --         --          --
                   ----------   -------   ----------   -------   ----------   --------   --------  ----------
Total loans with
modified terms...         --        --         1,256       --           870        --          76         --
                   ----------   -------   ----------   -------   ----------   --------   --------  ----------
Repossessed
property:
 Equipment held
 for sale........       4,437       --           --        --           --         --         --          --
 Repossessed
 vehicles........       4,563       --           --        --           --         --         --          --
                   ----------   -------   ----------   -------   ----------   --------   --------  ----------
Total repossessed
property.........       9,000       --           --        --           --         --         --          --
                   ----------   -------   ----------   -------   ----------   --------   --------  ----------
Total NPAs.......  $   77,888   $12,648   $   40,143   $23,436   $   13,874   $ 25,163   $  9,475  $    6,974
                   ==========   =======   ==========   =======   ==========   ========   ========  ==========
Total loans and
OREO.............  $1,475,920   $24,087   $2,012,704   $40,955   $1,168,783   $869,463   $216,555  $1,094,144
Total NPA's as a
percentage of
loans and OREO...        5.27%    52.51%        1.99%    57.22%        1.19%      2.89%      4.38%       0.64%

                           1993
                   ----------------------
                                FORMER
                   ALL OTHER   MORTGAGE
                    LENDING    BANKING
                   ACTIVITIES OPERATIONS
                   ---------- -----------
                        
Nonaccrual loans:
 One to four
 family..........   $  1,124  $    1,198
 Commercial
 property........      1,481         --
 Multi-family
 property........      1,136         --
 Leases and
 installment.....        --          --
                   ---------- -----------
Total nonaccrual
loans............      3,741       1,198
                   ---------- -----------
OREO:
 One to four
 family..........        189       2,148
 Commercial
 property........        358         --
 Multi-family
 property........        781         --
                   ---------- -----------
Total OREO.......      1,328       2,148
                   ---------- -----------
Loans with
modified terms:
 One to four
 family..........         47         --
 Commercial
 property........        702         --
 Multi-family
 property........        871         --
                   ---------- -----------
Total loans with
modified terms...      1,620         --
                   ---------- -----------
Repossessed
property:
 Equipment held
 for sale........        --          --
 Repossessed
 vehicles........        --          --
                   ---------- -----------
Total repossessed
property.........        --          --
                   ---------- -----------
Total NPAs.......   $  6,689  $    3,346
                   ========== ===========
Total loans and
OREO.............   $120,606  $1,281,313
Total NPA's as a
percentage of
loans and OREO...       5.55%       0.26%

 
                                       92

 
  The following table summarizes certain information regarding the Company's
allowance for loan losses and losses on OREO:
 


                                            YEARS ENDED DECEMBER 31,
                                      -----------------------------------------
                                       1997     1996     1995     1994    1993
                                      -------  -------  -------  ------  ------
                                                 (IN THOUSANDS)
                                                          
Allowance at beginning of period....  $19,999  $13,729  $ 7,054  $3,255  $1,995
Provision for loan and lease losses.   38,951    9,773    5,450   5,150   2,350
Business acquisitions and bulk loan
 purchases..........................   11,161    4,500    4,320     --      --
Sale of leases......................     (900)     --       --      --      --
Deconsolidation of ICIFC............     (687)     --       --      --      --
Loans charged off...................  (31,053)  (8,326)  (3,106) (1,436) (1,124)
Recoveries on loans previously
 charged off........................      576      323       11      85      34
                                      -------  -------  -------  ------  ------
Net charge-offs.....................  (30,477)  (8,003)  (3,095) (1,351) (1,090)
                                      -------  -------  -------  ------  ------
Allowance at end of period..........  $38,047  $19,999  $13,729  $7,054  $3,255
                                      =======  =======  =======  ======  ======
OREO losses:
  OREO writedowns...................  $ 2,074  $ 3,252  $ 2,085  $  369  $  406
  Loss (gain) on sale of OREO.......    4,453    2,842     (957)   (119)    (62)
                                      -------  -------  -------  ------  ------
    Total OREO losses...............  $ 6,527  $ 6,094  $ 1,128  $  250  $  344
                                      =======  =======  =======  ======  ======

 
  The percentage of the allowance for loan losses to nonaccrual loans will not
remain constant due to the nature of the Company's portfolio of mortgage
loans. The collateral for each non-performing mortgage loan is analyzed by the
Company to determine potential loss exposure, and in conjunction with other
factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan losses. On an ongoing basis, management
monitors the loan portfolio and evaluates the adequacy of the allowance for
loan losses.
 
  In determining the adequacy of the allowance for loan losses, management
considers such factors as historical loan loss experience, underlying
collateral values, evaluations made by bank regulatory authorities, assessment
of economic conditions and other appropriate data to identify the risks in the
loan portfolio. Loans deemed by management to be uncollectible are charged to
the allowance for loan losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan losses are charged to expense
and credited to the allowance in amounts deemed appropriate by management
based upon its evaluation of the known and inherent risks in the loan
portfolio. While management believes that the current allowance for loan
losses is sufficient, future additions to the allowance may be necessary.
 
FUNDING AND SECURITIZATIONS
 
  The Company's liquidity requirements are met primarily by warehouse lines of
credit and repurchase facilities from financial institutions, securitizations,
whole loan sales, SPB customer deposits and FHLB borrowings. The Company has
also accessed the capital markets through equity and debt offerings.
 
  As of December 31, 1997, the Company had warehouse lines of credit and
commitments and repurchase facilities of $434.6 million. Business operations
conducted through divisions of SPB are primarily financed through deposits,
capital contributions from ICII to SPB, a warehouse line of credit and FHLB
borrowings. At December 31, 1997 and December 31, 1996, SPB had total deposits
of approximately $1.2 billion and $1.1 billion, respectively, (excluding
deposits of the Company maintained with SPB).
 
                                      93

 
 Repurchase and Warehouse Facilities
 
  The Company is dependent upon its ability to access repurchase facilities
and warehouse lines of credit in order to fund new originations and purchases.
The Company had various warehouse lines and reverse repurchase facilities
available as follows at December 31, 1997:
 


                         INTEREST                            INDEX
                           RATE   COMMITMENT OUTSTANDING (BASIS POINTS) EXPIRATION DATE
                         -------- ---------- ----------- -------------- ---------------
                                             (DOLLARS IN THOUSANDS)
                                                         
Greenwich Capital
 Financial (AMN)........   7.25%   $125,000   $ 20,058   Libor plus 125  March 10, 1998
Donaldson, Lufkin and
 Jenrette (Corona Film
 Finance Fund)..........   5.85      79,591     79,591   Fixed rate     January 7, 1998
CoreStates Bank, N.A.
 (IBC)..................   8.17      30,000     10,192   Libor plus 220 October 6, 1998
Morgan Stanley (SPB)....   6.51     200,000     35,000   Libor plus 50  October 1, 1998
                                   --------   --------
                           6.37    $434,591   $144,841
                                   ========   ========

 
 Securitizations of Assets
 
  As a fundamental part of its business and financing strategy, the Company
has sold substantially all of its loans and leases through securitization,
except for loans held for investment by SPB. The Company believes that
securitizations provide it with greater operating leverage and a reduced cost
of funds. In a securitization, the Company sells loans or leases that it has
originated or purchased to a trust or special purpose entity for a cash
purchase price and an interest in the loans or leases securitized. The cash
price is raised through an offering of pass-through certificates by the trust
or special purpose entity. Following the securitization, the purchasers of the
pass-through certificates receive the principal collected and the investor
pass-through interest rate on the principal balance of the loans or leases,
while the Company receives the balance of the cash flows generated by the
securitized assets in the form of principal and interest on any subordinate
bonds or residual interests retained. These cash flows represent the excess
cash flow collected after credit losses on loans or leases sold over the sum
of the pass-through interest rate plus a normal servicing fee, a trustee fee
and, where applicable, an insurance fee related to such loans or leases over
the life of the loans or leases.
 
  Each loan or lease securitization may have specific credit enhancement
requirements in the form of overcollateralization which must be met before the
Company receives cash flows due. As the securitized assets generate cash
flows, they may be used to pay down the balance of the pass-through
certificates until such time as the ratio of securitized assets to pass-
through certificates reaches the overcollateralization requirement specified
in each securitization. This overcollateralization amount is carried on the
balance sheet as retained interest in loan and lease securitizations. After
the overcollateralization requirement and the other requirements specified in
the pooling and servicing agreement have been met, the Company begins to
receive principal and interest on any subordinate bonds or residual interests
retained.
 
  A substantial portion of the Company's gross income is recognized as gain on
sales of loans or leases, which represent the present value of the estimated
cash flows on the subordinate bonds or residual interests retained, less
origination and underwriting costs. The Company may retain interests in loan
and lease securitizations in the form of subordinate bonds or residual
interests, which represent interests in the trust or special purpose entity to
which such loans or leases have been sold.
 
  The Company recognizes such gain on sale of loans or leases in the year in
which such loans or leases are sold, although cash (representing the principal
and interest on any retained subordinate bonds or residual interests in loan
and lease securitizations) is received by the Company over the life of the
loans or leases. Concurrent with recognizing such a gain on sale, the Company
records any subordinate bonds or residual interests as an asset on its
consolidated balance sheet.
 
  The capitalized balance of any subordinate bonds or residual interest is
determined by computing the present value of the excess of the weighted
average coupon on the loans or leases sold over the sum of: (i) the coupon in
 
                                      94

 
the pass-through certificates, (ii) a base servicing fee paid to the loan or
lease servicer and (iii) expected losses to be incurred on the portfolio of
loans or leases sold, and considering prepayment assumptions.
 
  Prepayment assumptions are based on recent evaluations of the actual
prepayments of the Company's servicing portfolio or on market prepayment rates
on new portfolios and consideration of the current interest rate environment
and its potential impact on prepayment rates.
 
  The cash flows expected to be received by the Company, net of expected
losses, are then discounted at an interest rate that the Company believes an
unaffiliated third-party purchaser would require as a rate of return on a
financial instrument with similar characteristics. Expected losses are
discounted using a rate equivalent to the risk-free rate for securities with a
duration similar to that estimated for the underlying loans or leases sold.
The excess cash flows may only be available to the Company to the extent that
there is no impairment of the credit enhancements established at the time the
loans or leases are sold. Interest-only and residual certificates in
securitizations of mortgage loans retained by the Company are held as trading
securities and are adjusted to their respective market value quarterly with
corresponding charges and credits made to income in the adjustment period.
Subordinate bonds retained by the Company are held as either trading or
available for sale securities in accordance with the Company's investment
objectives.
 
  To the extent that actual results are different from the cash flows the
Company estimated, the Company's subordinate bonds, interest-only certificates
or residual interest will be adjusted quarterly with corresponding charges
made against income in that period. Upon completion and analysis of the
carrying values of the Company's subordinate bonds, interest-only certificates
or residual interest during 1996, the Company wrote down the balance of such
assets by $4.7 million. Any similar future charge against income may have a
material adverse effect on the Company's results of operations. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
 
  On the Company's consolidated balance sheet, securitization-related assets
such as capitalized excess servicing fees receivable, subordinate bonds,
interest-only certificates and residual interests are reduced as cash is
received by the trust or special purpose entity holding the loans or leases
pooled and sold. Although the Company believes that it has made reasonable
assumptions, on a pool-by-pool basis, of its securitization-related assets
likely to be realized, it should be recognized that the rates of prepayment
and default or other assumptions utilized by the Company represent estimates.
Actual experience may vary from these estimates.
 
  At December 31, 1997 and December 31, 1996, the Company's consolidated
balance sheet reflected retained interest in loan and lease securitizations of
$43.1 million and $49.5 million, respectively. At December 31, 1997 and
December 31, 1996, the Company's consolidated balance sheet reflected
capitalized excess servicing fees receivable of $0 and $23.1 million,
respectively. Retained interest in loan and lease securitizations and
capitalized excess servicing fees receivable are computed using prepayment,
default, discount rate and interest rate assumptions that the Company believes
market participants would use for similar instruments at the time of sale.
There is no liquid market for these assets; therefore, no assurance can be
given that all or any portion of these assets could be sold at their stated
value on the consolidated balance sheet.
 
  During the year ended December 31, 1997, the Company completed five loan and
lease securitizations totaling $919.1 million. Multi-family and commercial
mortgage loans totaled $203.1 million, franchise loans totaled $343.8 million,
equipment leases totaled $213.6 million and auto loans totaled $158.6 million.
 
 
                                      95

 
  The following table sets forth the securitizations effected by the Company
since inception:
 


                                                                    PRINCIPAL
                                                                     AMOUNT
 ISSUE DATE                      ISSUANCE NAME                     SECURITIZED
 ----------                      -------------                    -------------
                                                                  (IN MILLIONS)
                                                            
 December 1994  Prudential Securities 1994-6...................     $   45.5
 March 1995     Prudential Securities 1995-1...................         95.5
 June 1995      Southern Pacific Secured Assets Corp. ("SPSAC")
                 1995-1........................................         55.3
 August 1995    Second delivery of SPSAC 1995-1................         20.0
 August 1995    Donaldson, Lufkin & Jenrette ("DLJ") 1995-4....        290.9
 September 1995 SPSAC 1995-2...................................        261.7
 November 1995  DLJ 1995-5.....................................         98.3
 November 1995  Second delivery of SPSAC 1995-2................         28.0
 December 1995  Third delivery of SPSAC 1995-2.................          2.3
 December 1995  Franchise Loan Receivables Trust ("FLRT") 1995-
                 B.............................................        105.2
 March 1996     SPSAC 1996-1...................................        102.4
 June 1996      SPSAC 1996-2...................................        130.0
 June 1996      FLRT 1996-A....................................        167.4
 July 1996      Second delivery of SPSAC 1996-2................         40.0
 August 1996    SPSAC 1996-3...................................        150.0
 September 1996 Southern Pacific Thrift and Loan 1996 C-1......        277.0
 October 1996   Second delivery of SPSAC 1996-3................         50.0
 December 1996  SPSAC 1996-4...................................        185.0
 December 1996  FLRT 1996-B....................................        157.7
 March 1997     IBCI 1997-1....................................         84.6
 June 1997      Southern Pacific Thrift and Loan 1997 C-1......        203.1
 June 1997      FMAC 1997-A....................................        158.6
 September 1997 FMAC 1997-B....................................        185.2
 December 1997  AMN 1997.......................................        158.6
                                                                    --------
                Total(1).......................................     $3,052.3
                                                                    ========

- --------
(1) Excludes IBC's monthly deliveries to CAPMAC and CNAI securitization
    vehicles totaling $129.0 million and $87.0 million for the years ended
    December 31, 1997 and 1996, respectively.
 
 SPB Deposits
 
  SPB obtains its funds from depositors by issuing FDIC insured passbook
accounts and term certificates of deposit. SPB solicits both individual and
institutional depositors for new accounts through print advertisements and
computerized referral networks. SPB currently maintains two deposit gathering
facilities in Southern California. At such facilities, tellers provide banking
services to customers such as accepting deposits and permitting withdrawals.
However, customers are not offered check writing services or offered demand
deposit accounts. Generally, certificates of deposit are offered for terms of
one to 12 months. See "--Regulation--Thrift and Loan Operations--Limitations
on Types of Deposits" for a description of limitations on types of deposits
that SPB, as a thrift and loan, can accept.
 
                                      96

 
  The following table sets forth the distribution of SPB's deposit accounts
(prior to intercompany elimination), and the weighted average nominal interest
rates on each category of deposits:
 


                             AT DECEMBER 31, 1997         AT DECEMBER 31, 1996
                         ---------------------------- ----------------------------
                                             WEIGHTED                     WEIGHTED
                                             AVERAGE                      AVERAGE
                                      % OF   INTEREST              % OF   INTEREST
                           AMOUNT   DEPOSITS   RATE     AMOUNT   DEPOSITS   RATE
                         ---------- -------- -------- ---------- -------- --------
                                          (DOLLARS IN THOUSANDS)
                                                        
Passbook accounts....... $   62,274    5.2%    4.81%  $   47,890    4.5%    4.73%
Time deposits of less
 than $100,000..........    891,102   74.9     6.00      803,556   74.9     5.84
Time deposits of
 $100,000 and over......    236,465   19.9     5.81      220,820   20.6     5.74
                         ----------  -----     ----   ----------  -----     ----
  Total................. $1,189,841  100.0%    5.80%  $1,072,266  100.0%    5.77%
                         ==========  =====     ====   ==========  =====     ====

 
  The following table sets forth the dollar amount of deposits by time
remaining to maturity:
 


                                           AT DECEMBER 31,     AT DECEMBER 31,
                                                1997                1996
                                         ------------------- -------------------
                                                      % OF                % OF
                                           AMOUNT   DEPOSITS   AMOUNT   DEPOSITS
                                         ---------- -------- ---------- --------
                                                 (DOLLARS IN THOUSANDS)
                                                            
Three months or less.................... $  449,414   37.8%  $  404,565   37.7%
Over three months through six months....    296,512   24.9      279,397   26.1
Over six months through twelve months...    357,326   30.0      311,862   29.1
Over twelve months......................     86,589    7.3       76,442    7.1
                                         ----------  -----   ----------  -----
  Total................................. $1,189,841  100.0%  $1,072,266  100.0%
                                         ==========  =====   ==========  =====

 
  Interest expense associated with certificates of deposit of $100,000 and
over was approximately $15.6 million, $13.6 million and $15.4 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
 
  Since December 31, 1991, SPB has increased its deposits as necessary so that
deposits together with cash, liquid assets, FHLB borrowings and warehouse
borrowings, have been sufficient to provide SPB funding for its lending
activities. The weighted average interest rate of the deposit accounts was
5.80% at December 31, 1997 as compared to 5.77% at December 31, 1996 and 5.54%
at December 31, 1995.
 
  The Company believes that SPB's local marketing strategies, as well as its
utilization of domestic money markets, have been the basis by which SPB has
been able to acquire new deposits at levels consistent with management's
financial targets. Certain levels of growth of SPB's assets and deposits
require notice to the FDIC.
 
  As an additional source of funds, SPB was approved in 1991 to become a
member of the FHLB. Currently, SPB is approved for borrowings from the FHLB
pursuant to a secured line of credit that is automatically adjusted subject to
applicable FHLB regulations and available pledged collateral. At December 31,
1997, $45.0 million was outstanding bearing an average interest rate of 6.71%.
 
  As a second additional source of funds, SPB had available a $200 million
secured line of credit from Morgan Stanley, that is automatically adjusted
subject to applicable available collateral. At December 31, 1997, $35.0
million was outstanding bearing an average interest rate of 6.51%.
 
COMPETITION
 
  The businesses in which the Company operates are highly competitive. The
Company faces significant competition from other commercial and consumer
finance lenders, commercial banks, credit unions, thrift institutions and
securities firms, among others. Many of these competitors are substantially
larger and have more capital and other resources than the Company.
 
                                      97

 
  Competition can take many forms, including convenience in obtaining a loan
or lease, customer service, marketing and distribution channels and interest
rates charged to borrowers. In addition, the current level of gains realized
by the Company and its competitors on the sale of their loans and leases could
attract additional competitors into these markets, with the possible effect of
lowering gains that may be realized on the Company's future loan and lease
sales.
 
  Wholesale originations are expected to remain a significant part of the
Company's loan and lease production programs. As a wholesale purchaser of
loans and leases, the Company is exposed to fluctuations in the volume and
cost of wholesale loans and leases resulting from competition with other
purchasers of such loans and leases, market conditions and other factors.
 
  Management believes that SPB's most direct competition for deposits comes
from savings and loan associations, other thrift and loan companies,
commercial banks and credit unions. The Company's cost of funds fluctuates
with general market interest rates. During certain interest rate environments,
additional significant competition for deposits may be expected from corporate
and governmental debt securities as well as money market mutual funds.
 
REGULATION
 
  The Company's businesses are subject to extensive regulation in the United
States at both the federal and state level. In the Company's home equity loan
and financing businesses, regulated matters include loan origination, credit
activities, maximum interest rates, finance and other charges, disclosure to
customers, the terms of secured transactions, the collection, repossession and
claims handling procedures utilized by the Company, multiple qualification and
licensing requirements for doing business in various jurisdictions, and other
trade practices. As a part of the financing and asset securitization business,
the Company is required to register as a broker-dealer with certain Federal
and state securities regulatory agencies and is a member of the NASD.
 
 Truth in Lending
 
  The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder
contain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans
and credit transactions in order to give them the ability to compare credit
terms. TILA also guarantees consumers a three day right to cancel certain
credit transactions, including loans of the type originated by the Company.
The Company believes that it is in compliance with TILA in all material
respects. The enforcement provisions applicable to TILA grant broad powers to
the appropriate federal regulatory agencies or the Federal Trade Commission to
enforce TILA with respect to those entities not otherwise subject to federal
regulations, such as the Company. TILA also contains criminal penalties for
wilful violations and grants a private right of action with specified
statutory damage awards for certain violations. If the Company were found not
to be in compliance with TILA with respect to certain loans, aggrieved
borrowers could have the right to rescind their mortgage loan transactions and
to demand the return of finance charges paid to the Company, and other damages
provided under TILA. The Board of Governors of the Federal Reserve System
recently amended Regulation Z to add rescission "tolerances" to the rule to
limit the rule's rescission remedy to disclosure inaccuracies of the finance
charge which amount to over one percent of the face amount of the note. The
new rule also implements amendments to TILA which provide for rescission after
the initiation of foreclosure proceedings under certain circumstances.
 
  TILA applies to all individuals and businesses that regularly extend
consumer credit which is subject to a finance charge or is payable by a
written agreement in more than four installments and is primarily for
personal, family or household purposes. As such, TILA is applicable to the
Company and its subsidiaries. Generally, TILA requires a creditor to make
certain disclosures to the consumer concerning, among other things, finance
charges and annual percentage rates. In addition to these general
requirements, TILA also requires additional disclosures in connection with
certain types of mortgage loans.
 
                                      98

 
  These additional disclosure requirements apply to loans (other than mortgage
loans to finance the acquisition or initial construction of a dwelling) with
(i) total points and fees upon origination in excess of eight percent of the
loan amount or $400, whichever is greater or (ii) an annual percentage rate of
more than ten percentage points higher than comparably maturing United States
Treasury securities ("Covered Loans"). Effective January 1, 1998, the $400
figure was adjusted by the Board of Governors of the Federal Reserve System to
$435 until December 31, 1998, in accordance with Regulation Z. These TILA
provisions prohibit lenders from originating Covered Loans that are
underwritten solely on the basis of the borrower's home equity without regard
to the borrower's ability to repay the loan.
 
  The Company believes that only a small portion of loans originated after
October 1995 (the effective date of the requirements) are of the type that,
unless modified, are prohibited by TILA. It is the Company's policy to apply
to all Covered Loans underwriting criteria that take into consideration the
borrower's ability to repay.
 
  TILA also prohibits lenders from including prepayment fee clauses in Covered
Loans to borrowers except in cases in which the penalty can be exercised only
during the first five years following consummation of the loan, the consumer's
total monthly debt-to-income ratio does not exceed 50% and the Covered Loans
are not used to refinance existing loans originated by the same lender. The
Company will continue to collect prepayment fees on loans originated prior to
October 1995 (the effective date of the prepayment provision of TILA) and on
non-Covered Loans, as well as on Covered Loans in permitted circumstances, but
the level of prepayment fee revenue may decline in future years. TILA imposes
other restrictions on Covered Loans, including restrictions on balloon
payments and negative amortization features, which the Company does not
believe will have a material impact on its operations.
 
 Other Lending Laws
 
  The Company and its subsidiaries are also required to comply with the Equal
Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors
from discriminating against applicants on the basis of race, color, religion,
sex, age or marital status. The ECOA also prohibits discrimination in the
extension of credit based on the fact that all or part of the applicant's
income derives from a public assistance program or the fact that the applicant
has in good faith exercised any right under the Consumer Credit Protection
Act. Regulation B promulgated under ECOA restricts creditors from obtaining
certain types of information from loan applicants. It also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants of the reasons for any credit denial. In instances where the
applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act of 1970 ("FERA"), as amended, requires lenders
to supply the applicant with the name and address of the reporting agency; the
FERA also imposes other reporting and disclosure requirements on creditors.
The Company is also subject to the Real Estate Settlement Procedures Act of
1974, as amended, and is required to file an annual report with the Department
of Housing and Urban Development pursuant to the Home Mortgage Disclosure Act.
 
  In addition, the Company is subject to various other Federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures which must be followed by, mortgage lenders and servicers, and
disclosures which must be made to consumer borrowers. Failure to comply with
such laws may result in civil and criminal liability and may, in some cases,
give consumer borrowers the right to rescind their mortgage loans and to
demand the return of finance charges paid to the Company.
 
  In addition, certain of the loans originated or purchased by the Company,
such as Title I home improvement loans, are insured by an agency of the
Federal government. Such loans are subject to extensive government regulation.
 
 Environmental Liability
 
  In the course of its business, the Company may foreclose on properties
securing loans that are in default. There is a risk that hazardous or toxic
substances or petroleum constituents could be on such properties.
 
                                      99

 
  In such event, it is possible that the Company could be held responsible for
the cost of cleaning up or removing such waste depending upon the lender's
activities, and such cost could exceed the value of the underlying properties.
 
  Under the laws of certain states, contaminated property may be subject to a
lien on the property to assure payment for cleanup costs. In several states,
such a lien has priority over the lien of an existing mortgage or owner's
interest.
 
  In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"), a lender may become liable for cleanup of a property and adjacent
properties that are contaminated by releases from the mortgaged property if
the lender engages in certain activities.
 
  In 1996 CERCLA was amended to eliminate federal lender liability under
CERCLA in certain circumstances, including foreclosure if the lender resells
the property at the earliest practicable, commercially reasonable time on
commercially reasonable terms. In addition, the amendments defined the term
participation in management, which provided some guidance to lenders about the
nature of activities that would and would not give rise to liability under
CERCLA. These amendments do not apply to state Superfund laws. Also,
foreclosure and other activities on contaminated property may subject a lender
to state tort liability.
 
 Future Laws
 
  Because each of the Company's businesses is highly regulated, the laws,
rules and regulations applicable to the Company are subject to modification
and change. There are currently proposed various laws, rules and regulations
which, if adopted, could impact the Company. There can be no assurance that
these proposed laws, rules and regulations, or other such laws, rules or
regulations will not be adopted in the future which could make compliance more
difficult or expensive, restrict the Company's ability to originate, broker,
purchase or sell loans, further limit or restrict the amount of commissions,
interest and other charges earned on loans originated, brokered, purchased or
sold by the Company, or otherwise adversely affect the business or prospects
of the Company.
 
THRIFT AND LOAN OPERATIONS
 
  SPB is subject to regulation, supervision and examination under both Federal
and California law. SPB is subject to supervision and regulation by the
California Department of Financial Institutions (the "DFI") and by the FDIC.
In states other than California where SPB operates loan production offices,
SPB may be subject to certain state and local laws, including those governing
qualifications to do business. Neither the Company's mortgage banking
operations nor SPB's thrift business is regulated or supervised by the Office
of Thrift Supervision, which regulates savings and loan institutions. ICII is
not directly regulated or supervised by the DFI, the FDIC, the Federal Reserve
Board or any other bank regulatory authority, except with respect to the
general regulatory and enforcement authority of the DFI and the FDIC over
transactions and dealings between ICII or any of its other subsidiaries and
SPB, and except with respect to both the specific limitations regarding
ownership of the capital stock of a parent company of any thrift and loan
association and the specific limitations regarding the payment of dividends
from SPB discussed below.
 
 General
 
  SPB is governed by the California Industrial Loan Law and the rules and
regulations of the DFI that, among other things, regulate in certain limited
circumstances the maximum interest rates payable on, and the terms of, certain
thrift deposits as well as the collateral requirements, maximum maturities and
repayment terms of the various types of loans that are permitted to be made by
California chartered industrial loan companies, also known as thrift and loan
companies or thrifts. As SPB's primary regulator, the DFI has broad
supervisory and enforcement authority with respect to SPB and its
subsidiaries. The enforcement authority of the DFI over thrift
and loan companies includes the ability to impose penalties for and to seek
correction of violations of laws or
 
                                      100

 
regulations or unsafe or unsound practices by assessing monetary penalties,
issuing cease and desist or removal and prohibition orders against a company,
its directors, officers or employees and other persons, initiating injunctive
actions or even taking possession of the business and property of a thrift and
loan company. In general, such enforcement actions may be initiated for
violations of laws, regulations, cease and desist orders or the thrift and
loan company's articles of incorporation or for unsafe or unsound conditions
or practices. Certain provisions of the California Industrial Loan Law also
provide for the institution of civil or criminal actions against thrift and
loan companies and their officers, directors, employees and affiliates with
respect to violations of the law and related regulations.
 
  SPB's investment certificates (hereinafter referred to as "deposits") are
insured by the Bank Insurance Fund of the FDIC to the full extent permissible
by law. As an insurer of deposits, the FDIC issues regulations, conducts
examinations, requires the filing of reports and generally regulates the
operations of institutions to which it provides deposit insurance. SPB is
subject to the rules and regulations of the FDIC to the same extent as other
state financial institutions that are insured by that entity. This regulation
is intended primarily for the protection of depositors, and to ensure services
for the public's convenience and advantage and to ensure the safety and
soundness of the regulated institution. Either notice to or approval by the
FDIC and the DFI is required before any merger, consolidation or change in
control, or the establishment, relocation or closure of a branch office of
SPB. However, only the DFI's approval is required to establish a loan
production office limited to the solicitation of loans. After January 1, 1998,
notice of intent to establish a branch office is required rather than
application for approval, subject to order or regulation of the DFI.
 
  The FDIC, as insurer of SPB's deposits, also has broad enforcement authority
over and other insured state-chartered thrift and loan companies, including
the power in appropriate circumstances to issue cease-and-desist orders and
removal and prohibition orders and to terminate the insurance of their insured
accounts. The FDIC is required to notify the DFI of its intent to take certain
types of enforcement actions with respect to a California chartered, FDIC-
insured thrift and loan company and of the grounds therefor. If satisfactory
corrective action is not effectuated within an appropriate time, the FDIC may
proceed with its enforcement action. The FDIC may also terminate the deposit
insurance of any insured depository institution if it determines that the
institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, order or any condition imposed by in writing by
the FDIC. The DFI also has the authority, independent of the FDIC, to issue
cease and desist orders, impose operating restrictions, and take other actions
to assure the safety and soundness of the institution.
 
  In September 1996, President Clinton signed into law, as part of a 1997
omnibus spending bill, the Economic Growth and Regulatory Paperwork Reduction
Act of 1996, which simplifies and streamlines across a broad spectrum the
regulation of federally-insured depository institutions in diverse areas
including consumer credit, truth-in-lending, real estate residential lending,
regulatory applications, branching, disclosures and advertising, regulatory
examinations, insider lending and lender and fiduciary exposure for
environmental contamination under the Comprehensive Environmental Response,
Compensation and Liability Act (i.e., "Superfund" liability) and the Solid
Waste Disposal Act, and the elimination (after five years) of civil liability
under the Truth in Savings Act.
 
  The FDIC and DFI completed a joint examination of SPB for the period ended
April 14, 1997. As a result of the examination, the FDIC terminated a
memorandum of understanding, dated September 16, 1996 ("MOU"), acknowledging
that SPB had sufficiently satisfied most of the provisions of the MOU.
 
  As part of the agreement for terminating the MOU, SPB's board of directors
adopted a resolution to address the issues remaining in the MOU, which include
(i) corrective actions to remedy the violations of law and regulations in the
FDIC's and DFI's most recent reports of examination and as were reflected in
the MOU, (ii) review by management of all existing written policies and
procedures, and enhancement and augmentation of them, so as to assure
continued compliance with all applicable federal and state laws and
regulations, (iii) development of additional staff training to assure
continued compliance with federal and state laws and regulations by all
appropriate personnel, and (iv) senior management periodic updates to the
board of directors on all progress made with respect to these matters.
 
                                      101

 
  The FDIC examination report also noted certain violations of applicable law
and regulations for which SPB is required to take remedial action. The FDIC
has the authority to take a variety of informal and formal remedial and other
enforcement actions with regard to violations of law, and unsafe and unsound
banking practices, including, among other things, the institution of
proceedings or actions imposing or seeking memoranda of understanding, cease
and desist orders, injunctions, criminal or civil penalties, removal from
office or the revocation of SPB's charter. Although the Company does not
believe that an enforcement action is warranted under the circumstances, any
such enforcement could have a material adverse effect on the Company.
 
 Limitations on Investments
 
  Subject to restrictions imposed by California law, SPB is permitted to make
secured and unsecured consumer and non-consumer loans. The maximum term for
repayment of loans made by thrift and loan companies may be as long as 40
years and 30 days depending upon collateral and priority of the lender's lien
on the collateral, except that loans with repayment terms in excess of 30
years and 30 days may not in the aggregate exceed five percent of total
outstanding loans and obligations of the thrift. Although secured loans may
generally be repayable in unequal periodic payments during their respective
terms, consumer loans secured by real property with terms in excess of three
years must be repayable in substantially equal periodic payments unless such
loans were made or purchased by the thrift and loan under the Garn-St. Germain
Depository Institutions Act of 1982 (which applies primarily to one to four
unit residential loans).
 
  California law limits lending activities outside of California by thrift and
loan companies to no more than 20% of total assets or 40% with the approval of
the DFI. California law contains requirements for the diversification of the
loan portfolios of thrift and loan companies. A thrift and loan with
outstanding deposits may not, among other things: (i) place more than 25% of
its loans or other obligations in loans or obligations that are secured only
partially, but not primarily, by real property (which restriction is repealed
effective January 1, 1998); (ii) make any loan secured primarily by improved
real property that exceeds 20% of its paid-up and unimpaired capital stock and
surplus not available for dividends; (iii) make any loan secured primarily by
unimproved real property in an amount in excess of 10% of its paid up and
unimpaired capital stock and surplus not available for dividends; (iv) lend an
amount in excess of five percent of its paid-up and unimpaired capital stock
and surplus not available for dividends upon the security of the stock of any
one corporation; (v) make loans to, or hold the obligations of, any one person
as primary obligor in an aggregate principal amount exceeding 20% of its paid-
up and unimpaired capital stock and surplus not available for dividends; (vi)
have more than 70% of its total assets in loans that have remaining terms to
maturity in excess of seven years (as defined) and are secured solely or
primarily by real property; and (vii) have more than 40% of its loans to
borrowers who do not reside in or have a place of business in the state of
California; provided, however, that certain loans that are sold within 90 days
are excluded from the portfolio limitations described in (vi) and (vii). SPB
had paid-up and unimpaired capital stock and surplus not available for
dividends of $125.0 million and $80.5 million at December 31, 1997 and 1996,
respectively.
 
  At December 31, 1997 and 1996, SPB was in compliance with its California
investment law restrictions. SPB originates and holds a portion of the
Company's loans held for sale, of which a majority have a maturity of greater
than seven years. SPB believes that it will be able to continue to meet its
requirements by managing the types of loans originated and where the loans are
domiciled.
 
  Under California law, thrift and loan companies are generally limited to
investments that are legal investments for commercial banks. A thrift and loan
company may acquire real property only in satisfaction of debts previously
contracted, pursuant to certain foreclosure transactions, or as may be
necessary as premises for the transaction of its business, in which case such
investment is limited to one-third of a thrift and loan's paid-in capital
stock and surplus not available for dividends.
 
  Effective January 1, 1997, as a result of changes in the California
Industrial Loan Law passed in 1996, SPB may invest in the capital stock,
obligations, or other securities of one or more corporations, subject to rules
or orders prescribed by the DFI, if such investment would be lawful for
commercial banks. California chartered
 
                                      102

 
commercial banks may invest in equity securities of one or more subsidiary
corporations upon receiving authorization from the DFI.
 
  Under federal law, SPB is considered an insured state bank, and as such, it
may make any equity investment, including an investment in the equity
securities of an operating subsidiary, that is permissible for a national
bank.
 
  Operating subsidiaries include corporations, limited liability companies or
similar entities. In turn, operating subsidiaries of national banks may engage
in activities that are part of, or incidental to the business of banking, as
determined by the Office of the Comptroller of the Currency (the "OCC").
 
 Transactions With Affiliates
 
  Under California law, a thrift and loan generally may not make any loan to,
or hold an obligation of, any of its directors or officers or any director or
officer of its holding company or affiliates, except in specified cases and
subject to regulation by the DFI. In addition, a thrift and loan may not make
any loan to, or hold an obligation of, any of its shareholders or any
shareholder of its holding company or affiliates, except that this prohibition
does not apply to persons who own less than 10% of the stock of a holding
company or an affiliate that is listed on a national securities exchange. As a
result of these requirements, SPB may not make loans to ICII or other
affiliates or purchase a contract, loan or chose in action of ICII or other
affiliates other than subsidiaries of SPB. Exemptions from these restrictions
are available for: (i) purchase of loans from affiliates which are licensed
mortgage brokers (such as ICII) or other certain types of licensed lenders,
subject to prior approval of the DFI; (ii) purchase of loans pursuant to a
sale and repurchase agreement. However, these purchases would be subject to
strict limitations under federal law.
 
  Federal law also limits transactions between SPB and its affiliates.
Generally, such transactions must be on terms and under conditions, including
credit standards, that are substantially the same, or at least as favorable to
SPB, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated companies. In addition, SPB is prohibited from
engaging in "covered transactions" with an affiliate if the aggregate amount
of such transactions with any one affiliate would exceed 10% of SPB's capital
stock and surplus, or in the case of all affiliates, if the aggregate amount
of such transactions exceeds 20% of SPB's capital stock and surplus. "Covered
transactions" include loans or extensions of credit to an affiliate, a
purchase of or investment in securities issued by an affiliate, a purchase of
assets from an affiliate (subject to certain exemptions), the acceptance of
securities issued by an affiliate as collateral security for a loan or
extension of credit to any person or company, or the issuance of a guarantee,
acceptance, or letter of credit on behalf of an affiliate. For certain
"covered transactions," collateral requirements in specified amounts will be
applicable. SPB also is prohibited from purchasing low-quality assets from its
affiliates, except under limited circumstances. SPB engages in many
transactions which involve its affiliates, including ICII and its other
subsidiaries. As such, many of the transactions between the Company and SPB
are subject to federal and state affiliate transaction regulations. Further,
under federal law, a transaction by SPB with any person shall be deemed to be
a transaction with an affiliate to the extent that the proceeds of the
transaction are used for the benefit of, or transferred to that affiliate.
 
  The term "affiliate" excludes any company other than a bank, that is a
subsidiary of SPB, unless the FDIC has determined by regulation or order not
to exclude such subsidiary. Absent such determination, transactions conducted
between SPB and its non-bank subsidiaries would not be subject to the amount
limitations and collateral requirements under federal law. This exemption,
however, is unavailable for transactions between a bank and a subsidiary that
engages in activities not permissible for the parent depository institution.
 
  Under the California Industrial Loan Law, unless the DFI has issued a permit
authorizing such sale, it is unlawful for SPB to offer or sell any security in
an issuer transaction which offer or sale is subject to applicable provisions
of the California Corporate Securities Act of 1968, as amended. Effective July
1, 1997, any offer to an affiliate or institutional or registered investor
under the California Corporate Securities Act of 1968, as amended, is exempt
from the permit requirement, subject to certain conditions. (See "--Recent
Legislation")
 
                                      103

 
  The DFI, however, has authority to exempt any such transaction which the DFI
determines is not comprehended within the purposes of the qualification
requirements and which the DFI finds not necessary or appropriate in the
public interest or for the protection of investors. The DFI also has authority
to impose conditions in any permit, including legends restricting
transferability, impounding proceeds, or other conditions deemed reasonable
and necessary in the public interest.
 
 Capital; Limitations on Borrowings
 
  Under California law, a thrift and loan is subject to certain leverage
limitations that are not generally applicable to commercial banks or savings
and loan associations. In particular, a thrift and loan institution that has
been in operation in excess of 60 months may have outstanding at any time
deposits not to exceed 20 times paid-up and unimpaired capital and surplus as
restricted in its by-laws as not available for dividends, with the exact
limitation subject to order by the DFI. The DFI has issued an order to SPB
authorizing the maximum 20 times leverage standard.
 
  Thrift and loan companies are not permitted to borrow, except by the
issuance of investment certificates, in an amount exceeding 300% of
outstanding capital stock, surplus and undivided profits, without the DFI's
prior consent. All sums borrowed in excess of 150% of outstanding capital
stock, surplus and undivided profits must be unsecured borrowings or, if
secured, approved in advance by the DFI, and be included as certificates of
deposit for purposes of computing the above ratios; however, collateralized
FHLB advances are excluded for this test of secured borrowings and are not
specifically limited by California law.
 
  In 1989, the FDIC and the other federal regulatory agencies adopted final
risk-based capital adequacy standards applicable to financial institutions
like SPB whose deposits are insured by the FDIC. These guidelines provide a
measure of capital adequacy and are intended to reflect the degree of risk
associated with both on and off balance sheet items, including residential
loans sold with recourse, legally binding loan commitments and standby letters
of credit. Under these regulations, financial institutions such as SPB are
required to maintain capital to support activities that in the past did not
require capital. Because ICII, unlike SPB, is not directly regulated by any
bank regulatory agency, it is not subject to any minimum capital requirements.
See "--Holding Company Regulations."
 
  A financial institution's risk-based capital ratio is calculated by dividing
its qualifying capital by its risk-weighted assets. Financial institutions
generally are expected to meet a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 50% of qualifying total capital
must be in the form of core capital (Tier 1), which includes common stock,
noncumulative perpetual preferred stock, minority interests in equity capital
accounts of combined subsidiaries and allowed mortgage servicing rights less
all intangible assets other than allowed mortgage servicing rights and
purchased credit card relationships, subject to certain amount limitations.
Supplementary capital (Tier 2) consists of the allowance for loan losses up to
1.25% of risk-weighted assets, cumulative preferred stock, intermediate-term
preferred stock, hybrid capital instruments and term subordinated debt. The
maximum amount of Tier 2 capital that may be recognized for risk-based capital
purposes is limited to 100% of Tier 1 capital (after any deductions for
disallowed intangibles).
 
  The aggregate amount of term subordinated debt and intermediate term
preferred stock that may be treated as Tier 2 capital is limited to 50% of
Tier 1 capital. Certain other limitations and restrictions apply as well. At
December 31, 1997, the Tier 2 capital of SPB consisted of its allowance for
loan losses and $35.0 million in term subordinated indebtedness.
 
  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.
 
                                      104

 
  The FDIC rules provide that a minimum leverage ratio of 3% is required for
institutions that have been determined to be in the highest category used by
regulators to rate financial institutions. All other organizations are
required to maintain leverage ratios of at least 100 to 200 basis points above
the 3% minimum. At December 31, 1997, SPB was in compliance with all of its
capital requirements.
 
 Prompt Corrective Action
 
  The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires the federal banking regulators to take "prompt corrective action"
with respect to banks that do not meet minimum capital requirements. In
response to this requirement, the FDIC adopted final rules based upon FDICIA's
five capital tiers. The FDIC's rules provide that an institution is "well
capitalized" if its risk-based capital ratio is 10% or greater; its Tier 1
risk-based capital ratio is 6% or greater; its leverage ratio is 5% or
greater; and the institution is not subject to a capital directive of a
federal bank regulatory agency. A bank is "adequately capitalized" if its
risk-based capital ratio is 8% or greater; its Tier 1 risk-based capital ratio
is 4% or greater; and its leverage ratio is 4% or greater (3% or greater for
the highest rated institutions).
 
  An institution is considered "undercapitalized" if its risk-based capital
ratio is less than 8%; its Tier 1 risk-based capital ratio is less than 4%, or
its leverage ratio is 4% or less (less than 3% for the highest rated
institutions). An institution is "significantly undercapitalized" if its risk-
based capital ratio is less than 6%; its Tier 1 risk-based capital ratio is
less than 3%; or its leverage ratio is less than 3%. A bank is deemed to be
"critically undercapitalized" if its ratio of tangible equity (Tier 1 capital)
to total assets is equal to or less than 2%. An institution may be deemed to
be in a capitalization category that is lower than is indicated by its actual
capital position if it engages in unsafe or unsound banking practices. Under
this standard, SPB is currently "well capitalized"; this classification,
however, is a regulatory capital classification used for internal regulatory
purposes, and is not necessarily indicative of SPB's financial condition and
operations.
 
  Undercapitalized institutions are required to submit a capital restoration
plan for improving capital. In order to be accepted, such plan must include a
financial guaranty from the institution's holding company that the institution
will return to capital compliance. If such a guarantee were deemed to be a
commitment to maintain capital under the Federal Bankruptcy Code, a claim for
a subsequent breach of the obligations under such guarantee in a bankruptcy
proceeding involving the holding company would be entitled to a priority over
third party general unsecured creditors of the holding company.
Undercapitalized institutions: are prohibited from making capital
distributions or paying management fees to controlling persons; may be subject
to growth limitations; are restricted from ongoing acquisitions, branching and
entering into new lines of business, and transactions with affiliates; and are
limited to the appointment of additional directors or senior executive
officers. Finally, the institution's regulatory agency has discretion to
impose certain of the restrictions generally applicable to significantly
undercapitalized institutions.
 
  In the event an institution is deemed to be significantly undercapitalized,
it may be required to: sell stock; merge or be acquired; restrict transactions
with affiliates; restrict interest rates paid; divest a subsidiary; or dismiss
specified directors or officers. If the institution is a bank holding company,
it may be prohibited from making any capital distributions without prior
approval of the Federal Reserve Board and may be required to divest a
subsidiary.
 
  A critically undercapitalized institution is generally prohibited from
making payments on subordinated debt and may not, without the approval of its
principal bank supervisory agency, enter into a material transaction other
than in the ordinary course of business; engage in any covered transaction; or
pay excessive compensation or
bonuses. Critically undercapitalized institutions are subject to appointment
of a receiver or conservator. Effectively, the FDIC would have general
enforcement powers over SPB and the Company in the event that SPB is deemed
undercapitalized.
 
                                      105

 
  SPB's Capital Ratios. The following tables indicate SPB's capital ratios
under (i) the California leverage limitation, (ii) the FDIC risk-based capital
requirements, using rules effective December 31, 1997, and (iii) a 3% FDIC
minimum leverage ratio at each of December 31, 1997.
 


                                                                       WELL
                                                     MINIMUM       CAPITALIZED
                                      ACTUAL       REQUIREMENT     REQUIREMENT
                                  --------------  --------------  --------------
                                   AMOUNT  RATIO   AMOUNT  RATIO   AMOUNT  RATIO
                                  -------- -----  -------- -----  -------- -----
                                      (IN THOUSANDS EXCEPT FOR RATIO DATA)
                                                         
California Leverage Limitation... $157,082 13.20% $ 59,476 5.00%  $    --    -- %
Risk-based Capital...............  190,673 12.25%  124,583 8.00%   155,729 10.00%
Risk-based Tier 1 Capital........  136,206  8.75%   62,292 4.00%    93,437  6.00%
FDIC Leverage Ratio..............  136,206  8.30%   65,644 4.00%    82,055  5.00%

 
 Limitations on Types of Deposits
 
  Because of limitations contained in the Industrial Loan Law, and to maintain
the exemption from the BHCA (see "Holding Company Regulations," below), SPB
currently offers investment certificates in the form of passbook accounts and
certificates of deposit. SPB does not offer demand deposit accounts.
 
 Insurance Premiums
 
  The FDIC administers two separate deposit insurance funds, the Bank
Insurance Fund ("BIF"), which insures the deposits of institutions which were
insured by the FDIC prior to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), and the Savings Association Insurance Fund
("SAIF"), which insures the deposits of institutions which were insured by the
Federal Savings and Loan Insurance Corporation prior to the enactment of
FIRREA. SPB's insurance premium for the year ended December 31, 1997 was
approximately $250,000.
 
  As required by FDICIA, the FDIC has established a risk-based system for
setting deposit insurance assessments. Under the risk-based assessment system,
an institution's insurance assessments vary depending on the level of capital
the institution holds and the degree to which it is of supervisory concern to
the FDIC. Once an insurance fund has reached its designated reserve ratio of
1.25%, and as long as there are no outstanding borrowings by the FDIC from the
United States Treasury, the FDIC is not permitted to charge assessment
premiums that would increase the reserve ratio of the insurance fund above its
designated reserve ratio. The BIF reached its designated reserve ratio in
1995.
 
 Recent Legislation
 
  A new California state regulatory agency was created in 1996 to be known as
the Department of Financial Institutions ("DFI"). The DFI became effective
July 1, 1997. All California state chartered depository institutions will be
licensed and regulated after July 1, 1997 by the DFI, which includes banks,
savings associations, credit unions, and industrial loan companies. SPB, an
industrial loan company, is subject to the jurisdiction of the DFI as its
state regulator. Certain administrative and most examination staff personnel
have transferred to the DFI from the California State Banking Department.
Former California Department of Banking senior staff personnel, including
persons in the office of general counsel and senior examination staff of the
DFI, who are unfamiliar with the Industrial Loan Law will be interpreting the
Industrial Loan Law. It is uncertain whether this will have any material
effect on SPB.
 
  The 1996 California legislation that created the DFI also authorized the use
of the word "bank" by thrift and loan companies, such as SPB, in their names.
Effective October 8, 1997, Southern Pacific Thrift and Loan changed its name
to "Southern Pacific Bank." That legislation also granted the DFI jurisdiction
over the issuance of securities by a thrift and loan company requiring
application and permit unless otherwise exempt.
 
  On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act")
was enacted which, among other things, imposes on BIF-insured deposits a
special premium assessment on domestic deposits at one-
 
                                      106

 
fifth the premium rate imposed on SAIF-insured deposits, which will be used to
pay the interest on Financial Corporation ("FICO") bonds issued by the federal
government as part of the savings association bailout provisions of the 1989
FIRREA legislation. In the year 2000, however, the Funds Act requires BIF-
insured institutions to share in the payment of the FICO obligations on a pro-
rata basis with all savings institutions, with annual assessments expected to
equal approximately 2.4 basis points until the year 2017, and to be completely
phased out by 2019. The Funds Act also prohibits the merger of the BIF and
SAIF insurance funds unless the savings institution charter has been
eliminated on January 1, 1999.
 
  In addition, on December 6, 1996, the FDIC determined to continue the
current downward adjustment to the assessment rate schedule applicable to
deposits of BIF institutions for the semi-annual assessment period beginning
January 1, 1997. For such period, and for succeeding semi-annual periods, the
BIF assessment rates will range from 0 to 27 basis points. In addition, in
accordance with the Funds Act, the FDIC eliminated the minimum assessment
amount for BIF-insured institutions. SPB's combined FDIC and FICO assessment
rate for 1998 was approximately 4.3 cents per $100 of deposits.
 
 Safety and Soundness Guidelines
 
  In July 1995, certain federal bank regulatory agencies, including the FDIC,
adopted Interagency Guidelines establishing standards for safety and soundness
as required by the FDICIA. In accordance with these Guidelines, institutions
are required to establish policies and procedures regarding: (i) internal
controls and information; (ii) internal audit systems; (iii) loan
documentation; (iv) credit underwriting; (v) interest rate exposure; and
(vi) asset growth. In addition, under these Guidelines institutions must
maintain safeguards to prevent the payment of compensation and fees which are
excessive or could lead to a material loss for the institution. The federal
bank regulatory agencies recently amended the Interagency Guidelines to
include asset quality and earnings standards. The new guidelines require an
institution to identify problem assets and estimate inherent losses. The
earnings standards under the revised guidelines require an institution to
establish monitoring and reporting systems.
 
 Holding Company Regulations
 
  The Competitive Equality Banking Act of 1987 ("CEBA") subjected certain
previously unregulated companies to regulation as bank holding companies by
expanding the definition of the term "bank" in the BHCA. SPB remained exempt
from the definition of "bank" under the BHCA, and therefore ICII was exempt
from regulation as a bank holding company. SPB may cease to fall within those
exceptions if it engages in certain operational practices, including accepting
demand deposit accounts. SPB currently has no plans to engage in any
operational practice that would cause it to fall outside of one or more of the
exceptions to the term "bank" as defined by CEBA. Pursuant to CEBA, ICII and
its affiliates are treated as if ICII were a bank holding company for the
limited purposes of applying certain restrictions on loans to insiders,
transactions with affiliates and anti-tying provisions.
 
 Limitations on Dividends
 
  Under the California Industrial Loan Law, a thrift and loan may declare
dividends on its capital stock only if it has at least $750,000 of unimpaired
capital stock plus additional capital stock of $50,000 for each branch office.
In addition, no distribution of dividends is permitted unless: (i) such
distribution would not exceed a thrift and loan's retained earnings; (ii) any
payment would not result in a violation of the approved minimum capital to
thrift and loan certificate of deposit ratio; and/or (iii) after giving effect
to the distribution, either (y) the sum of a thrift and loan's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes,
deferred income and other deferred credits), and (z) current assets would be
not less than current liabilities (except that if a thrift and loan's average
earnings before taxes for the last two fiscal years had been less than average
interest expense, current assets must be not less than 125% of current
liabilities).
 
                                      107

 
  Under California law, in order for capital (including surplus) of an
institution to be included in calculating the leverage limitation described
above, thrift institutions must amend their by-laws to restrict such capital
from the payment of dividends.
 
  The amount of restricted capital maintained by a thrift also provides the
basis for establishing the maximum amount that a thrift may lend to one
borrower. As of December 31, 1997 and 1996, $125.0 million and $80.5 million,
respectively, of SPB's capital was so restricted.
 
  The FDIC has advised insured institutions that the payment of cash dividends
in excess of current earnings from operations is inappropriate and may be
cause for supervisory action. As a result of this policy, thrift and loans may
find it difficult to pay dividends out of retained earnings from historical
periods prior to the most recent fiscal year or to take advantage of earnings
generated by extraordinary items.
 
  Under the Financial Institutions Supervisory Act and FIRREA, federal
regulators also have authority to prohibit financial institutions from
engaging in business practices which are considered to be unsafe or unsound.
It is possible, depending upon the financial condition of a thrift and other
factors, that such regulators could assert that the payment of dividends in
some circumstances might constitute unsafe or unsound practices and prohibit
payment of dividends even though technically permissible.
 
  Pursuant to FDICIA, SPB is prohibited from paying dividends if the payment
of such dividends would cause the institution to become "undercapitalized."
These limitations on the payment of dividends may restrict the Company's
ability to utilize cash from SPB which may have been otherwise available to
the Company for working capital.
 
 Limitations on Acquisitions of Voting Stock of the Company
 
  Any person who wishes to acquire 10% or more of the capital stock or capital
of a California thrift and loan company or 10% or more of the voting capital
stock or other securities giving control over management of its parent company
must obtain the prior written approval of the DFI. Similarly, the federal
Change in Bank Control Act of 1978 requires any person or company that obtains
"control" of an insured depository institution to notify the appropriate
Federal banking agency, which would be the FDIC in the case of SPB, 60 days
prior to the proposed acquisition. If the FDIC has not issued a notice
disapproving the proposed acquisition within that time period (including a
possible 120 day extension), the person may retain its interest in such
institution. For purposes of the statute, "control" is defined as the power,
directly or indirectly, to direct the management or policies of an insured
depository institution or to vote 25% or more of any class of voting
securities of an insured depository institution. However, there is a
rebuttable presumption that any person acquiring 10% or more of any class of
voting securities of said institution is presumed to have "control." In such
cases, such person must file an application for approval with the FDIC or
rebut the presumption.
 
 Restrictions on Investments by Imperial Bank
 
  At December 31, 1997, Imperial Bank owned 8,938,553 shares of Common Stock,
or 23.0% of the Company. Imperial Bancorp ("Bancorp") is the owner of all of
the outstanding capital stock of Imperial Bank.
 
  FDICIA restricts the ability of state chartered banks, such as Imperial
Bank, to hold equity securities and requires impermissible investments to be
disposed of before December 19, 1996. Imperial Bank acquired its interest in
the Company at its formation, which interest has been reduced by the Company's
sale of Common Stock to third parties, as well as through a sale of stock by
Imperial Bank subsequent to the initial public offering of the Company.
 
  Because Imperial Bank owns less than 50% of the outstanding shares of the
Company and the Company is operated as a company independent of Imperial Bank
and Bancorp, the Company believes that, in the event of an insolvency,
bankruptcy or receivership proceeding involving Imperial Bank or Bancorp, a
court, exercising reasonable judgment after full consideration of all relevant
factors, would not order the substantive consolidation of the assets and
liabilities of the Company with either Imperial Bank or Bancorp.
 
                                      108

 
  One director of the Company also serves on the board of directors of
Bancorp. See item 10, "Directors and executive officers of the registrant."
 
 Imperial Financial Group
 
  In February 1997, the board of directors of Bancorp approved a plan to spin
off a portion of its specialty lending and finance businesses, including
Imperial Bank's common stock interest in ICII, to Imperial Financial Group,
Inc. ("IFG"), a recently created subsidiary of Imperial Bank formed to hold
various business assets of Bancorp and its subsidiaries.
 
  Three directors of the Company also serve on the board of directors of IFG.
 
 EMPLOYEES
 
  As of December 31, 1997, the Company had 784 employees, (55 at ICII, 317 at
SPB, 88 at IBC, 224 at AMN, 9 at ICCAMC, 80 at ICG, 10 at ICW and one at
ICAI). Management believes that its relations with these employees are
satisfactory. Neither ICII nor any of its subsidiaries is a party to any
collective bargaining agreement.
 
PROPERTIES
 
  The Company's executive offices occupy approximately 22,000 square feet of
space in Torrance, California at a current monthly rental of approximately
$31,400.
 
  The Company's former administrative facilities occupy approximately 37,638
square feet of space in Santa Ana Heights, California. The Company leases
these facilities pursuant to a ten-year lease, commencing September 1, 1992
and subleases a portion of these premises to IMH resulting in a current net
monthly rental of approximately $39,200. See "Item 13--Certain Relationships
and Certain Transactions--Relationships with IMH."
 
  The Company currently leases offices in San Diego, Walnut Creek, Newport
Beach, Woodland Hills, Sacramento, San Jose and Irvine, California, as well as
in Parsippany, New Jersey; Greenville, Delaware; Bellevue, Washington; Denver,
Colorado; Boca Raton, Florida; Allentown, Pennsylvania; and Lake Oswego and
Grants Pass, Oregon. SPB operates in California through branches and loan
production offices and in other states through loan production offices and
representatives.
 
LEGAL PROCEEDINGS
 
  The Company is a defendant in Fortune Mortgage Corporation et al. vs. ICII
et al., originally filed in Orange County Superior Court on March 5, 1997 and
recently ordered removed to arbitration under the auspices of the American
Arbitration Association. The complaint alleges breach of contract, breach of
implied covenant of good faith and fair dealing, negligent misrepresentation,
fraud, conspiracy to commit fraud, aiding and abetting fraud, contractual
indemnity and reimbursement, money had and received, and unjust enrichment
arising from the Company's sale of a group of loan production offices to
plaintiffs.
 
  The plaintiffs seek rescission, restitution and general, special and/or
consequential damages, and also exemplary and punitive damages as relate to
the claims regarding fraud. The plaintiffs are seeking approximately $3.5
million in general damages and approximately $10.0 million in punitive
damages.
 
  In Steadfast Insurance Co., Inc. vs. AMN and ICII, filed on August 12, 1997
in the U.S. District Court, Northern District of Illinois, the plaintiff seeks
a declaratory judgment, compensatory damages in the amount of $9 million and
punitive damages arising from an alleged breach of contract and allegedly
fraudulent conduct by AMN. The claim relates to an insurance policy issued to
AMN in 1993 covering certain losses resulting from auto loan defaults.
 
                                      109

 
  The Company and a Director, among others, are defendants in Judy L. Resnick
v. Imperial Credit Industries, Inc., et al originally filed on January 14,
1998, in Los Angeles Superior Court, which was recently ordered removed to
arbitration. The complaint alleges conspiracies by the defendants to defraud,
interfere with advantageous business relationships, defame, and breach of
fiduciary duty as well as actual fraud, defamation, and breach of the implied
covenant of good faith and fair dealing arising out of ICG's acquisition of
substantially all of the assets of Dabney/Resnick/Imperial. The plaintiff is
seeking actual, consequential, incidental, general and punitive damages in a
sum of not less than $25 million.
 
  The Company is involved in additional litigation arising in the normal
course of business.
 
  All of the above referenced actions are being actively defended.
 
                                      110

 
                                  MANAGEMENT
 
  The following table sets forth certain information with respect to the
directors and executive officers of the Company.
 


   NAME                      AGE                POSITION WITH COMPANY
   ----                      ---                ---------------------
                           
   H. Wayne Snavely(1).....   56 Chairman of the Board, President and Chief Executive
                                 Officer
   Kevin E. Villani(1).....   49 Executive Vice President and Chief Financial Officer
   Irwin L. Gubman(1)......   55 General Counsel and Secretary
   Paul B. Lasiter.........   31 Senior Vice President and Controller
   Stephen J. Shugerman(1).   50 President of SPB and a Director
   Joseph R. Tomkinson.....   49 Director
   Robert S.
    Muehlenbeck(2).........   50 Director
   G. Louis Graziadio,
    III(2).................   47 Director
   Perry A. Lerner(2)(3)...   54 Director
   James Clayburn LaForce,
    Jr.(2)(3)                 68 Director

- --------
(1) Member of Executive Committee.
 
(2) Member of Compensation Committee.
 
(3) Member of Audit Committee.
 
  H. WAYNE SNAVELY has been Chairman of the Board and Chief Executive Officer
of the Company since December 1991 and President since February 1996. Mr.
Snavely served as a director of Imperial Bank from 1975 to 1983 and from 1993
to January 1998. From 1986 to February 1992 Mr. Snavely served as Executive
Vice President of Imperial Bancorp and Imperial Bank Mortgage, SPB, Imperial
Trust Company, Wm. Mason & Company, Imperial Ventures, Inc. and the Lewis
Horowitz Organization. From 1983 through 1986 Mr. Snavely was employed as
Chief Financial Officer of Imperial Bancorp and Imperial Bank. Mr. Snavely is
Chairman of the Board of SPFC, IMH, FMC and ICCMIC and Imperial Credit and a
director of IFG.
 
  KEVIN E. VILLANI has been the Executive Vice President and Chief Financial
Officer of the Company since September 1995. Mr. Villani is President of
ICCAMC and serves as a member of the Company's Board of Directors and is Vice-
Chairman of the Board of ICCMIC. Mr. Villani joined the University of Southern
California as the Wells Fargo Visiting Professor of Finance in 1990 and
remained on the full-time faculty through 1997. From 1985 to 1990, he was the
Executive Vice President and Chief Financial Officer for Imperial Corporation
of America. From 1982 to 1985, Mr. Villani served in various capacities at the
Federal Home Loan Mortgage Corporation, including Chief Economist and Chief
Financial Officer. From 1975 to 1982, he served as the Financial Economist,
The Director for the Division of Housing Finance Analysis and The Deputy
Assistant Secretary for the Office of Economic Affairs and Chief Economist for
the Department of Housing and Urban Development. From 1990 through 1995, Mr.
Villani also served as a full-time consulting economist at the World Bank and
International Finance Corporation.
 
  IRWIN L. GUBMAN has been the General Counsel and Secretary of ICII since
October 1996. From February 1992 to September 1996, Mr. Gubman was a Partner
at Coudert Brothers serving in various capacities including syndicated
lending, structured finance, and regulatory matters. From December 1970 to
September 1991, Mr. Gubman served in various capacities at Bank of America,
most recently as Senior Vice President and Associate General Counsel. From
March 1968 to October 1970, Mr. Gubman was an Attorney Advisor for the U.S.
Arms Control and Disarmament Agency. From September 1967 to March 1968, Mr.
Gubman was a Legal Advisor to the Government of Liberia.
 
                                      111

 
  PAUL B. LASITER has been Senior Vice President and Controller of the Company
since November 1992. From June 1988 to November 1992, Mr. Lasiter was a
Supervising Senior Accountant for KPMG Peat Marwick, specializing in the
financial institutions industry. Mr. Lasiter is a Certified Public Accountant.
 
  STEPHEN J. SHUGERMAN has been President of SPB since June 1987 and has been
a Director of the Company since December 1991. From June 1985 to May 1987, Mr.
Shugerman was President of ATI Thrift & Loan Association, a privately owned
thrift and loan association, and, from 1979 to 1985, he was Senior Vice
President of Imperial Thrift and Loan Association, a former subsidiary of
Imperial Bank. Mr. Shugerman recently served as President of the California
Association of Thrift & Loan Companies. Mr. Shugerman is a director of SPFC.
 
  JOSEPH R. TOMKINSON has been a Director of the Company since December 1991.
Mr. Tomkinson has been the Vice Chairman of the Board and Chief Executive
Officer of IMH since August 1995. Mr. Tomkinson served as President of the
Company from January 1992 to February 1996 and from 1986 to January 1992, he
was President of Imperial Bank Mortgage, a subsidiary of Imperial Bank, one of
the companies combined to become ICII in 1992. From 1984 to 1986, he was
employed as Executive Vice President of Loan Production for American Mortgage
Network, a privately owned mortgage bank. Mr. Tomkinson is the Chairman and
Chief Executive Officer of Impac Commercial Holdings, Inc., a commercial REIT,
Vice Chairman and Chief Executive Officer of IMH and a Director of BNC
Mortgage, Inc., a residential real estate lending company
 
  ROBERT S. MUEHLENBECK has been a Director of the Company since December
1991. Mr. Muehlenbeck is also an Executive Vice President of Imperial Bank.
Mr. Muehlenbeck was formerly the President of Seaborg, Incorporated and has
been involved in commercial and residential real estate development and
finance activities.
 
  G. LOUIS GRAZIADIO, III has been a Director of the Company since February
1992. Mr. Graziadio has been Chairman of the Board and Chief Executive Officer
of Ginarra Holdings, Inc. (as well as predecessor and affiliated companies)
since 1979. Ginarra Holdings, Inc. is a privately held California corporation
engaged in a wide range of investment activities. Mr. Graziadio has been
actively involved, since 1972, in real estate development, construction and
home building. Mr. Graziadio is a Director of FMC and of Imperial Bancorp and
Imperial Trust Company, an indirect subsidiary of Imperial Bancorp. He serves
as Co-Chairman of IFG.
 
  PERRY A. LERNER has been a Director of the Company since May 1992. He has
been a principal in his investment firm of Crown Capital Group, Inc., since
1996. Mr. Lerner was with the law firm of O'Melveny & Myers from 1982 to 1997,
having been a partner with the firm since 1984. Mr. Lerner was an Attorney-
Advisor of the International Tax Counsel of the United States Treasury
Department from 1973 to 1976. Mr. Lerner is a Director of FMC and IFG.
 
  JAMES CLAYBURN LAFORCE, JR. has been a Director of the Company since May
1992. From July 1978 to July 1993, Mr. LaForce was the Dean of The Anderson
School, University of California at Los Angeles. In addition, Mr. LaForce was
appointed in January 1991 to the position of Acting Dean of the Hong Kong
University of Science and Technology, Hong Kong. He is also a director of
Rockwell International, Eli Lilly & Co., Inc., Timken Co., Motorcargo
Industries, Blackrock Funds, Payden & Rygel Funds and Provident Investment
Counsel.
 
  Directors of the Company hold office until the next annual meeting of
shareholders and until their successors are elected and qualified, or until
their earlier resignation or removal. All officers are appointed by and serve
at the discretion of the Board of Directors, subject to employment agreements,
where applicable. There are no family relationships between any directors or
officers of the Company. George L. Graziadio, Jr., the President, Chief
Executive Officer and the Chairman of the Board of Directors of Imperial
Bancorp ("Bancorp"), is the father of G. Louis Graziadio, III. The Graziadio
family and related entities are significant shareholders of Bancorp.
 
                                      112

 
EXECUTIVE COMPENSATION
 
  The following table provides information concerning the cash and non-cash
compensation earned and received by the Company's Chief Executive Officer and
its four most highly compensated executive officers (the "Named Executive
Officers"), other than the Company's Chief Executive Officer, whose salary and
bonus during the fiscal year ended December 31, 1997 exceeded $100,000:
 
                          SUMMARY COMPENSATION TABLE
 


                                                                     LONG TERM
                                                                    COMPENSATION
                                                                       AWARDS
                                                                    ------------
                               ANNUAL COMPENSATION
                             ------------------------
                             FISCAL                   OTHER ANNUAL    OPTIONS
NAME AND PRINCIPAL POSITION   YEAR   SALARY   BONUS   COMPENSATION    GRANTED
- ---------------------------  ------ -------- -------- ------------  ------------
                                                     
H. Wayne Snavely...........   1997  $450,000 $700,000   $29,082(1)        --
 President, Chief Executive   1996   300,000  700,000    28,564(1)    400,000(2)
 Officer and Chairman         1995   300,000  252,603    32,960(1)        --
Kevin E. Villani...........   1997   300,000  266,666    17,082(3)     50,000(2)
 Executive Vice President
  and                         1996   200,000  200,000    12,986(3)     84,000(2)
 Chief Financial Officer      1995    59,103   25,000     2,295(3)     66,000(2)
Stephen J. Shugerman.......   1997   250,000  501,000    21,882(4)        --
 President of SPB             1996   200,000  400,000    20,963(4)    100,000(2)
                              1995   200,000  166,027    16,372(4)        --
Irwin L. Gubman............   1997   200,000  200,000    16,852(5)     70,000(2)
 General Counsel and          1996    50,000   30,000       750(5)     30,000(2)
 Secretary                    1995       --       --        --            --
Joseph Parise..............   1997   141,667  175,000     2,911(6)     40,000(2)
 Managing Director of         1996    45,032   26,000       --         20,000(2)
 Capital Markets              1995       --       --        --            --

- --------
(1) In 1997, 1996 and 1995, consists of (i) a car allowance paid by the
    Company of $18,000, $18,000 and $18,000, respectively, and (ii) aggregate
    contributions paid by the Company of $11,082, $10,564 and $14,960
    respectively, under employee benefit plans.
 
(2) See "--Stock Option Plans" for details regarding the terms of such
    options.
 
(3) In 1997, 1996 and 1995, consists of (i) a car allowance paid by the
    Company of $6,000, $6,000 and $1,773, respectively, and (ii) aggregate
    contributions paid by the Company of $11,082, $6,986, and $522,
    respectively, under employee benefit plans.
 
(4) In 1997, 1996 and 1995, consists of (i) a car allowance paid by the
    Company of $10,800, $10,800, and $10,800, respectively, and (ii) aggregate
    contributions paid by the Company of $11,082, $10,163, and $5,572,
    respectively.
 
(5) In 1997 and 1996, consists of (i) a car allowance paid by the Company of
    $6,000 and $750, respectively, and (ii) aggregate contributions paid by
    the Company of $10,852 and $0, respectively, under employee benefit plans.
 
(6) In 1997, consists of aggregate contributions paid by the Company of $2,911
    under employee benefit plans.
 
                                      113

 
                 OPTION GRANTS, EXERCISES AND YEAR END VALUES
 


                                                                    POTENTIAL
                                                                 REALIZED VALUE
                                                                   AT ASSUMED
                                                                 ANNUAL RATES OF
                                                                   STOCK PRICE
                                             EXERCISE             APPRECIATION
                           1997   PERCENTAGE  PRICE              FOR OPTION TERM
                          OPTIONS  OF TOTAL    PER    EXPIRATION ---------------
  NAME                    GRANTED   GRANTS   OPTION      DATE      5%      10%
  ----                    ------- ---------- -------- ---------- ------- -------
                                                       
Kevin E. Villani......... 50,000    10.64%   18.6250   8/15/02   257,287 568,537
Irwin L. Gubman.......... 70,000    14.89%   18.6250   8/15/02   360,202 795,952
Joseph Parise............ 40,000     8.51%   18.6250   8/15/02   205,830 454,830

 
   AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
 


                                              NUMBER OF UNEXERCISED    NUMBER OF UNEXERCISED            VALUE OF ALL
                                                OPTIONS AT FY-END        SENIOR MANAGEMENT        UNEXERCISED IN-THE-MONEY
                         SHARES               UNDER THE OPTION PLAN OPTIONS AT FY-END UNDER THE          OPTIONS AT
                       ACQUIRED ON   VALUE        EXERCISABLE/       OPTION PLAN EXERCISABLE/        DECEMBER 31, 1997
         NAME           EXERCISE    REALIZED    UNEXERCISABLE(1)         UNEXERCISABLE(2)       EXERCISABLE/UNEXERCISABLE(3)
         ----          ----------- ---------- --------------------- --------------------------- ----------------------------
                                                                                 
H. Wayne Snavely......   15,285    $  269,877    80,000/320,000               917,052              $18,421,949/$2,680,000
Kevin E. Villani......      --            --     30,000/156,800               -- / --                   35,780/ 1,246,849
Stephen J. Shugerman..   76,422     1,368,435    20,000/ 80,000          158,524 / --                3,164,035/   545,000
Irwin L. Gubman.......      --            --      6,000/ 94,000               -- / --                   24,375/   228,750
Joseph R. Parise......      --            --      4,000/ 56,000               -- / --                   20,250/   156,000

- --------
(1) For a description of the terms of such options, see "--Stock Option
    Plans--1992 Stock Option Plan."
 
(2) For a description of the terms of such options, see "--Senior Management
    Stock Options."
 
(3) Based on a price per share of $21.00, which was the price of a share of
    Common Stock as quoted on the Nasdaq National Market at the close of
    business on December 31, 1997
 
EMPLOYMENT AGREEMENTS
 
  As of January 1, 1997, Mr. Snavely entered into a five-year employment
agreement at an annual base salary of $450,000, subject to adjustment, plus an
annual bonus based on attainment of performance objectives, including the
Company's return on equity, earnings per share and increase in the price of
the Company's common stock. Mr. Snavely's total cash compensation may not
exceed $1.5 million annually.
 
  As of January 1, 1997, Mr. Villani entered into a five-year employment
agreement at an annual base salary of $300,000, subject to adjustment, plus an
annual bonus based on attainment of performance objectives identical to the
objectives established for Mr. Snavely. Mr. Villani's total cash compensation
may not exceed $700,000 annually.
 
  As of January 1, 1997, Mr. Shugerman entered into a five-year employment
agreement at an annual base salary of $250,000, subject to adjustment, plus an
annual bonus based on attainment of performance objectives, including the
Company's earnings per share and certain qualitative objectives with respect
to the performance of SPB. Mr. Shugerman's total cash compensation may not
exceed $750,000 annually.
 
  Pursuant to the employment agreements with Messrs. Snavely, Villani and
Shugerman, they are each entitled to receive compensation following their
termination, as follows: (i) with cause: base salary shall be paid through the
date on which termination occurs, or (ii) without cause (or for "good reason"
as defined in the employment agreement), base salary shall be paid through the
date of termination together with the pro-rata portion of any cash bonus award
the employee would be entitled to receive at year end and a severance amount
equal to base salary reduced by the employee's projected primary social
security benefit. The severance amount shall be further reduced if the
executive becomes employed by another company or becomes an independent
contractor of another company and shall be eliminated entirely if such other
company is determined by the Board of Directors to compete with the Company.
 
                                      114

 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
  The Company's Compensation Committee consists of Messrs. Muehlenbeck,
Graziadio, Lerner and LaForce. Mr. Muehlenbeck is an Executive Vice President
of Imperial Bank. Mr. Graziado is a Director of Imperial Bancorp and Imperial
Trust Company and Co-Chairman of IFG. Mr Lerner is the Manager of Corona Film
Finance Fund (in which ICII is an investor).
 
SENIOR MANAGEMENT STOCK OPTIONS
 
  Effective January 1992, members of senior management of the Company received
ten year options to purchase shares of the Company's common stock (the "Common
Stock"). Such options are not covered by the Company's option plans described
below. The exercise price of these options is $0.88 per share for one-half of
the options, with the other half exercisable at $1.40 per share. These options
are currently exercisable. H. Wayne Snavely, Joseph R. Tomkinson, and Stephen
J. Shugerman were granted 917,053, 917,053 and 458,526 of such options,
respectively.
 
  In April 1996, Mr. Tomkinson sold 750,000 shares of Common Stock he acquired
under the option agreement described above. In November 1996, Mr. Shugerman
sold 300,000 shares of Common Stock he acquired under the option agreement
described above.
 
  The Company recognizes compensation expense with respect to the senior
management stock options because they were granted at less than the estimated
market value of the Company's Common Stock. The total compensation expense was
$2.2 million, all of which was recognized as of December 31, 1997. See Note 23
of Notes to Consolidated Financial Statements.
 
STOCK OPTION PLANS
 
 1992 Stock Option Plan
 
  A total of 2,292,632 shares of the Company's Common Stock has been reserved
for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory
Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own
terms in 2002. A total of 1,082,493 options were outstanding at December 31,
1997.
 
  The 1992 Stock Option Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonqualified stock options
("NQSOs") to employees, officers, directors and consultants of the Company.
Incentive stock options may be granted only to employees. The 1992 Stock
Option Plan is administered by the Board of Directors or a committee appointed
by the Board, which determines the terms of options granted, including the
exercise price, the number of shares subject to the option, and the option's
exercisability.
 
  The exercise price of all options granted under the 1992 Stock Option Plan
must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the 1992 Stock Option Plan is
10 years.
 
  With respect to any participant who owns stock representing more than 10% of
the voting rights of the Company's outstanding capital stock, the exercise
price of any option must be at least equal to 110% of the fair market value on
the date of grant.
 
 1996 Stock Option Plan
 
  The Company has adopted the 1996 Stock Option, Deferred Stock and Restricted
Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of
ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards
consisting of deferred stock, restricted stock, stock appreciation rights and
limited stock appreciation rights ("Awards").
 
                                      115

 
  The 1996 Stock Option Plan is administered by a committee of directors
appointed by the Board of Directors (the "Committee"). ISOs may be granted to
the officers and key employees of the Company or any of its subsidiaries. The
exercise price for any option granted under the 1996 Stock Option Plan may not
be less than 100% (110% in the case of ISOs granted to an employee who is
deemed to own in excess of 10% of the outstanding Common Stock) of the fair
market value of the shares of Common Stock at the time the option is granted.
The purpose of the 1996 Stock Option Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
the Company. The effective date of the 1996 Stock Option Plan was June 21,
1996. A total of 3,000,000 shares of the Company's Common Stock has been
reserved for issuance under the 1996 Stock Option Plan and a total of
1,453,200 options were outstanding at December 31, 1997.
 
  If an option granted under the 1996 Stock Option Plan expires or terminates,
or an Award is forfeited, the shares subject to any unexercised portion of
such option or Award will again become available for the issuance of further
options or Awards under the 1996 Stock Option Plan.
 
  Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the 1996 Stock Option Plan after June 21, 2006.
 
  Options granted under the 1996 Stock Option Plan will become exercisable
upon the terms of the grant made by the Committee. Awards will be subject to
the terms and restrictions of the Award made by the Committee. The Committee
has discretionary authority to select participants from among eligible persons
and to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO. Under current law,
ISOs may not be granted to any individual who is not also an officer or
employee of the Company or any subsidiary.
 
  Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of the Company's outstanding
Common Stock). Options may be granted on terms providing for exercise in whole
or in part at any time or times during their respective terms, or only in
specified percentages at stated time periods or intervals during the term of
the option, as determined by the Committee.
 
  The exercise price of any option granted under the 1996 Stock Option Plan is
payable in full (i) in cash, (ii) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
1996 Stock Option Plan, (iii) by cancellation of indebtedness owed by the
Company to the optionholder, or (iv) by any combination of the foregoing.
 
  The Board of Directors may from time to time revise or amend the 1996 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding options or Award without such participant's consent or may,
without shareholder approval, increase the number of shares subject to the
1996 Stock Option Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant (with the exception
of adjustments resulting from changes in capitalization), materially modify
the class of participants eligible to receive options or Awards under the 1996
Stock Option Plan, materially increase the benefits accruing to participants
under the 1996 Stock Option Plan or extend the maximum option term under the
1996 Stock Option Plan.
 
PROFIT SHARING AND 401(K) PLAN
 
  On July 1, 1993, the Company terminated its participation in Imperial
Bancorp's 401(k) and profit sharing plans, establishing its own 401(k) plan.
On September 30, 1993, Imperial Bancorp transferred all plan assets to the
Company.
 
  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
 
                                      116

 
Company will match 50% of the first 4% of employee contributions. The Company
recorded 401(k) matching expense of $296,000, $305,000, and $209,000 for the
years ended December 31, 1997, 1996, and 1995, respectively.
 
  An additional Company contribution may be made, at the discretion of the
Company. Should a discretionary contribution be made, the contribution would
first be allocated to those employees deferring salaries in excess of 4%. The
matching contribution would be 50% of any deferral in excess of 4% up to a
maximum deferral of 8%.
 
  Should discretionary contribution funds remain following the allocation
outlined above, any remaining Company discretionary contributions would be
allocated as a 50% match of employee contributions, on the first 4% of the
employee's deferrals. Discretionary contributions of $600,000, $350,000, and
$200,000 were charged to operations in 1997, 1996 and 1995, respectively.
 
  Company matching contributions are made as of December 31st each year.
 
LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
 
  The Company's and the Subsidiary Guarantors' Articles of Incorporation and
Bylaws provide for indemnification of the officers and directors of the
Company to the full extent permitted by law. The General Corporation Law of
the State of California and the State of Florida, as applicable, permit a
corporation to limit, under certain circumstances, a director's liability for
monetary damages in actions brought by or in the right of the corporation. The
Company's and the Subsidiary Guarantors' Articles of Incorporation also
provide for the elimination of the liability of directors for monetary damages
to the full extent permitted by law.
 
  The Company has entered into agreements to indemnify its directors and
officers in addition to the indemnification provided for in the Articles of
Incorporation and Bylaws. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys'
fees), judgments, fines, and settlement amounts incurred in any action or
proceeding, including any action by or in the right of the Company, on account
of services as a director or officer of the Company, as a director or officer
of any subsidiary of the Company, or as a director or officer of any other
enterprise to which the person provides services at the request of the
Company. The Company believes that these provisions and agreements are
necessary to attract and retain qualified persons as directors and officers.
The Company has $20.0 million of directors' and officers' liability insurance.
At present, there is no pending litigation or proceeding involving a director,
officer or employee of the Company as to which indemnification is sought, nor
is the Company aware of any threatened litigation or proceeding that may
result in claims for indemnification, except as set forth in Item 2.
"Business--Legal Proceedings."
 
                                      117

 
        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 April
30, 1998, by (i) each director of the Company, (ii) the Chief Executive
Officer and the four most highly compensated executive officers whose salary
exceeded $100,000 for the year ended December 31, 1997, (iii) each person who
is known to the Company to own beneficially more than 5% of the Common Stock,
and (iv) all directors and executive officers of the Company as a group.
Unless otherwise indicated, the Company believes that the beneficial owners of
the Common Stock listed below have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
 


                                               NUMBER OF SHARES    % OF TOTAL
              BENEFICIAL OWNER(1)             BENEFICIALLY OWNED OUTSTANDING(2)
              -------------------             ------------------ --------------
                                                           
   Imperial Bank(3)..........................     8,938,553           22.1%
   Wellington Management Co.(4)..............     4,558,540           11.3
   Keefe Managers, Inc.(4)...................     2,233,900            5.5
   Maverick Capital Ltd.(4)..................     2,000,000            5.0
   H. Wayne Snavely(5).......................     1,396,281            3.5
   Stephen J. Shugerman(6)...................       258,768            0.6
   G. Louis Graziadio, III(7)................       133,518            0.3
   Joseph R. Tomkinson(8)....................        73,474            0.2
   Perry A. Lerner(9)........................        79,722            0.2
   Robert S. Muehlenbeck(10).................        77,792            0.1
   J. Clayburn LaForce(11)...................        48,422            0.1
   Kevin E. Villani(12)......................        40,000            0.1
   Paul B. Lasiter(13).......................        36,745            0.1
   Irwin L. Gubman(14).......................        10,000              *
   Joseph R. Parise..........................         4,000              *
   All Directors and Officers as a Group (11
    persons)(15).............................     2,158,722            5.3%

- --------
  * Less than 1%.
 
 (1) Each of such persons may be reached through the Company at 23550
     Hawthorne Boulevard, Building One, Suite 110, Torrance, California 90505,
     telephone (310) 791-8020.
 
 (2) Percentage ownership is based on 40,384,115 shares of Common Stock
     outstanding as of April 30, 1998.
 
 (3) Imperial Bank, headquartered in Los Angeles, California, is a California
     chartered bank whose deposits are insured by the FDIC. The address of
     Imperial Bank is 9920 La Cienega Boulevard, Inglewood, California 90301.
 
 (4) Based upon a Schedule 13G filed with the Company reflecting beneficial
     ownership as of April 30, 1998. The shares are owned by various
     investment advisory clients of Wellington Management Company (or of
     Wellington Trust Company, National Association, WMC's wholly-owned
     subsidiary), Keefe Managers, Inc. and Maverick Capital Ltd., which is
     deemed a beneficial owner of the shares only by virtue of the direct or
     indirect investment and/or voting discretion they possess pursuant to the
     provisions of investment advisory agreements with such clients.(5)
 
 (5) Includes 1,037,052 shares subject to stock options exercisable within 60
     days of April 30, 1998.
 
 (6) Includes 178,524 shares subject to stock options exercisable within 60
     days of April 30, 1998.
 
 (7) Includes 119,422 shares subject to stock options exercisable within 60
     days of April 30, 1998.
 
 (8) Includes 10,000 shares subject to stock options exercisable within 60
     days of April 30, 1998. Mr. Tomkinson resigned as an officer of the
     Company in February 1996 but remains a director.
 
 (9) Includes 76,422 shares subject to stock options exercisable within 60
     days of April 30, 1998.
 
(10) Includes 70,022 shares subject to stock options exercisable within 60
     days of April 30, 1998.
 
(11) Includes 48,422 shares subject to stock options exercisable within 60
     days of April 30, 1998.
 
(12) Includes 40,000 shares subject to stock options exercisable within 60
     days of April 30, 1998.
 
(13) Includes 11,300 shares subject to stock options exercisable within 60
     days of April 30, 1998.
 
(14) Includes 6,000 shares subject to stock options exercisable within 60 days
     of April 30, 1998.
 
(15) Includes 1,597,164 shares subject to stock options exercisable within 60
     days of April 30, 1998.
 
                                      118

 
                             CERTAIN TRANSACTIONS
 
PRINCIPAL SHAREHOLDER; LIMITATIONS ON INVESTMENT; CONFLICTS OF INTEREST
 
  At December 31, 1997, Imperial Bank owned 8,938,553 shares of Common Stock,
or 23.0% of the Company. Imperial Bancorp ("Bancorp") is the owner of all of
the outstanding capital stock of Imperial Bank.
 
  The Federal Reserve Board has advised Bancorp that it considers the
retention by the Bank of its shares of ICII stock to be in violation of the
Bank Holders Company Act. This position is apparently a consequence of the
Federal Reserve Board's view that ICII is engaged in activities which are not
determined by regulation to be a closely related activity and that Bancorp did
not file or obtain a notice or approval to engage such activities in
accordance with Regulation Y.
 
  In addition, Section 24 of the Federal Deposit Insurance Act (the "FDIA")
limits the investments of state-chartered banks, such as the Bank, to
investments which are permitted investments for national banks or are
otherwise permitted under Section 24. On June 10, 1996, the Bank filed an
application for approval of retention of its ownership of ICII stock. The Bank
has submitted additional information to the FDIC in response to FDIC requests.
Subsequently, the Bank has advised the FDIC of its intention to contribute all
of the common stock owned by the Bank to Imperial Financial Group, Inc, a
Delaware corporation, which is currently a wholly-owned subsidiary of the Bank
(the "Contribution"). No action has been taken by the FDIC on the application
in contemplation of consummation of the Contribution.
 
  Due to the perceived existence of significant issues as to whether approval
by the Federal Reserve Board of an application to retain Bancorp's ownership
in ICII or approval of the FDIC of the application to retain the Bank's
ownership in ICII would be forthcoming, the Bancorp Board has determined no to
seek Federal Reserve approval at this time of its ownership in ICII stock, but
rather to address these regulatory concerns through the Contribution.
 
  Because Imperial Bank owns less than 50% of the outstanding shares of the
Company and the Company is operated as a company independent of Imperial Bank,
Bancorp, and Imperial Financial Group, Inc. the Company believes that, in the
event of an insolvency, bankruptcy or receivership proceeding involving
Imperial Bank, Bancorp, or Imperial Financial Group, Inc., a court, exercising
reasonable judgment after full consideration of all relevant factors, would
not order the substantive consolidation of the assets and liabilities of the
Company with either of these entities.
 
  In February 1997, the board of directors of Bancorp approved a plan to spin
off a portion of its specialty lending and finance business, including
Imperial Bank's common stock interest in ICII, to IFG, a recently created
subsidiary of Bancorp formed to hold various business assets of Bancorp.
 
  One director of the Company also serves on the Board of Directors of
Imperial Bancorp. See Item 10. "Directors and Executive Officers of the
Registrant."
 
PAYMENT AND TERMINATION AGREEMENT
 
  On January 1, 1992, Mr. Tomkinson entered into a five-year employment
agreement at an annual salary of $200,000, subject to adjustment for
inflation, plus an annual bonus to be paid out of a "bonus pool" in an amount
determined by the Board of Directors, but in no event to exceed his base
salary. Effective July 1, 1994, Mr. Tomkinson's employment agreement was
amended to reflect an annual salary of $300,000, plus a bonus based on 1.0% of
the Company's pre-tax profits in excess of $10.0 million and the attainment of
defined Company goals. Mr. Tomkinson's total compensation did not exceed
$750,000 annually. Mr. Tomkinson resigned as an officer of the Company in
February 1996.
 
  In February 1996, the Company entered into a Payment and Termination
Agreement with Mr. Tomkinson. Under the terms of this agreement, Mr. Tomkinson
received, as settlement for termination of Mr. Tomkinson's
 
                                      119

 
employment with the Company on November 20, 1995 (the "Termination Date"), the
following: (i) the amount by which (A) the aggregate of all compensation Mr.
Tomkinson would have been entitled to receive under his employment agreement
with the Company from the Termination Date through the original termination
date of the employment agreement on December 31, 1996, exceeds (B) the
aggregate Mr. Tomkinson was entitled to receive from IMH under his employment
agreement with IMH during such period, (ii) all accrued but unpaid
compensation due Mr. Tomkinson under his employment agreement with the Company
through the Termination Date and (iii) the full and immediate vesting of all
stock options held by Mr. Tomkinson covering shares of the capital stock of
the Company. Mr. Tomkinson received $28,650 under this agreement.
 
BANK DEPOSITS
 
  The Company had deposits (including escrow balances) with SPB which were
approximately $14.7 million and $4.5 million at December 31, 1997 and 1996,
respectively.
 
BORROWING ARRANGEMENTS
 
  In October 1995, Imperial Bank extended ICII a $10.0 million revolving line
of credit bearing interest at the prime rate (8.50% at December 31, 1995). All
amounts outstanding under this line were repaid in May 1996.
 
  Additional or modified arrangements and transactions may be entered into by
the Company, Imperial Bank, and their respective subsidiaries, after the date
hereof. Any such future arrangements and transactions will be determined
through negotiation between the Company and Imperial Bank, and it is possible
that conflicts of interest will be involved. The Audit Committee of the Board
of Directors of the Company, consisting of directors independent of both
management and Imperial Bank, must independently approve all transactions by
and between the Company and Imperial Bank.
 
RELATIONSHIPS WITH SPFC
 
 THE CONTRIBUTION TRANSACTION
 
  In October 1994, ICII incorporated SPFC as part of a strategic decision to
form a separate subsidiary through which to operate SPB's residential lending
division. To further this strategy, in December 1994, ICII made a capital
contribution of $250,000 to SPFC in exchange for 100% of its outstanding
capital stock, and in April 1995, ICII caused SPB to contribute to SPFC
certain customer lists of SPB's residential lending division relating to the
ongoing operations of such division. In addition, in April 1996 all employees
of SPB's residential lending division became employees of SPFC. SPB retained
all other assets and all liabilities related to the contributed operations
including all residual interests generated in connection with securitizations
effected by SPB's residential lending division.
 
 ARRANGEMENTS WITH ICII AND ITS AFFILIATES
 
  The Company and SPFC have entered into agreements for the purpose of
defining their ongoing relationship. The agreements have been developed in the
context of a parent/subsidiary relationship and therefore are not the result
of arm's length negotiations between independent parties. It is the intention
of the Company and SPFC that such agreements and the transactions provided for
therein, taken as a whole, are fair to both parties, while continuing certain
mutually beneficial arrangements. However, there can be no assurance that each
of such agreements, or the transactions provided for therein, have been
effected on terms at least as favorable to the Company or to SPFC as could
have been obtained from unaffiliated parties.
 
  Additional or modified arrangements and transactions may be entered into by
the Company, SPFC and their respective affiliates. Any such future
arrangements and transactions will be determined through negotiations between
the Company and SPFC, and it is possible that conflicts of interest will
develop.
 
  The unaffiliated directors of SPFC, consisting of directors independent of
the Company and SPFC, must independently approve all transactions between the
Company and SPFC.
 
                                      120

 
  The following is a summary of certain arrangements and transactions between
the Company and SPFC.
 
 TAX AGREEMENT
 
  The Company entered into an agreement (the "SPFC Tax Agreement") with SPFC
for the purposes of (i) providing for filing certain tax returns, (ii)
allocating certain tax liability and (iii) establishing procedures for certain
audits and contests of tax liabilities.
 
  Under the SPFC Tax Agreement, ICII agreed to indemnify and hold SPFC
harmless from any tax liability attributable to periods ending on or before
June 1996 in excess of such taxes as SPFC has already paid or provided for.
For periods ending after June 1996, SPFC will pay its tax liability directly
to the appropriate taxing authorities. To the extent that (i) there are audit
adjustments that result in a tax detriment to SPFC or (ii) SPFC incurs losses
that are carried back to an earlier period and such adjustment described in
(i) or loss described in (ii) results in a tax benefit to ICII or its
affiliates, then ICII will pay to SPFC an amount equal to the tax benefit as
that benefit is realized. ICII also agreed to indemnify SPFC for any liability
arising out of the filing of federal consolidated returns by ICII or any
return filed with any state or local taxing authority. To the extent there are
audit adjustments that result in any tax detriment to ICII or any of its
affiliates with respect to any period ending on or before June 1996 and, as a
result thereof, SPFC for any taxable period after June 1996 realizes a tax
benefit, then SPFC shall pay to ICII the amount of such benefit at such time
or times as SPFC actually realizes such benefit.
 
  ICII generally will control audits and administrative and judicial
proceedings with respect to periods ending on or before June 1996, although
ICII cannot compromise or settle any issue that increases SPFC's liability
without first obtaining the consent of SPFC. SPFC generally controls all other
audits and administrative and judicial proceedings.
 
 SERVICES PROVIDED BY ICII
 
  SPFC has been historically allocated expenses of various administrative
services provided to it by ICII. The costs of such services were not directly
attributable to a specific division or subsidiary and primarily included
general corporate overhead, such as accounting and cash management services,
human resources and other administrative functions. These expenses were
calculated as a pro rata share of certain administrative costs based on
relative number of employees and assets and liabilities of the division or
subsidiary, which management believed was a reasonable method of allocation.
The allocation of expenses for the years ended December 31, 1997 1996 and 1995
were approximately $74,000, $713,000 and $256,000, respectively.
 
  Effective April 1, 1997, ICII discontinued providing many of the services it
previously provided to SPFC. ICII currently provides to SPFC mortgage loan
production software and hardware and data communications management.
 
 OTHER ARRANGEMENTS
 
  From the point of commencement of operations until March 1994, SPB served as
the servicer of SPFC's loans. From March 1994 through September 1995, SPFC
subcontracted all of its servicing obligations under mortgage loans originated
or acquired on a servicing released basis to ICII pursuant to a servicing
agreement containing fees and other terms that were comparable to industry
standards. In addition, ICII was the servicer of loans securitized by SPFC in
1994 and 1995 under the respective pooling and servicing agreements. Effective
May 1, 1996, ICII transferred the servicing for all of SPFC's loans it
serviced to Advanta Mortgage Corp. USA ("Advanta") or subcontracted with
Advanta to perform such servicing functions.
 
  In February and March 1996, certain of ICII's residential mortgage
origination offices were transferred to SPFC.
 
  In March 1996, SPFC entered into a $10.0 million revolving credit and term
loan agreement with SPB. Advances under this agreement were collateralized by
the Company's interest-only and residual certificates
 
                                      121

 
(other than those retained by SPB pursuant to the Contribution Transaction) at
an interest rate of 2% above LIBOR. In April 1996, the loan was repaid and the
agreement was canceled.
 
  During 1995, SPFC borrowed approximately $1.5 million from ICII, such sum
bearing interest at approximately 10.3% per annum. At June 18, 1996 the amount
owed to ICII was approximately $17.0 million. As of March 31, 1997, all
amounts owed to ICII had been repaid. In July 1997, SPFC borrowed $15.0 from
ICII bearing interest at 12.0% per annum. As of August 31, 1997, the $15.0
million owed to ICII had been repaid.
 
  On July 17, 1997, SPFC borrowed $15 million from ICII due on October 17,
1997 bearing interest at a rate of 12%. SPFC repaid the loan along with
$125,000 in interest on August 11, 1997.
 
  SPFC has entered into a registration rights agreement with ICII, pursuant to
which SPFC has agreed to register for sale under the Securities Act in the
future all of ICII's remaining shares of SPFC's common stock, subject to
certain conditions.
 
  Lehman Commercial Paper, Inc. ("LCPI") has agreed to make available
repurchase lines to SPFC in an amount equal to $200.0 million. LCPI has
provided SPFC with these funding capabilities for its mortgage banking
operations, where SPFC can close loans in its name. The loan collateral is
held by an independent third-party custodian and SPFC has the ability to
borrow against that collateral at a percentage of the original principal
balance. The rate charged is LIBOR plus 65 basis points. Until the first
quarter of 1997, this line was guaranteed by ICII. The line had an expiration
date of March 26, 1998, a new expiration date is being negotiated. As of
December 31, 1997, SPFC had no amounts outstanding with respect to this
facility. The guarantee expired on April 1, 1997. ICII does not intend to
guarantee any other indebtedness of SPFC.
 
RELATIONSHIPS WITH IMH
 
 THE CONTRIBUTION TRANSACTION
 
  In January 1998, IMH changed its name to Impac Mortgage Holdings, Inc. from
Imperial Mortgage Holdings, Inc. On November 20, 1995, the effective date of
IMH's initial public stock offering (the "Effective Date"), the Company
contributed to ICIFC certain of the operating assets and certain customer
lists of the Company's mortgage conduit operations including all of ICII's
mortgage conduit operations' commitments to purchase mortgage loans subject to
rate locks from correspondents (having a principal balance of $44.3 million at
November 20, 1995), in exchange for shares representing 100% of the common
stock and 100% of the outstanding non-voting preferred stock of ICIFC.
Simultaneously, on the Effective Date, in exchange for 500,000 shares of IMH
common stock, the Company (i) contributed to IMH all of the outstanding non-
voting preferred stock of ICIFC, which represented 99% of the economic
interest in ICIFC, (ii) caused SPB to contribute to IMH certain of the
operating assets and certain customer lists of SPB's warehouse lending
division and (iii) executed a non-compete agreement and a right of first
refusal agreement, each having a term of two years from the Effective Date. Of
the 500,000 shares issued pursuant to the contribution, 450,000 shares were
issued to ICII and 50,000 shares were issued to SPB. All of the outstanding
shares of common stock of ICIFC were retained by ICII. Lastly, IMH contributed
all of the aforementioned operating assets of SPB's warehouse lending
operations contributed to it by SPB to IWLG in exchange for shares
representing 100% of the common stock of IWLG thereby forming it as a wholly
owned subsidiary. At November 20, 1995, the net tangible book value of the
assets to be contributed pursuant to the contribution was $525,000. The
Company and SPB retained all other assets and liabilities related to the
contributed operations which at November 20, 1995 consisted mostly of
$11.7 million of PMSRs, $22.4 million of finance receivables and $26.6 million
in advances made by the Company and SPB to fund mortgage conduit loan
acquisitions and to fund finance receivables, respectively.
 
 OTHER ARRANGEMENTS AND TRANSACTIONS WITH IMH
 
  The Company and IMH have entered into agreements for the purpose of defining
their ongoing relationships. These agreements have been developed in the
context of a parent/subsidiary relationship and therefore are not the result
of arm's-length negotiations between independent parties.
 
  It is the intention of the Company and IMH that such agreements and the
transactions provided for therein, taken as a whole, are fair to both parties,
while continuing certain mutually beneficial arrangements.
 
                                      122

 
  IMH has entered into a sublease with the Company to lease a portion of its
facilities as IMH's executive offices and administrative facilities at an
aggregate monthly rental of approximately $39,200. The sublease expires in
1999.
 
  The following is a summary of certain arrangements and transactions between
and the Company and IMH.
 
 Tax Agreement
 
  IMH has entered into an agreement (the "IMH Tax Agreement") effective as of
the Effective Date with the Company for the purposes of (i) providing for
filing certain tax returns, (ii) allocating certain tax liability and (iii)
establishing procedures for certain audits and contests of tax liability.
 
  Under the IMH Tax Agreement, the Company has agreed to indemnify and hold
IMH harmless from any tax liability attributable to periods ending on or
before November 20, 1995 in excess of such taxes as IMH has already paid or
provided for. For periods ending after the November 20, 1995, IMH will pay its
tax liability directly to the appropriate taxing authorities. To the extent
(i) there are audit adjustments that result in a tax detriment to IMH or (ii)
IMH incurs losses that are carried back to an earlier year and any such
adjustment described in (i) or loss described in (ii) results in a tax benefit
to ICII or its affiliates, then the Company will pay to IMH an amount equal to
the tax benefit as that benefit is realized. ICII will also agree to indemnify
IMH for any liability associated with the contribution of the preferred stock
of ICIFC and certain operational assets of SPB's warehouse lending division or
any liability arising out of the filing of a federal consolidated return by
the Company or any return filed with any state or local taxing authority. To
the extent there are audit adjustments that result in any tax detriment to the
Company or any of its affiliates with respect to any period ending on or
before November 20, 1995, and, as a result thereof, IMH for any taxable period
after the Effective Date realizes a tax benefit, then IMH shall pay to the
Company the amount of such benefit at such time or times as IMH actually
realizes such benefit.
 
  ICII generally controls audits and administrative and judicial proceedings
with respect to periods ending on or before the November 20, 1995, although
ICII cannot compromise or settle any issue that increases IMH's liability
without first obtaining the consent of IMH. IMH generally controls all other
audits and administrative and judicial proceedings.
 
 Services Agreement
 
  Prior to March 31, 1997, ICIFC was allocated expenses of various
administrative services provided by ICII. IWLG was also allocated expenses
prior to the contribution transaction referenced above. The costs of such
services were not directly attributable to a specific division or subsidiary
and primarily included general corporate overhead, such as data processing,
accounting and cash management services, human resources and other
administrative functions. These expenses were calculated as a pro rata share
of certain administrative costs based on relative assets and liabilities of
the division or subsidiary, which management believed was a reasonable method
of allocation. In connection with IMH's initial public offering in November
1995, IMH and ICII entered into a services agreement (the "IMH Services
Agreement") under which ICII provided similar general corporate overhead
services to IMH and its affiliates, including ICIFC and IWLG. The Company
charged fees for each of the services which it provides under the IMH Services
Agreement based upon usage. The IMH Services Agreement expired on December 31,
1996. The allocation of expenses to ICIFC and IWLG and amounts paid to ICII
under the IMH Services Agreement for the years ended December 31, 1997, 1996,
and 1995 aggregated $67,000, $518,000, and $269,000, respectively.
 
  Effective December 31, 1997, ICIFC and IMH entered into a services agreement
whereby ICAI would provide human resource, data and phone communication
services for an agreed upon fee. The initial term of this agreement expires on
December 19, 1998.
 
                                      123

 
 OTHER TRANSACTIONS
 
 General
 
  ICAI, a wholly-owned subsidiary of the Company, oversaw the day-to-day
operations of IMH, subject to the supervision of IMH's Board of Directors,
pursuant to a management agreement (the "Management Agreement") effective as
of November 20, 1995, for an initial term that expired on January 31, 1997.
ICAI and IMH have concluded a five-year extension to the Management Agreement
whereby amounts payable thereunder would be subordinated to a specified rate
of return payable to IMH stockholders.
 
  ICAI was entitled to receive a per annum base management fee payable monthly
in arrears of an amount equal to 75% of (i) 3/8 of 1% of gross mortgage assets
of IMH composed of other than agency certificates, conforming mortgage loans
or mortgage-backed securities secured by or representing interests in
conforming mortgage loans, plus (ii) 1/8 of 1% of the remainder of gross
mortgage assets of IMH plus (iii) 1/5 of 1% of the average daily asset balance
of the outstanding amounts under IWLG's warehouse lending facilities. The term
"gross mortgage assets" means for any month the weighted average book value of
IMH's Mortgage Assets (as defined in the Management Agreement), before
reserves for depreciation or bad debts or other similar noncash reserves,
computed at the end of such month. During the years ended December 31, 1997,
1996 and 1995, ICAI earned $3.0 million, $2.0 million and $37,888 in
management fees, respectively.
 
  ICAI was entitled to receive as incentive compensation for each fiscal
quarter, an amount equal to 75% of 25% of the net income of IMH, before
deduction of such incentive compensation, in excess of the amount that would
produce an annualized Return on Equity (as defined in the Management
Agreement) equal to the ten-year United States Treasury rate plus 2%. Return
on Equity is calculated for any quarter by dividing IMH's net income for the
quarter by its average net worth for the quarter. For such calculations, the
"net income" of IMH means the income of IMH determined in accordance with GAAP
before ICAI's incentive compensation, the deduction for dividends paid and any
net operating loss deductions arising from losses in prior periods. A
deduction for all of IMH's interest expenses for borrowed money is also taken
in calculating net income. "Average net worth" for any period means the
arithmetic average of the sum of the gross proceeds from any offering of its
equity securities by IMH, before deducting any underwriting discounts and
commissions and other expenses and costs relating to such offering, plus IMH's
retained earnings (without taking into account any losses incurred in prior
periods) computed by taking the daily average of such values during such
period. The definition Return on Equity is only for purposes of calculating
the incentive compensation payable, and is not related to the actual
distributions received by IMH's stockholders. The incentive payment to ICAI is
calculated quarterly in arrears before any income distributions are made to
stockholders for the corresponding period. During the years ended December 31,
1997, 1996 and 1995, ICAI earned $1.9 million, $1.3 million and $0,
respectively, for ICAI's incentive payment. The remaining 25% of the base
management fee and of the incentive compensation fee are payable to
participants in IMH's executive bonus pool as determined by the chief
executive officer of IMH.
 
  Pursuant to the Management Agreement, IMH also paid all operating expenses
except those specifically required to be borne by ICAI under the Management
Agreement. The operating expenses generally required to be borne by ICAI
include the compensation and other employment costs of ICAI's officers in
their capacities as such and the cost of office space and out-of-pocket costs,
equipment and other personnel required for oversight of IMH's operations. The
expenses that are paid by IMH include issuance and transaction costs incident
to the acquisition, disposition and financing of investments, regular legal
and auditing fees and expenses of IMH, the fees and expenses of IMH's
directors, premiums for directors' and officers' liability insurance, premiums
for fidelity and errors and omissions insurance, servicing and subservicing
expenses, the costs of printing and mailing proxies and reports to
stockholders, and the fees and expenses of IMH's custodian and transfer agent,
if any. In addition, ICAI provides various administrative services to IMH such
as human resource and management information services. ICAI has subcontracted
with ICII and certain of its affiliates to provide certain of such
administrative services required under the Management Agreement.
Reimbursements of expenses incurred by ICAI which are the responsibility of
IMH are made monthly. During the years ended December 31, 1997, 1996 and 1995,
there were no monies paid to ICAI as reimbursement of expenses.
 
                                      124

 
  In December 1997, IMH and the Company negotiated a termination of the
management agreement (the "Termination Agreement"). The consideration received
by the Company pursuant to the Termination Agreement was comprised of
2,009,310 shares of IMH common stock and certain securitization-related
assets. Additionally, the Company agreed to cancel its note receivable from
ICIFC, the origination unit of IMH, in the amount of $29.1 million. The IMH
common stock and the securitization related assets were recorded by the
Company at their estimated fair values of approximately $35.0 million and
$13.1 million, respectively, for a total of $48.1 million. This amount, when
netted with the $29.1 million cancellation of the ICIFC note receivable
resulted in the gain on termination of the management agreement of
approximately $19.0 million.
 
 IMH Registration Rights Agreement
 
  Pursuant to the IMH Registration Rights Agreement IMH has agreed to file one
or more registration statements under the Securities Act in the future for
shares of IMH held by ICAI pursuant to the Termination Agreement, subject to
certain conditions set forth therein. Pursuant to the IMH Registration Rights
Agreement, IMH will use its reasonable efforts to cause such registration
statements to be kept continuously effective for the public sale from time to
time of the shares of IMH held by ICAI pursuant to the aforementioned
termination agreement. ICAI has contributed the shares to ICII.
 
 Residual Interests owned by ICIFC
 
  Effective December 31, 1996, ICII sold $46.9 million of residual interests
to ICIFC. In connection therewith, ICII lent ICIFC 100% of the purchase price.
This loan bore interest at a rate of 12% per annum, and was secured by the
residual interests. On March 31, 1997, ICIFC renegotiated the loan, paying it
down by $9.5 million, setting a term of ten years and reducing the interest
rate from 12% to 10%. ICII had agreed to compensate ICIFC for losses related
to certain loans, to the extent that such loans did not perform, with the
exact terms to be determined later. The residual interests were subsequently
received by the Company in consideration of the Termination Agreement and the
loan was forgiven. See "Other Transactions--General".
 
 Bulk Mortgage Loan Purchases
 
  In December 1995, ICIFC entered into a number of agreements with the Company
and SPB to purchase bulk mortgage loan packages. All mortgage loan purchase
agreements were entered into under the following terms.
 
  On December 5, 1995 and December 13, 1995, ICIFC purchased from the Company
bulk mortgage loan packages of 30-year fully amortized six-month adjustable
LIBOR and one-year adjustable United States Treasury Bill rate loans and 30-
and 15-year fixed rate second trust deed mortgages with servicing rights on
all mortgage loans released to ICIFC. The principal balances of the mortgages
at the time of purchase was $106.7 million and $66.2 million, respectively,
with a premium paid of $2.1 million and $1.6 million, respectively.
 
  On December 29, 1995, ICIFC purchased from SPB two bulk mortgage loan
packages of 30-year fully amortized six-month adjustable LIBOR and one-year
adjustable United States Treasury Bill rate loans. The principal balances of
the loans in the servicing released and servicing retained bulk package at the
time of purchase was $300.0 million and $28.5 million with premiums paid of
$3.4 million and $142,395, respectively.
 
 Purchase of Mortgage-Backed Securities
 
  On December 29, 1995, IMH purchased, from SPB, DLJ Mortgage Acceptance Corp.
Pass-Through Certificates Series 1995-4, Class B-1 and Class B-2 issued August
29, 1995. These certificates consist primarily of a pool of certain
conventional, 11th District Cost of Funds adjustable rate, one-to-four family,
first lien mortgage loans, with terms to maturity of not more than 30 years.
The mortgage loans underlying the certificates were originated or acquired by
ICII. All of the mortgage loans are serviced by ICII in its capacity as master
servicer. IMH purchased Class B-1 certificates having an initial certificate
principal balance of $4.8 million and the Class B-2 certificates having an
initial certificate principal balance of $2.2 million for a price of 78.54 or
 
                                      125

 
$4.8 million and for a price of 70.01 or $2.3 million, respectively, equating
to a discount of $1.0 million and $0.7 million, respectively. The Class B-1
certificates are single "B" rated mortgage securities and the Class B-2 are
double "BB" rated mortgage securities. There was no gain or loss recorded by
either party as a result of this transaction.
 
 Purchase of Subordinated Lease Receivables
 
  On December 29, 1995, IMH purchased a subordinated interest in a lease
receivable securitization from IBC. The lease receivables underlying the
security were originated by IBC. IMH purchased the subordinated lease
receivable based on the present value of estimated cash flows using a discount
rate of 12% which resulted in a purchase price of $8.4 million. As a result of
the purchase, IBC recorded a gain of $1.6 million.
 
  The purchase price was based upon a market discount rate as confirmed by an
independent third party. In March 1996, IBC repurchased the subordinated
interest from IMH, and as of December 31,1997, holds the subordinated interest
as an investment vehicle.
 
 Transfer of ICIFC Stock
 
  To conclude the deconsolidation of ICIFC, in the first quarter of 1997 ICII,
as sole common shareholder, contributed the common shares of ICIFC to four
individuals in approximately equal number of shares, with an approximate value
of $25,000 each. ICII no longer has any equity interest in ICIFC.
 
RELATIONSHIPS WITH FMC
 
  On November 24, 1997, FMC completed an initial public offering of 10,000,000
shares of common stock. On December 3, 1997, FMC and the selling stockholders
completed the sale of 1,500,000 shares pursuant to the underwriters' over-
allotment option. Of the aggregate offering of 11,500,000 shares, 6,828,125
shares were sold by FMC, 3,568,175 shares were sold by the Company and
1,103,700 shares were sold by FLRT, Inc., respectively. As a result of these
sales pursuant to the initial public offering, the Company's and FLRT, Inc.'s
percentage ownership of FMC was reduced to approximately 38.4% and 21.6%,
respectively.
 
  FMC and ICII have entered into agreements for the purpose of defining their
ongoing relationships. The agreements have been developed in the context of a
parent/subsidiary relationship and therefore are not the result of arm's-
length negotiations between independent parties. It is the intention of FMC
and ICII that such agreements and the transactions provided for therein, taken
as a whole, are fair to both parties, while continuing certain mutually
beneficial arrangements. However, there can be no assurance that each of such
agreements, or the transactions provided for therein, have been effected on
terms at least as favorable to FMC as could have been obtained from
unaffiliated parties.
 
  Additional or modified arrangements and transactions may be entered into by
FMC, ICII, and their respective subsidiaries, after completion of the proposed
initial public offering. Any such future arrangements and transactions will be
determined through negotiation between FMC and ICII, and it is possible that
conflicts of interest will be involved. All transactions by and between FMC
and ICII must be approved by a majority of the disinterested directors of FMC.
 
  The following is a summary of certain arrangements and transactions between
FMC and ICII.
 
 FMC Services Agreement
 
  FMC and ICII have entered into a services agreement effective as of November
18, 1997 (the "FMC Services Agreement") under which ICII will continue to
provide human resource administration and certain accounting functions to FMC.
 
  ICII will charge fees for each of the services which it will provide under
the FMC Services Agreement based upon usage. The FMC Services Agreement will
have an initial term that ends one year from the date of
 
                                      126

 
the proposed initial public offering and is renewable annually thereafter. FMC
may terminate the FMC Services Agreement, in whole or in part, upon one
month's written notice. As part of the services to be provided under the FMC
Services Agreement, ICII will provide FMC with insurance coverage and self
insurance programs, including health insurance. The charge to FMC for coverage
will be based upon a pro rata portion of the costs to ICII to the various
policies. Management believes that the terms of the FMC Services Agreement are
as favorable to FMC as could be obtained from independent third parties.
 
 FMC Tax Agreement
 
  Pursuant to the Reorganization, FMAC's status as a limited liability company
was automatically terminated. Pursuant to the FMC tax agreement (the "FMC Tax
Agreement"), FMC has agreed to indemnify each of ICII and FLRT, Inc. for any
federal or state income taxes, including penalties and interest thereon,
imposed by any taxing authority with respect, to, for, or fairly attributable
to the operations of FMAC for the period from July 1, 1995 through November
24, 1997. Notwithstanding the foregoing, each of ICII and FLRT, Inc. has
agreed to indemnify FMC for all taxes, including penalties and interest
thereon, resulting from any determination made by a taxing authority that FMAC
should be determined for tax purposes to be an association taxable as a
corporation and only to the extent that such taxes pertain to the income of
FMAC as originally reported on its income tax return for the period in
question and solely to the extent of any limited liability company
distributions made by FMAC to ICII and FLRT, Inc.
 
 ICII Registration Rights Agreement
 
  FMC has entered into a registration rights agreement (the "ICII Registration
Rights Agreement") pursuant to which FMC has agreed to file one or more
registration statements under the Securities Act in the future for shares of
FMC held by ICII, subject to certain conditions set forth therein. Pursuant to
the ICII Registration Rights Agreement, FMC will use its reasonable efforts to
cause such registration statements to be kept continuously effective for the
public sale from time to time of the shares of FMC held by ICII. Also, under
the ICII Registration Rights Agreement, FLRT, Inc. may piggyback its shares
onto any registration statement concerning shares of the FMC's common stock
held by ICII; provided however than for a period of three years following the
date of the proposed initial public offering, FLRT, Inc. is limited in the
amount of shares of FMC's common stock it can sell to that amount authorized
pursuant to Rule 144. Thereafter, FLRT, Inc. has registration rights similar
to those granted to ICII under the ICII Registration Rights Agreement without
any volume limitations.
 
 Transactions Involving SPB
 
  In July 1995, FMAC sold approximately $3.8 million of servicing rights to
SPB, resulting in a gain of $31,000. At December 31, 1997, 1996 and 1995,
there was approximately $0, $183 million and $262 million, respectively, of
loans outstanding underlying this subservicing arrangement. FMAC received
approximately 13 basis points for providing such services. ICII purchased the
servicing rights from SPB in December 1997. FMC then purchased the servicing
rights from ICII for $2.2 million.
 
  FMAC purchased $15.5 million in franchise loans at par value from SPB on
June 26, 1997. These franchise loans were purchased at par value by SPB from
FMAC in 1996 and 1997. FMC purchased $45.1 million in franchise loans at par
value from SPB on December 24, 1997. These franchise loans were purchased at
par value by SPB from FMAC in 1996 and 1997. On December 30, 1997, FMC sold
$1.8 million of participation loans at par value to SPB.
 
  FMC also has a master purchase and sale agreement with SPB to originate
loans for SPB under mutual agreement, and subject to SPB underwriting each
such loan prior to sale of such loans. Under this agreement, FMC also has the
ability to repurchase loans, under mutual agreement with SPB. There is no
specified commitment by either party, and each individual sale is negotiated
separately as to pricing. This agreement has no expiration date. At December
31, 1997, loans originated for SPB (and not repurchased), totaled
approximately $104 million. FMC does not expect to originate a significant
volume of loans for SPB under this arrangement in the future.
 
                                      127

 
 Borrowings and Guarantees
 
  At December 31, 1997 and 1996, FMC had borrowings from ICII outstanding of
$0 and $17.7 million, respectively. FMAC paid interest at 12% on the
outstanding balances.
 
  FMAC, among other subsidiaries of ICII, jointly and severally and fully and
unconditionally guaranteed the 9.875% Senior Notes and the ROPES securities.
Such guarantees terminated upon the deconsolidation of FMC in the financial
statements of ICII.
 
  In consideration of ICII's guarantee of FMC's warehouse lines of credit and
repurchase facilities, FMC pays to ICII monthly a fee equal to 15 basis points
on FMC's committed warehouse lines covered by such guarantee. For the years
ended December 31, 1997, 1996 and 1995, the amount of such guarantee fees was
$617,000, $0 and $0, respectively. ICII will not guarantee any of FMC's future
warehouse lines of credit and repurchase facilities.
 
  ICII guaranteed FMC's lease obligations for its executive and administrative
offices located in Los Angeles, California and Greenwich, Connecticut. The
parties to the leases are currently negotiating a release of such guarantees.
ICII will not guarantee any of FMC's future leases.
 
  ICII and FLRT, Inc. have agreed to indemnify FMC against any and all
liability that FMC and its stockholders (other than ICII and FLRT, Inc.) may
incur as a result of the lawsuit of DeWald et al. vs. Knyal, et al.
 
 ICII Options Granted to Executive Officers and Key Employees of FMC
 
  In April 1996, ICII granted incentive stock options to purchase 25,000
shares of ICII common stock to each of Messrs. Shaughnessy and Rinaldi and
incentive stock options to purchase 10,000 shares of ICII common stock to Mr.
Farren.
 
  In December 1995 and July 1996, ICII granted Raedelle A. Walker incentive
stock options to purchase an aggregate of 30,000 shares of ICII common stock.
The exercise price of all such options was the fair market value of ICII
common stock at the time of the grants.
 
 Other Arrangements and Transactions With FMC
 
  In the ordinary course of business, FMC has conducted transactions with
certain of its officers and directors and with affiliated companies and
entities. All such transactions are conducted at "arm's length" in accordance
with FMC's policies.
 
RELATIONSHIPS WITH ICCMIC
 
 ICCMIC Management Agreement
 
  On the closing date of ICCMIC's initial public offering, ICCMIC entered into
a management agreement (the "ICCMIC Management Agreement") with Imperial
Credit Commercial Asset Management Corporation ("ICCAMC"), a wholly-owned
subsidiary of ICII, for an initial term expiring on the second anniversary of
the closing date of ICCMIC's initial public offering. Thereafter, successive
extensions, each for a period not to exceed two years, may be made by
agreement between ICCMIC and ICCAMC, subject to the affirmative vote of a
majority of ICCMIC's independent directors.
 
  ICCMIC may terminate, or decline to renew the term of, the ICCMIC Management
Agreement without cause at any time after the first two years upon 60 days
written notice by a majority vote of the independent directors; provided that
a termination fee will be due. In addition, ICCMIC has the right to terminate
the ICCMIC Management Agreement upon the occurrence of certain specified
events, including a material breach by ICCAMC of any provision contained in
the ICCMIC Management Agreement that remains uncured at the end of the
applicable cure period, without the payment of any termination fee.
 
                                      128

 
  Pursuant to the provisions of the ICCMIC Management Agreement, ICCAMC is at
all times subject to the supervision of ICCMIC's board of directors and has
only such functions and authority as ICCMIC delegates to it. ICCAMC advises
the board of directors as to the activities and operations of ICCMIC. ICCAMC
is responsible for the day-to-day operations of ICCMIC pursuant to the
authority granted to it by ICCMIC's board of directors under the ICCMIC
Management Agreement, and ICCAMC performs (or causes to be performed) such
services and activities relating to the assets and operations of ICCMIC as may
be directed by ICCMIC's board of directors or as ICCAMC otherwise considers
appropriate, including: (i) serving as ICCMIC's consultant with respect to the
formulation of investment criteria and preparation of policy guidelines by the
board of directors; (ii) advising and representing ICCMIC in connection with
the acquisition and commitment to acquire assets, the sale and commitment to
sell assets, and the maintenance and administration of its portfolio of
assets; (iii) advising ICCMIC regarding, and arranging for, (a) the issuance
of collateralized mortgage obligations ("CMOs") collateralized by ICCMIC's
mortgage loans, (b) reverse repurchase agreements on ICCMIC's mortgage-backed
securities ("MBS"), and (c) other borrowings, as appropriate; (iv) furnishing
reports and statistical and economic research to ICCMIC regarding ICCMIC's
activities and the services performed for ICCMIC by ICCAMC; (v) monitoring and
providing to ICCMIC's board of directors on an ongoing basis price information
and other data obtained from dealers that maintain markets in assets
identified by the board of directors from time to time, and providing data and
advice to the board of directors in connection with the identification of such
dealers; (vi) providing executive and administrative personnel, office space
and office services required in rendering services to ICCMIC; administering
the day-to-day operations of ICCMIC; and performing and supervising the
performance of such other administrative functions necessary in the management
of ICCMIC, including the collection of revenues and the payment of ICCMIC's
debts and obligations and maintenance of appropriate computer services to
perform such administrative functions; (vii) communicating on behalf of ICCMIC
with the holders of any equity or debt securities of ICCMIC as required to
satisfy the reporting and other requirements of any governmental bodies or
agencies or trading markets and to maintain effective relations with such
holders; (viii) to the extent not otherwise subject to an agreement executed
by ICCMIC, designating a servicer for mortgage loans sold to ICCMIC and
arranging for the monitoring and administering of such servicers; (ix)
counseling ICCMIC in connection with policy decisions to be made by the board
of directors; (x) engaging in hedging activities on behalf of ICCMIC which are
consistent with ICCMIC's status as a real estate investment trust ("REIT") and
with the guidelines; (xi) upon request by and in accordance with the
directions of ICCMIC's board of directors, investing or reinvesting any money
of ICCMIC; (xii) counseling ICCMIC regarding the maintenance of its exemption
from the Investment Company Act and monitoring compliance with the
requirements for maintaining exemption from that Act; (xiii) counseling ICCMIC
regarding the maintenance of its status as a REIT and monitoring compliance
with the various REIT qualification tests and other rules set out in the Code
and Treasury Regulations thereunder; and (xiv) counseling ICCMIC as to
compliance with all applicable laws, including those that would require ICCMIC
to qualify to do business in particular jurisdictions.
 
  ICCAMC performs portfolio management services on behalf of ICCMIC pursuant
to the ICCMIC Management Agreement with respect to ICCMIC's investments. Such
services include, but are not limited to, consulting ICCMIC on purchase, sale
and other opportunities, collection of information and submission of reports
pertaining to ICCMIC's assets, interest rates, and general economic
conditions, periodic review and evaluation of the performance of ICCMIC's
portfolio of assets, acting as liaison between ICCMIC and banking, mortgage
banking, investment banking and other parties with respect to the purchase,
financing and disposition of assets, and other customary functions related to
portfolio management. ICCAMC may enter into subcontracts with other parties,
including ICII and its affiliates, to provide any such services to ICCMIC.
 
  ICCAMC performs monitoring services on behalf of ICCMIC pursuant to the
ICCMIC Management Agreement with respect to loan servicing activities provided
by third parties and with respect to ICCMIC's portfolio of special servicing
rights. Such monitoring services include, but are not limited to, the
following activities: negotiating special servicing agreements; acting as a
liaison between the servicers of ICCMIC's mortgage loans and ICCMIC; review of
servicers' delinquency, foreclosures and other reports on ICCMIC's mortgage
loans; supervising claims filed under any mortgage insurance policies; and
enforcing the obligation of
 
                                      129

 
any servicer to repurchase mortgage loans. ICCAMC may enter into subcontracts
with other parties, including its affiliates, to provide any such services for
ICCAMC.
 
  ICCAMC will receive a base management fee calculated as a percentage of the
Average Invested Assets of ICCMIC for each calendar quarter and equal to 1%
per annum of the first $1 billion of such Average Invested Assets, .75% of the
next $250 million of such Average Invested Assets, and .50% of Average
Invested Assets above $1.25 billion. The term "Average Invested Assets" for
any period means the average of the aggregate book value of the assets of
ICCMIC, including the assets of all of its direct and indirect subsidiaries,
before reserves for depreciation or bad debts or other similar noncash
reserves, computed by taking the daily average of such values during such
period. ICCAMC will not receive any management fee for the period prior to the
sale of the shares in ICCMIC's initial public offering. The base management
fee is intended to compensate ICCAMC for its costs in providing management
services to ICCMIC. The board of directors of ICCMIC may adjust the base
management fee in the future if necessary to align the fee more closely with
the costs of such services.
 
  ICCAMC shall be entitled to receive incentive compensation for each fiscal
quarter in an amount equal to the product of (A) 25% of the dollar amount by
which (1)(a) Funds from Operations of ICCMIC (before the incentive fee) per
share of common stock (based on the weighted average number of shares
outstanding) plus (b) gains (or minus losses) from debt restructuring and
sales of property per share of common stock (based on the weighted average
number of shares outstanding), exceed (2) an amount equal to (a) the weighted
average of the price per share at the initial offering and the prices per
share at any secondary offerings by ICCMIC multiplied by (b) the Ten-Year U.S.
Treasury Rate plus four percent per annum multiplied by (B) the weighted
average number of shares of common stock outstanding during such quarter.
"Funds from Operations" as defined by the National Association of Real Estate
Investment Trusts ("NAREIT") means net income (computed in accordance with
GAAP) excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures.
 
  Funds from Operations does not represent cash generated from operating
activities in accordance with GAAP and should not be considered as an
alternative to net income as an indication of ICCMIC's performance or to cash
flows as a measure of liquidity or ability to make distributions. As used in
calculating ICCAMC's compensation, the term "Ten-Year U.S. Treasury Rate"
means the arithmetic average of the weekly average yield to maturity for
actively traded current coupon U.S. Treasury fixed interest rate securities
(adjusted to constant maturities of ten years) published by the Federal
Reserve Board during a quarter, or, if such rate is not published by the
Federal Reserve Board, any Federal Reserve Bank or agency or department of the
federal government selected by ICCMIC.
 
  If ICCMIC determines in good faith that the Ten-Year U.S. Treasury Rate
cannot be calculated as provided above, then the rate shall be the arithmetic
average of the per annum average yields to maturities, based upon
closing asked prices on each business day during a quarter, for each actively
traded marketable U.S. Treasury fixed interest rate security with a final
maturity date not less than eight nor more than 12 years from the date of the
closing asked prices as chosen and quoted for each business day in each such
quarter in New York City by at least three recognized dealers in U.S.
government securities selected by ICCMIC.
 
  ICCAMC will be reimbursed for (or charge ICCMIC directly for) ICCAMC's costs
and expenses in employing third-parties to perform due diligence tasks on
assets purchased or considered for purchase by ICCMIC.
 
  The above referenced management fees are payable in arrears. ICCAMC's base
and incentive fees and reimbursable costs and expenses shall be calculated by
ICCAMC within 45 days after the end of each quarter, and such calculation
shall be promptly delivered to ICCMIC. ICCMIC is obligated to pay such fees,
costs and expenses within 60 days after the end of each fiscal quarter.
 
                                      130

 
 Right of First Offer
 
  Pursuant to the ICCMIC Management Agreement, ICCAMC will not assume any
responsibility other than to render the services called for thereunder and
will not be responsible for any action of ICCMIC's board of directors in
following or declining to follow its advice or recommendations. ICCAMC, its
directors and its officers will not be liable to ICCMIC, any subsidiary of
ICCMIC, the independent directors, ICCMIC's stockholders or any subsidiary's
stockholders for acts performed in accordance with and pursuant to the ICCMIC
Management Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties under the
ICCMIC Management Agreement. ICCMIC has agreed to indemnify ICCAMC, its
directors and its officers with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from acts of ICCAMC not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of duties, performed in good faith in accordance with and pursuant
to the ICCMIC Management Agreement.
 
  The ICCMIC Management Agreement does not limit or restrict the right of
ICCAMC or any of its officers, directors, employees or affiliates to engage in
any business or to render services of any kind to any other person, including
the purchase of, or rendering advice to others purchasing, assets that meet
ICCMIC's policies and criteria, except that ICCAMC may not manage or advise
another REIT or other entity that invests or intends to invest primarily in
commercial and multifamily mortgage loans or subordinated commercial or
multifamily MBS interests. Moreover, the directors and certain of the
executive officers of ICCAMC executed non-compete agreements that preclude
them from leaving ICCAMC and, under certain circumstances, forming or joining
another REIT that invests or intends to invest primarily in commercial and
multifamily mortgage loans or subordinated CMBS interests.
 
  ICII and its affiliates, including SPB, expect to continue to originate
mortgage loans and MBS interests. SPB has entered into an agreement granting
ICCMIC, as long as the ICCMIC Management Agreement is in effect, a right of
first offer to purchase, in addition to the initial investments made by
ICCMIC, not less than $150 million annually of multifamily and commercial
mortgage loans typical of those originated by SPB. Although not contractually
committed to do so, ICCMIC intends to purchase mortgage loans offered to it
pursuant to the foregoing right of first offer, subject to compliance with the
guidelines and underwriting criteria as established and modified from time to
time by ICCMIC's independent directors.
 
  ICCMIC expects to maintain a relationship with ICII and SPB in which ICCMIC
will be a ready, willing and able purchaser of MBS interests that may be sold
from time to time by SPB. Although no binding commitment will exist on the
part of ICII, SPB or ICCMIC regarding the sale and purchase of MBS interests,
ICCMIC expects to be able to purchase MBS interests from SPB at prices and on
terms meeting ICCMIC's investment criteria.
 
  ICCMIC expects that ICII and SPB will offer to sell assets to ICCMIC on
terms and at prices that, in the aggregate, will be fair to both parties,
subject to compliance with the guidelines. In deciding whether to acquire any
such asset, ICCAMC may consider, among other factors, whether acquisition of
the asset will enhance ICCMIC's ability to achieve or exceed ICCMIC's risk
adjusted target rate of return established for that period by ICCMIC's board
of directors, whether the asset otherwise is well-suited for ICCMIC and
whether ICCMIC is financially able to take advantage of the investment
opportunity. If an asset that otherwise meets all of ICCMIC's criteria for
asset acquisition is being offered to ICCMIC at a price that is greater, or on
terms that are less favorable, than would be required by third parties for
similar assets in bona fide arms' length transactions, ICCAMC would be
expected to recommend that ICCMIC decline to acquire that asset at the quoted
price and terms, notwithstanding the relationship among ICCMIC, ICII and SPB.
 
 Other Transactions
 
  From time to time, SPB may act as the servicer for ICCMIC's loans. SPB will
receive fees for such services pursuant to applicable pooling and servicing
agreements.
 
                                      131

 
  ICCMIC, on the one hand, and ICII and its affiliates, on the other, will
enter into a number of relationships other than those governed by the ICCMIC
Management Agreement, some of which may give rise to conflicts of interest.
Moreover, three of the members of the board of directors of ICCMIC and all of
its officers are also employed by ICCAMC or its affiliates.
 
  The relationships between ICCMIC, on the one hand, and ICII and its
affiliates, on the other, are governed by policy guidelines approved by a
majority of ICCMIC's independent directors. The guidelines establish certain
parameters for the operations of ICCMIC, including quantitative and
qualitative limitations on ICCMIC's assets that may be acquired. The
guidelines are to assist and instruct ICCAMC and to establish restrictions
applicable to transactions with ICII and its affiliates. A majority of the
independent directors approved the acquisition of the initial investments by
ICCMIC from ICII and SPB. However, subsequent to the acquisition of the
initial investments, ICCAMC may enter into transactions on behalf of ICCMIC
with ICII and its affiliates based upon the guidelines approved by the
independent directors. Such transactions will be reviewed on a quarterly basis
to insure compliance with the guidelines.
 
 Mortgage Loan and Other Asset Purchases
 
  On October 31, 1997, ICCMIC purchased multifamily/commercial mortgage loans
and interests in certain multifamily and commercial mortgage backed securities
from SPB and from the Company, for an aggregate purchase price of
approximately $163 million plus interest.
 
  In December 1997, ICCMIC purchased a pool of multifamily and commercial
mortgage loans from SPB for approximately $97 million plus interest.
 
  ICCMIC may acquire additional assets from ICII and its affiliates in the
future. Any such acquisitions will be in accordance with the guidelines
approved by a majority of ICCMIC's independent directors. The terms of a
particular transaction, however, will not be approved in advance by ICCMIC's
independent directors in all cases. The independent directors will review any
such transactions quarterly to insure compliance with the guidelines, but in
doing so they, by necessity, will rely primarily on information and analysis
provided to them by ICCAMC.
 
 Equity Investment
 
  On October 20, 1997, the Company completed the initial public offering of
ICCMIC. The initial public offering of 34,500,000 shares of common stock was
priced at $15.00 per share, representing total net proceeds from the offering
of approximately $481.2 million. All of the shares were offered by ICCMIC. In
October 1997, the Company purchased 2,970,000 shares of ICCMIC common stock
for $41.4 million. In December 1997, the Company purchased an additional
100,000 shares of ICCMIC common stock for $1.5 million.
 
  As of December 31, 1997, the Company owns 8.9% of the outstanding common
stock of ICCMIC. ICCMIC will be managed by ICCAMC, a wholly owned subsidiary
of the Company. ICCMIC intends to invest primarily in performing multifamily
and commercial loans and in mortgage backed securities. ICCAMC also has
received stock options pursuant to the ICCMIC Option Plan. ICII will retain
its shares of ICCMIC for at least two years after ICCMIC's initial public
offering of shares of common stock, but may dispose of its shares any time
thereafter. Notwithstanding the foregoing, if ICCMIC terminates the ICCMIC
Management Agreement, ICII may dispose of its shares at that time.
 
  The market in which ICCMIC expects to acquire assets is characterized by
rapid evolution of products and services and, thus, there may in the future be
relationships between ICCMIC, ICCAMC, and affiliates of ICCAMC in addition to
those described herein.
 
                                      132

 
OTHER MATTERS
 
  In October 1997, the Company loaned H. Wayne Snavely and Kevin E. Villani
$1,999,998 and $999,992, respectively, for the purposes of assisting each of
them to purchase ICCMIC common stock. The loans are each evidenced by a
promissory note maturing June 14, 2002, secured by a deed of trust and stock of
ICCMIC held by such individuals. The note bears interest at an annual rate of
10.4% and is payable in semi-annual installments commencing June 15, 1998. At
February 28, 1998, the remaining balances are $1.1 million and $610,000, for
Wayne Snavely and Kevin E. Villani, respectively.
 
                                      133

 
                              THE EXCHANGE OFFER
 
PURPOSE AND EFFECT
 
  In connection with the sale of the Old Par Securities, the Company, the
Trust and the Subsidiary Guarantors (collectively, the "Registrants") entered
into a Registration Rights Agreement with the Initial Purchaser pursuant to
which the Registrants agreed to file a registration statement under the
Securities Act with respect to the New Par Securities and, upon the
effectiveness of such registration statement, offer to the holders of the Old
Par Securities the opportunity to exchange their Old Par Securities for a like
liquidation amount of New Par Securities, which will be issued without a
restrictive legend and, except as set forth below, may be reoffered and resold
by the holder without registration under the Securities Act. Upon the
completion of the Exchange Offer, each of the Registrants' obligations with
respect to the registration of the Old Par Securities and the New Par
Securities will terminate, except as provided below. A copy of the
Registration Rights Agreement delivered in connection therewith has been filed
as an exhibit to the Registration Statement of which this Prospectus is a
part. Following the completion of the Exchange Offer, holders of Old Par
Securities not tendered will not have any further registration rights, except
as provided below, and the Old Par Securities will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
the Old Par Securities could be adversely affected upon completion of the
Exchange Offer.
 
  Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third-parties, the Registrants believe that New Par
Securities issued pursuant to the Exchange Offer in exchange for Old Par
Securities may be offered for resale, resold and otherwise transferred by a
holder thereof (other than any such holder that is an "affiliate" of the
Registrants within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such holder represents to the Registrants that
(i) such New Par Securities are acquired in the ordinary course of business of
such holder, (ii) such holder is not engaging in and does not intend to engage
in a distribution of such New Par Securities and (iii) such holder has no
arrangement or understanding with any person to participate in the
distribution of such New Par Securities. Any holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Par Securities cannot rely on such interpretation by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Each broker-dealer that receives New Par Securities for its own
account in exchange for Old Par Securities, where such Old Par Securities were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resales
of such New Par Securities. See "Plan of Distribution."
 
  In the event that any holder of Old Par Securities would not receive freely
tradeable New Par Securities in the Exchange Offer or is not eligible to
participate in the Exchange Offer, such holder can elect, by so indicating on
the Letter of Transmittal and providing certain additional necessary
information, to have such holder's Old Par Securities registered in a "shelf"
registration statement on an appropriate form pursuant to Rule 415 under the
Securities Act.
 
  In the event that the Registrants are obligated to file a "shelf"
registration statement, they will be required to keep such "shelf"
registration statement effective for a period of three years or such shorter
period that will terminate when all of the Old Par Securities covered by such
registration statement have been sold pursuant thereto. Other than as set
forth in this paragraph, no holder will have the right to require the
Registrants to register such holder's Par Securities under the Securities Act.
See "Procedures for Tendering Old Securities."
 
  Pursuant to the Registration Rights Agreement, the Registrants (or, if the
Debentures have been distributed to holders of the Par Securities in
liquidation of the Trust, the Company only) agreed to file with the
Commission, on or prior to 30 days after the Closing Date, the Exchange Offer
Registration Statement on the appropriate form under the Securities Act with
respect to the New Par Securities, the New Trust Guarantee and the New
Debentures. Upon the effectiveness of the Exchange Offer Registration
Statement, the Registrants will offer to the holders of Old Par Securities who
are able to make certain representations the opportunity to exchange their
 
                                      134

 
Transfer Restricted Old Par Securities for New Par Securities pursuant to the
Exchange Offer. If (i) the Registrants are not required to file the Exchange
Offer Registration Statement or permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy, (ii) the Company has received an opinion of independent tax counsel
experienced in such matters to the effect that, as a result of the
consummation of the Exchange Offer, there is more than an insubstantial risk
that (x) the Trust would be subject to United States federal income tax with
respect to income received or accrued on the Debentures or New Debentures, (y)
interest payable by the Company on such Debentures or New Debentures would not
be deductible by the Company, in whole or in part, for United States federal
income tax purposes, or (z) the Trust would be subject to more than a de
minimis amount of other taxes, duties or other governmental charges or
(iii) any holder of Old Par Securities notifies the Company and the Trust on
or before the 20th Business Day following the consummation of the Exchange
Offer that (A) it is prohibited by law or Commission policy from participating
in the Exchange Offer, (B) it may not resell the New Par Securities acquired
by it in the Exchange Offer to the public without delivering a prospectus and
the prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (C) it is a broker-dealer and
owns Old Par Securities acquired directly from the Trust or an affiliate of
the Trust or in the Remarketing, the Registrants will file with the Commission
a Shelf Registration Statement to cover resales of the Securities by the
holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. The Company
and the Trust will use their respective best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
Commission. For purposes of the foregoing, "Transfer Restricted Securities"
means each Par Security, Trust Guarantee or Debenture until (i) the date on
which such Par Security, Trust Guarantee or Debenture has been exchanged by a
person other than a broker-dealer for a New Par Security, New Trust Guarantee
or New Debenture in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of an Old Par Security for a New Par
Security , the date on which such New Par Security is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy
of the prospectus contained in the Exchange Offer Registration Statement,
(iii) the date on which such Par Security, Trust Guarantee or Debenture has
been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which
such Par Security, Trust Guarantee or Debenture is distributed to the public
pursuant to Rule 144 under the Securities Act.
 
  The Registration Rights Agreement provides that (i) the Registrants will
file an Exchange Offer Registration Statement with the Commission on or prior
to 30 days after the Closing Date (unless not required to do so pursuant to
clause (x) or (y) of the fourth sentence of the preceding paragraph), (ii) the
Registrants will use their respective best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to 90
days after the Closing Date, (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Registrants will
commence the Exchange Offer and use their best efforts to issue on or prior to
30 Business Days after the date on which the Exchange Offer Registration
Statement was declared effective by the Commission, New Par Securities, New
Trust Guarantees and New Debentures in exchange for all Old Par Securities,
Old Trust Guarantees and Old Debentures tendered prior thereto in the Exchange
Offer and (iv) if obligated to file the Shelf Registration Statement, the
Registrants will use their best efforts to file the Shelf Registration
Statement with the Commission on or prior to 60 days after such filing
obligation arises and to cause the Shelf Registration to be declared effective
by the Commission on or prior to 30 days after such obligation arises. If (w)
the Registrants fail to file any of the Registration Statements required by
the Registration Rights Agreement on or before the date specified for such
filing, (x) any of such Registration Statements is not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (y) the Registrants fail to consummate the
Exchange Offer within 30 Business Days of the Effectiveness Target Date with
respect to the Exchange Offer Registration Statement or (z) the Shelf
Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Securities during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (w) through (z) above a "Registration Default"), then the Company will
pay additional interest ("Additional Interest") on the Debentures (including
in respect of amount occurring during any Extension
 
                                      135

 
Period) and corresponding Additional Distributions (the "Additional
Distributions") will become payable on the Transfer Restricted Securities,
with respect to the first 90-day period immediately following the occurrence
of such Registration Default in an amount equal to $.05 per week per $1,000
liquidation or principal amount of Transfer Restricted Securities held by such
holder. The amount of the Additional Interest (and corresponding Additional
Distributions) will increase by an additional $.05 per week per $1,000
liquidation or principal amount of Transfer Restricted Securities with respect
to each subsequent 90-day period until all Registration Defaults have been
cured, up to a maximum amount of Additional Interest (and corresponding
Additional Distributions) of $.50 per week per $1,000 liquidation or principal
amount of Transfer Restricted Securities. All accrued Additional Interest (and
corresponding Additional Distributions) will be paid by the Company on each
Distribution payment date to The Depositary Trust Company ("DTC") by wire
transfer of immediately available funds or by federal funds check and to
holders of definitive securities by wire transfer to the accounts specified by
them or by mailing checks to their registered addresses if no such accounts
have been specified. Following the cure of all Registration Defaults, the
accrual of Additional Interest (and corresponding Additional Distributions)
will cease.
 
  Transfer Restricted Securities which have not been exchanged for New Par
Securities, New Debentures and New Trust Guarantees pursuant to the Exchange
Offer are mandatorily redeemable by the Company on the Remarketing Settlement
Date, as described under "Description of Securities--Redemption--Transfer
Restricted Security Redemption."
 
  Holders of Old Par Securities will be required to make certain
representations to the Company, the Trust and the Subsidiary Guarantors (as
described in the Registration Rights Agreement) in order to participate in the
Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide comments on
the Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Securities included in
the Shelf Registration Statement and benefit from the provisions regarding
Additional Interest set forth above.
 
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD PAR SECURITIES
 
  Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Trust will accept for exchange Old Par Securities which
are properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 P.M.,
New York City time, on June 22, 1998; provided, however, that if the Trust, in
its sole discretion, has extended the period of time during which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended. As of the date of this Prospectus,
$70,000,000 aggregate liquidation amount of the Old Par Securities is
outstanding. This Prospectus, together with the Letter of Transmittal, is
first being sent on or about May 20, 1998, to all holders of Old Par
Securities known to the Trust. The Trust's obligation to accept Old Par
Securities for exchange pursuant to the Exchange Offer is subject to certain
customary conditions as set forth under "--Certain Conditions to the Exchange
Offer" below.
 
  The Trust expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Exchange Offer is open, and thereby
delay acceptance for exchange of any Old Par Securities, by giving oral or
written notice of such extension to the holders thereof as described below.
During any such extension, all Old Par Securities previously tendered will
remain subject to the Exchange Offer and may be accepted for exchange by the
Trust. Any Old Par Securities not accepted for exchange for any reason will be
returned without expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
 
  Old Par Securities tendered in the Exchange Offer must be in denominations
of principal amount of $1,000 or any integral multiple thereof. The Trust
expressly reserves the right to amend or terminate the Exchange Offer, and not
to accept for exchange any Old Par Securities not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under "--Certain Conditions to the Exchange
 
                                      136

 
Offer." The Trust will give oral or written notice of any extension,
amendment, non-acceptance or termination to the holders of the Old Par
Securities as promptly as practicable, such notice in the case of any
extension to be issued by means of a press release or other public
announcement no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
 
PROCEDURES FOR TENDERING OLD PAR SECURITIES
 
  Only a registered holder of Old Par Securities may tender such Old Par
Securities in the Exchange Offer. The tender to the Trust of Old Par
Securities by a holder thereof as set forth below and the acceptance thereof
by the Trust will constitute a binding agreement between the tendering holder
and the Trust upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal. Except as set forth
below, a holder who wishes to tender Old Par Securities for exchange pursuant
to the Exchange Offer must transmit a properly completed and duly executed
Letter of Transmittal, including all other documents required by such Letter
of Transmittal, to Chase Trust Company of California (the "Exchange Agent") at
one of the addresses set forth below under "Exchange Agent" on or prior to the
Expiration Date. In addition, either (i) certificates for such Old Par
Securities must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-
Entry Confirmation") of such Old Par Securities, if such procedure is
available, into the Exchange Agent's account at DTC (the "Book-Entry Transfer
Facility") pursuant to the procedure for book-entry transfer described below,
must be received by the Exchange Agent prior to the Expiration Date, or (iii)
the holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OLD PAR SECURITIES, LETTERS OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS.
IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT
OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD PAR SECURITIES SHOULD
BE SENT TO THE TRUST. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES, OR NOMINEES TO EFFECT THE ABOVE
TRANSACTIONS FOR SUCH HOLDERS.
 
  Any beneficial owner whose Old Par Securities are registered in the name of
a broker, dealer, commercial bank, trust company, or other nominee and who
wishes to tender should contact the registered holder promptly and instruct
such registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering
such owner's Old Par Securities, either make appropriate arrangements to
register ownership of the Old Par Securities in such beneficial owner's name
or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
 
  Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal Rights"), as the case may be, must be guaranteed (see
"--Guaranteed Delivery Procedures") unless the Old Par Securities surrendered
for exchange pursuant thereto are tendered (i) by a registered holder of the
Old Par Securities who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution (as defined below). In the
event that signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, such guaranties must be by a
financial institution (including most banks, savings and loan associations and
brokerage houses) that is a participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Program or the Stock
Exchanges Medallion Program (collectively, "Eligible Institutions"). If Old
Par Securities are registered in the name of a person other than a signer of
the Letter of Transmittal, the Old Par Securities surrendered for exchange
must be endorsed by or be accompanied by a written instrument or instruments
of transfer or exchange, in satisfactory form as determined by the Trust in
its sole discretion, duly executed by the registered holder exactly as the
name or names of the registered holder or holders appear on the Old Par
Securities with the signature thereon guarantied by an Eligible Institution.
 
  If the Letter of Transmittal or any Old Par Securities or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-
fact, officers of corporations or others acting in a fiduciary or
 
                                      137

 
representative capacity, such person should so indicate when signing, and,
unless waived by the Trust, proper evidence satisfactory to the Trust of their
authority to so act must be submitted with the Letter of Transmittal.
 
  All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Par Securities tendered for exchange will be
determined by the Trust in its sole discretion, which determination shall be
final and binding. The Trust reserves the absolute right to reject any and all
tenders of any particular Old Par Securities not properly tendered or not to
accept any particular Old Par Securities which acceptance might, in the
judgment of the Trust or its counsel, be unlawful. The Trust also reserves the
absolute right to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Old Par Securities either before or after
the Expiration Date (including the right to waive the ineligibility of any
holder who seeks to tender Old Par Securities in the Exchange Offer). The
interpretation of the terms and conditions of the Exchange Offer as to any
particular Old Par Securities either before or after the Expiration Date
(including the Letter of Transmittal and the instructions thereto) by the
Trust shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Par Securities for exchange
must be cured within such reasonable period of time as the Trust shall
determine. None of the Trust, the Exchange Agent or any other person shall be
under any duty to give notification of any defect or irregularity with respect
to any tender of Old Par Securities for exchange, nor shall any of them incur
any liability for failure to give such notification.
 
  By tendering, each holder will represent to the Trust that, among other
things, the New Par Securities acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the person receiving such
New Par Securities, whether or not such person is the holder, and that neither
the holder nor such other person has any arrangement or understanding with any
person to participate in the distribution of the New Par Securities. If any
holder or any such other person is an "affiliate," as defined under Rule 405
of the Securities Act, of the Trust, the Company or the Subsidiary Guarantors
or is engaged in or intends to engage in, or has an arrangement or
understanding with any person to participate in, a distribution of such New
Par Securities to be acquired pursuant to the Exchange Offer, such holder or
any such other person (i) may not rely on the applicable interpretation of the
staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Par Securities for
its own account in exchange for Old Par Securities, where such Old Par
Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such New Par Securities. See
"Plan of Distribution." The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
 
  The Company currently is obligated to apply for listing of the New Par
Securities, upon request of the holders of a majority in aggregate liquidation
amount of the New Par Securities, only in connection with this registration
statement covering the New Par Securities, provided that the New Par
Securities qualify for listing. Any holder who wishes to request listing of
the New Par Securities in connection with this registration must submit
written notification thereof under separate cover to: Irwin L. Gubman, Regular
Trustee, c/o Imperial Credit Industries, Inc., 23550 Hawthorne Boulevard,
Building One, Suite 240, Torrance, California 90505. Holders must indicate
along with such request the aggregate liquidation amount of the New Par
Securities they hold.
 
ACCEPTANCE OF OLD PAR SECURITIES FOR EXCHANGE; DELIVERY OF NEW PAR SECURITIES
 
  Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Trust will accept, promptly after the Expiration Date, all Old Par
Securities properly tendered and will issue the New Par Securities promptly
after acceptance of the Old Par Securities. See "--Certain Conditions to the
Exchange Offer" below. For purposes of the Exchange Offer, the Trust will be
deemed to have accepted properly tendered Old Par Securities for exchange
when, as and if the Trust has given oral or written notice thereof to the
Exchange Agent.
 
  For each Old Par Security accepted for exchange, the holder of such Old Par
Security will receive as set forth below under "Description of the
Securities--Book-Entry, Delivery and Form" a New Par Security having
 
                                      138

 
a principal amount equal to that of the surrendered Old Par Security.
Accordingly, registered holders of New Par Securities on the relevant record
date for the first interest payment date following the consummation of the
Exchange Offer will receive interest accruing from the most recent date to
which interest has been paid on the Old Par Securities or, if no interest has
been paid, from June 9, 1997. Old Par Securities accepted for exchange will
cease to accrue interest from and after the date of consummation of the
Exchange Offer. Holders whose Old Par Securities are accepted for exchange
will not receive any payment in respect of accrued interest on such Old Par
Securities otherwise payable on any interest payment date the record date for
which occurs on or after consummation of the Exchange Offer.
 
  In all cases, issuance of New Par Securities for Old Par Securities that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Old Par
Securities or a timely Book-Entry Confirmation of such Old Par Securities into
the Exchange Agent's account at the Book-Entry Transfer Facility, a properly
completed and duly executed Letter of Transmittal and all other required
documents. If any tendered Old Par Securities are not accepted for any reason
set forth in the terms and conditions of the Exchange Offer or if Old Par
Securities are submitted for a greater principal amount than the holder
desires to exchange, such unaccepted or non-exchanged Old Par Securities will
be returned without expense to the tendering holder thereof (or, in the case
of Old Par Securities tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
procedures described below, such non-exchanged Old Par Securities will be
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
 
BOOK-ENTRY TRANSFER
 
  The Exchange Agent will make a request to establish an account with respect
to the Old Par Securities at the Book-Entry Transfer Facility for purposes of
the Exchange Offer within two business days after the date of this Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Par Securities by
causing the Book-Entry Transfer Facility to transfer such Old Par Securities
into the Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with such Book-Entry Transfer Facility's procedures for transfer.
However, although delivery of Old Par Securities may be effected through book-
entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal
or a facsimile thereof, with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received by the
Exchange Agent at one of the addresses set forth below under "--Exchange
Agent" on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
 
GUARANTEED DELIVERY PROCEDURES
 
  If a registered holder of the Old Par Securities desires to tender such Old
Par Securities and the Old Par Securities are not immediately available, or
time will not permit such holder's Old Par Securities or other required
documents to reach the Exchange Agent before the Expiration Date, or the
procedure for book-entry transfer cannot be completed on a timely basis, a
tender may be effected if (i) the tender is made through an Eligible
Institution, (ii) on or prior to 5:00 P.M., New York City time, on the
Expiration Date, the Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Letter of Transmittal (or a facsimile
thereof) and Notice of Guaranteed Delivery, substantially in the form provided
by the Trust (by telegram, telex, facsimile transmission, mail or hand
delivery), setting forth the name and address of the holder of Old Par
Securities and the amount of Old Par Securities tendered, stating that the
tender is being made thereby and guaranteeing that within three New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Old Par
Securities, in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent, and
(iii) the certificates for all physically tendered Old Par Securities, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be,
and any other documents required by the Letter of Transmittal will be
 
                                      139

 
deposited by the Eligible Institution within three NYSE trading days after the
date of execution of the Notice of Guaranteed Delivery
 
WITHDRAWAL RIGHTS
 
  Tenders of Old Par Securities may be withdrawn at any time prior to 5:00
P.M., New York City time, on the Expiration Date. For a withdrawal to be
effective, a written notice of withdrawal must be received by the Exchange
Agent at one of the addresses set forth below under "--Exchange Agent." Any
such notice of withdrawal must specify the name of the person having tendered
the Old Par Securities to be withdrawn, identify the Old Par Securities to be
withdrawn (including the principal amount of such Old Par Securities), and
(where certificates for Old Par Securities have been transmitted) specify the
name in which such Old Par Securities are registered, if different from that
of the withdrawing holder. If certificates for Old Par Securities have been
delivered or otherwise identified to the Exchange Agent, then, prior to the
release of such certificates the withdrawing holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such holder is an Eligible Institution in which case such guarantee
will not be required. If Old Par Securities have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Par Securities and otherwise
comply with the procedures of such facility. All questions as to the validity,
form and eligibility (including time of receipt) of such notices will be
determined by the Trust, whose determination will be final and binding on all
parties. Any Old Par Securities so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any Old Par
Securities which have been tendered for exchange but which are not exchanged
for any reason will be returned to the holder thereof without cost to such
holder (or, in the case of Old Par Securities tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry transfer procedures described above, such Old Par Securities
will be credited to an account maintained with such Book-Entry Transfer
Facility for the Old Par Securities) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Old Par Securities may be retendered by following one of the procedures
described under "--Procedures for Tendering Old Par Securities" above at any
time on or prior to the Expiration Date.
 
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
 
  Notwithstanding any other provisions of the Exchange Offer, and subject to
its obligations pursuant to the Registration Rights Agreement, the Trust shall
not be required to accept for exchange, or to issue New Par Securities in
exchange for, any Old Par Securities and may terminate or amend the Exchange
Offer, if at any time before the acceptance of such New Par Securities for
exchange, any of the following events shall occur:
 
  If (i) the Registrants are not required to file the Exchange Offer
Registration Statement or permitted to consummate the Exchange Offer because
the Exchange Offer is not permitted by applicable law or Commission policy,
(ii) the Company has received an opinion of independent tax counsel
experienced in such matters to the effect that, as a result of the
consummation of the Exchange Offer, there is more than an insubstantial risk
that (x) the Trust would be subject to United States federal income tax with
respect to income received or accrued on the Debentures or New Debentures, (y)
interest payable by the Company on such Debentures or New Debentures would not
be deductible by the Company, in whole or in part, for United States federal
income tax purposes, or (z) the Trust would be subject to more than a de
minimis amount of other taxes, duties or other governmental charges or (iii)
any holder of Transfer Restricted Securities notifies the Company and the
Trust on or before the 20th Business Day following the consummation of the
Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer, (B) it may not resell the New Par
Securities, the New Trust Guarantees and the New Debentures acquired by it in
the Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (C) it is a broker-dealer and
owns Old Par Securities acquired directly from the Trust or an affiliate of
the Trust or in the Remarketing, the Registrants will file with the Commission
a Shelf Registration Statement to cover resales of the Par Securities by the
holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement.
 
                                      140

 
  The foregoing conditions are for the sole benefit of the Registrants and may
be asserted by the Registrants in whole or in part at any time and from time
to time in their sole discretion. The failure by the Registrants at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any
such right and such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
 
  In addition, the Trust will not accept for exchange any Old Par Securities
tendered, and no New Par Securities will be issued in exchange for any such
Old Par Securities, if at such time any stop order is threatened by the
Commission or in effect with respect to the Registration Statement of which
this Prospectus is a part or the qualification of the Indenture under the
Trust Indenture Act of 1939, as amended.
 
  The Exchange Offer is not conditioned on any minimum principal amount of Old
Par Securities being tendered for exchange.
 
EXCHANGE AGENT
 
  Chase Trust Company of California has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at the address set forth below. Questions and requests
for assistance, requests for additional copies of this Prospectus or of the
Letter of Transmittal and requests or Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
 
  Chase Trust Company, Exchange Agent
 
  By Hand/Overnight Courier/By Mail:
    c/o The Chase Manhattan Bank
    Attn: Mr. Carlos Estevez
          55 Water Street
          Second Floor, Room #234
          New York, New York 10041
 
  By Facsimile: (212) 638-7380
  Confirm by Telephone (212) 638-0828
 
  DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
 
  The Exchange Agent also acts as Property Trustee and Indenture Trustee.
 
FEES AND EXPENSES
 
  The Trust will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
 
  The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$200,000.
 
TRANSFER TAXES
 
  Holders who tender their Old Par Securities for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that
holders who instruct the Trust to register New Par Securities in the name of,
or request that Old Par Securities not tendered or not accepted in the
Exchange Offer be returned to, a person other than the registered tendering
holder will be responsible for the payment of any applicable transfer tax
thereon.
 
                                      141

 
CONSEQUENCES OF FAILURE TO EXCHANGE OLD PAR SECURITIES
 
  Holders of Old Par Securities who do not exchange their Old Par Securities
for New Par Securities pursuant to the Exchange Offer will continue to be
subject to the restrictions on transfer of such Old Par Securities as set
forth in the legend thereon as a consequence of the issuance of the Old Par
Securities pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state
securities laws. In general, the Old Par Securities may not be offered or
sold, unless registered under the Securities Act and applicable state
securities laws. None of the Trust, the Company nor the Subsidiary Guarantors
(collectively, the "Registrants") currently anticipate that it will register
Old Par Securities under the Securities Act. See "Description of Securities--
Exchange Offer; Registration Rights." Based on interpretations by the Staff of
the Division of Corporation Finance of the Commission, as set forth in no-
action letters issued to third parties, the Registrants believe that New Par
Securities issued pursuant to this Exchange Offer in exchange for Old Par
Securities may be offered for resale, resold and otherwise transferred by a
holder thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Par Securities are acquired in the
ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Par Securities. However, any holder of Old Par Securities who is an
"affiliate" of the Registrants (within the meaning of Rule 405 under the
Securities Act) or who intends to participate in the Exchange Offer for the
purpose of distributing New Par Securities, or any broker-dealer who purchased
Old Par Securities from the Trust to resell them pursuant to Rule 144A under
the Securities Act ("Rule 144A") or any other available exemption under the
Securities Act, (a) will not be able to rely on the interpretations of the
Staff of the Division of Corporation Finance of the Commission set forth in
the above-mentioned interpretive letters, (b) will not be permitted or
entitled to tender such Old Par Securities in the Exchange Offer and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Old Par
Securities unless such sale is made pursuant to an exemption from such
requirements. In addition, as described below, if any broker-dealer holds Old
Par Securities acquired for its own account as a result of market-making or
other trading activities and exchanges such Old Par Securities for New Par
Securities, then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Par Securities.
 
  Each holder of Old Par Securities who wishes to exchange Old Par Securities
for New Par Securities in the Exchange Offer will be required to represent
that (i) it is not an "affiliate" of the Registrants, (ii) any New Par
Securities to be received by it are being acquired in the ordinary course of
its business, (iii) it has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of
such New Par Securities, and (iv) if such holder is not a broker-dealer, such
holder is not engaged in, and does not intend to engage in, a distribution
(within the meaning of the Securities Act) of such New Par Securities. In
addition, the Registrants may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Registrants (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934 (the "Exchange Act")) on behalf of whom such holder holds
the Par Securities to be exchanged in the Exchange Offer. Each broker-dealer
that receives New Par Securities for its own account pursuant to the Exchange
Offer must acknowledge that it acquired the Old Par Securities for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Par Securities.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Based on the position
taken by the Staff of the Division of Corporation Finance of the Commission in
the interpretive letters referred to above, the Registrants believe that
broker-dealers who acquired Old Par Securities for their own accounts, as a
result of market-making activities or other trading activities ("Participating
Broker-Dealers") may fulfill their prospectus delivery requirements with
respect to the New Par Securities received upon exchange of such Old Par
Securities with this Prospectus, as it may be amended or supplemented from
time to time. Subject to certain exceptions, the Registrants have agreed that
this Prospectus, as it may be amended or supplemented from time to time, may
be
 
                                      142

 
used by a Participating Broker-Dealer in connection with resales of such New
Par Securities for a period ending 180 days after the Registration Statement
of which this Prospectus constitutes a part is declared effective. Any
Participating Broker-Dealer who is an "affiliate" of the Registrants (within
the meaning of Rule 405 under the Securities Act) may not rely on such
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
 
  Any Old Par Securities not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Declaration
(except for those rights relating to the Exchange Offer which terminate upon
consummation of the Exchange Offer). Following consummation of the Exchange
Offer, the holders of Old Par Securities will continue to be subject to all of
the existing restrictions upon transfer thereof and none of the Registrants
will have any further obligation to such holders (other than under certain
limited circumstances) to provide for registration under the Securities Act of
the Old Par Securities held by them. Any Old Par Securities which have not
been exchanged for New Par Securities pursuant to the Exchange Offer will be
mandatorily redeemed by the Company on the Remarketing Settlement Date, as
described under "Description of the Securities--Redemption--Transfer
Restricted Security Redemption." To the extent that Old Par Securities are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Old Par Securities could be adversely affected. See "Risk Factors--
Consequences of a Failure to Exchange Old Par Securities." In addition, to
comply with the securities laws of certain jurisdictions, if applicable, the
New Par Securities may not be offered or sold unless they have been registered
or qualified for sale in such jurisdictions or an exemption from registration
or qualification is available and is complied with. The Registrants have
agreed, pursuant to the Registration Rights Agreement, subject to certain
limitations specified therein, to register or qualify the New Par Securities
for offer or sale under the securities laws of such jurisdiction as any holder
reasonably requests in writing. Unless a holder so requests, the Registrants
do not currently intend to register or qualify the sale of the New Par
Securities in any such jurisdictions.
 
                                      143

 
                                   THE TRUST
 
  The Trust is a statutory business trust formed under the Delaware Business
Trust Act, as amended (the "Trust Act"), pursuant to (i) a declaration of
trust (as so amended and restated, the "Declaration") dated as of May 28,
1997, executed by the Company, as sponsor, and the trustees of the Trust and
(ii) a certificate of trust, dated as of May 28, 1997, filed with the
Secretary of State of the State of Delaware. The Company acquired Common
Securities in an aggregate liquidation amount equal to at least 3% of the
total capital of the Trust, at the same time as the Par Securities were sold.
The Trust used all the proceeds derived from the issuance of the Trust
Securities to purchase the Debentures and, accordingly, the assets of the
Trust consist solely of the Debentures. The Trust exists for the exclusive
purpose of (i) issuing and selling the Trust Securities representing undivided
beneficial ownership interests in the assets of the Trust, (ii) investing the
gross proceeds from such sales in the Debentures and (iii) engaging in only
those other activities necessary or incidental thereto.
 
  Pursuant to the Declaration, there are five trustees (the "Trustees") for
the Trust. Three of the Trustees (the "Regular Trustees") are individuals who
are employees or officers of or who are affiliated with the Company. The
fourth trustee is a financial institution that is unaffiliated with the
Company (the "Property Trustee"). The fifth trustee is an entity that
maintains its principal place of business in the State of Delaware (the
"Delaware Trustee"). Initially, Chase Trust Company of California, a state
banking corporation, will act as Property Trustee, and its affiliate, Chase
Manhattan Bank, a Delaware corporation, will act as Delaware Trustee until, in
each case, removed or replaced by the Company as holder of the Common
Securities. Chase Trust Company of California will also act as trustee under
the Trust Guarantee (the "Guarantee Trustee").
 
  The Property Trustee holds title to the Debentures for the benefit of the
holders of the Trust Securities and, as the holder of the Debentures, the
Property Trustee has the power to exercise all rights, powers and privileges
of a holder of Debentures under the Indenture. In addition, the Property
Trustee maintains exclusive control of a segregated non-interest bearing bank
account (the "Property Account") to hold all payments made in respect of the
Debentures for the benefit of the holders of the Trust Securities. The
Guarantee Trustee holds the Trust Guarantee for the benefit of the holders of
the Par Securities. The Company, as the holder of all the Common Securities,
has the right to appoint, remove or replace any of the Trustees and to
increase or decrease the number of Trustees, provided that the number of
Trustees will be at least three; provided further that at least one Trustee
will be a Delaware Trustee, at least one Trustee will be the Property Trustee
and at least one Trustee will be a Regular Trustee. The Company will pay all
fees and expenses related to the organization and operations of the Trust
(including any taxes, duties, assessments or governmental charges of whatever
nature (other than withholding taxes) imposed by the United States or any
other domestic taxing authority upon the Trust) and will be responsible for
all debts and obligations of the Trust (other than with respect to the Par
Securities).
 
  For so long as the Par Securities remain outstanding, the Company has
covenanted (i) to maintain directly or indirectly 100% ownership of the Common
Securities, (ii) to cause the Trust to remain a statutory business trust and
not to voluntarily dissolve, wind-up, liquidate or be terminated, except as
permitted by the Declaration, (iii) to use its commercially reasonable efforts
to ensure that the Trust will not be an "investment company" for purposes of
the 1940 Act and (iv) to take no action that would be reasonably likely to
cause the Trust to be classified as an association or a publicly traded
partnership taxable as a corporation for United States federal income tax
purposes.
 
  The rights of the holders of the Par Securities, including economic rights,
rights to information and voting rights, are set forth in the Declaration and
the Trust Indenture Act. See "Description of Securities." The Declaration and
the Trust Guarantee also incorporate by reference the terms of the Trust
Indenture Act.
 
  The location of the principal executive office of the Trust is c/o the
Company, 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance,
California, 90505, and its telephone number is (310) 373-1704.
 
                                      144

 
                           DESCRIPTION OF SECURITIES
 
DESCRIPTION OF THE COMMON SECURITIES
 
  The Company owns all of the non-transferable, beneficial ownership interests
represented by the Common Securities of the Trust. The Common Securities of
the Trust have an aggregate liquidation amount of $2,165,000. The Common
Securities are subordinated to the Par Securities in certain limited
circumstances with respect to Distributions and the amount payable on
redemption or liquidation, as described below and in the Declaration. This
summary of certain provisions of the Common Securities and the Declaration
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Declaration (as
supplemented or amended from time to time), including the definitions therein
of certain terms.
 
GENERAL
 
  Except as described under "--Subordination of Common Securities" below, the
Common Securities will rank on a parity, and payments of distributions on, and
amounts payable on redemption of, the Common Securities will be made thereon
pro rata, with the Par Securities.
 
VOTING RIGHTS
 
  Except as provided below and as otherwise required by law and the
Declaration, the Common Securities holder will have no voting rights.
 
  The Common Securities holder has the right to vote to appoint, remove or
replace any Trustee or to increase or decrease the number of Trustees, subject
to certain limitations as provided in the Declaration. In addition, the Common
Securities holder has voting rights substantially similar to the voting rights
of the holders of Par Securities. See "Description of Securities--Voting
Rights; Amendment of the Declaration." However, the Common Securities holder
has the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee, or to direct the
exercise of any trust or power conferred upon the Property Trustee under the
Declaration, only after all Trust Enforcement Events with respect to the Par
Securities have been cured, waived or otherwise eliminated. If the Property
Trustee fails to enforce its rights under the Debentures after the Common
Securities holder has made a written request, such Common Securities holder
may directly institute a legal proceeding against the Company to enforce the
Property Trustee's rights under the Debentures without first instituting any
legal proceeding against the Property Trustee or any other person or entity.
 
SUBORDINATION OF COMMON SECURITIES
 
  Payment of distributions on, and amounts payable on redemption of, the
Common Securities shall be made pro rata with payments of Distributions on,
and the Redemption Price of, the Par Securities, based on the liquidation
amount of such Common Securities and Par Securities; provided, however, that
if on any Distribution Date or redemption date an Indenture Event of Default
shall have occurred and be continuing, no payment of any Distribution on, or
Redemption Price of, any of the Common Securities, and no other payment on
account of the redemption, liquidation or other acquisition of such Common
Securities, shall be made unless payment in full in cash of all accumulated
and unpaid Distributions on all of the outstanding Par Securities for all
Distribution periods terminating on or prior thereto, or in the case of
payment of the Redemption Price the full amount of such Redemption Price of
all of the outstanding Par Securities then called for redemption, shall have
been made or provided for, and all funds available to the Property Trustee
shall first be applied to the payment in full in cash of all Distributions on,
or Redemption Price of, the Par Securities then due and payable.
 
DESCRIPTION OF THE PAR SECURITIES
 
  The Par Securities represent undivided beneficial ownership interests in the
assets of the Trust and the holders thereof are entitled to a preference in
certain circumstances with respect to Distributions and amounts payable on
redemption or liquidation over the Common Securities, as well as other
benefits as described in the
 
                                      145

 
Declaration. This summary of certain provisions of the Par Securities and the
Declaration does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the
Declaration, including the definitions therein of certain terms, and the Trust
Indenture Act. Wherever particular defined terms of the Declaration (as
supplemented or amended from time to time) are referred to herein, the
definitions of such defined terms are incorporated herein by reference. For
purposes of this summary, the term "Company" refers only to ICII and not to
any of its Subsidiaries.
 
GENERAL
 
  The Par Securities rank on a parity, and payments will be made thereon pro
rata, with the Common Securities except as described under "--Subordination of
Common Securities." Legal title to the Debentures is held by the Property
Trustee in trust for the benefit of the holders of the Trust Securities. The
Trust Guarantee executed by the Company for the benefit of the holders of the
Par Securities is a guarantee with respect to the Par Securities but does not
guarantee payment of Distributions or amounts payable on redemption or
liquidation of the Par Securities when the Trust does not have sufficient
funds available to make such payments. See "Description of Trust Guarantee."
The Company's obligations under the Trust Guarantee, taken together with its
obligations under the Declaration of Trust, the Debentures and the Indenture,
including its obligation to pay all costs, expenses and liabilities of the
Trust (other than with respect to the Par Securities), constitute a full and
unconditional guarantee of all of the Trust's obligations under the Par
Securities.
 
  Holders of the Par Securities have no preemptive or similar rights.
 
DISTRIBUTIONS
 
  From the date of original issuance to but excluding the Remarketing
Settlement Date, distributions will accumulate at the Initial Distribution
Rate of the stated liquidation amount of $1,000 per Par Security. From the
Remarketing Settlement Date to but excluding the date of redemption of the Par
Securities, holders of Par Securities will be entitled to receive
Distributions at the Adjusted Distribution Rate that results from the
Remarketing consummated on the Remarketing Settlement Date. The Adjusted
Distribution Rate will not exceed the Maximum Adjusted Distribution Rate. See
"--Remarketing--Remarketing Procedures."
 
  As used herein:
 
  (i) "Scheduled Remarketing Date" means the third Business Day prior to any
  Scheduled Remarketing Settlement Date;
 
  (ii) "Scheduled Remarketing Settlement Date" means June 14, 2002, or such
  other date determined pursuant to this definition, unless a Trust
  Enforcement Event has occurred and is continuing on the 25th Business Day
  prior to such Scheduled Remarketing Settlement Date, in which case the
  Scheduled Remarketing Settlement Date will be the 30th Business Day after
  the date of cure or waiver of such Trust Enforcement Event; provided that
  if (x) purchases and sales of Par Securities pursuant to a Remarketing are
  not consummated on any Scheduled Remarketing Settlement Date for any reason
  (including the Company's failure to make the deposit required in the event
  of a Special Mandatory Redemption) other than the occurrence and
  continuance of any other Trust Enforcement Event or if (y) the Company
  fails to redeem Debentures in connection with a Tax Opinion Redemption
  after cancelling the Remarketing, the next Scheduled Remarketing Settlement
  Date will be the 30th Business Day after such Scheduled Remarketing
  Settlement Date;
 
  (iii) "Remarketing Settlement Date" means the Scheduled Remarketing
  Settlement Date on which purchases and sales of Par Securities pursuant to
  a Remarketing are consummated;
 
  (iv) "Maximum Adjusted Distribution Rate" means the rate per annum,
  determined on the Scheduled Remarketing Date by the Remarketing Agent in
  its discretion, equal to the greater of (a) the 30-year Treasury Rate plus
  600 basis points and (b) a nationally-recognized high-yield index rate for
  similarly-rated issues, plus 100 basis points; and
 
                                      146

 
  (v) "30-year Treasury Rate" means the rate per annum equal to the semi-
  annual equivalent yield to maturity of the U.S. Treasury security used, in
  accordance with customary financial practice, as the benchmark pricing bond
  in pricing new issues of corporate debt securities of 30-year maturities on
  the Scheduled Remarketing Date.
 
  Distributions are payable semi-annually in arrears on June 15th (June 14 in
2002) and December 15th of each year, commencing December 15, 1997, and on the
Scheduled Remarketing Settlement Date. In the event that any date on which
Distributions are payable on the Par Securities is not a Business Day, then
payment of the Distributions payable on such date will be made on the next
succeeding day that is a Business Day (and without any additional
Distributions or other payment in respect of any such delay), except that, if
such Business Day is in the next succeeding calendar year, such payment will
be made on the immediately preceding Business Day, in each case with the same
force and effect as if made on the date such payment was originally payable
(each date on which Distributions are payable in accordance with the
foregoing, a "Distribution Date"). A "Business Day" means any day other than a
Saturday or a Sunday, or a day on which banking institutions in The City of
New York are authorized or required by law or executive order to remain closed
or a day on which the principal corporate trust office of the Property Trustee
or the Indenture Trustee (as defined herein) is closed for business. The
amount of Distributions payable for any period will be computed (i) for any
full 180-day semi-annual distribution period, on the basis of a 360-day year
of twelve 30-day months and (ii) for any period shorter than a full 180-day
semi-annual distribution period for which distributions are computed, on the
basis of a 30-day month and for periods less than a month, the actual number
of days elapsed per 30-day-month.
 
  Distributions on the Par Securities (other than distributions on a
redemption date) will be payable to the holders thereof as they appear on the
register of the Trust as of the close of business on the relevant record
dates, which, as long as the Par Securities are represented by one or more
global certificates ("Global Certificates"), will be the close of business on
the June 1 or December 1 next preceding the Distribution Date. Distributions
payable on any Par Securities that are not punctually paid on any Distribution
Date will cease to be payable to the person in whose name such Par Securities
are registered on the relevant record date, and such defaulted Distribution
will instead be payable to the person in whose name such Par Securities are
registered on the special record date or other specified date determined in
accordance with the Declaration.
 
  At all times, the Applicable Distribution Rate, the distribution payment
dates and other payment dates for the Par Securities will correspond to the
interest rate, interest payment dates and other payment dates on the
Debentures, which will be the sole assets of the Trust.
 
  Distributions on the Par Securities must be paid on the dates payable to the
extent that the Trust has funds available for the payment of such
Distributions. The revenue of the Trust available for distribution to holders
of its Par Securities will be limited to payments under the Debentures in
which the Trust has invested the proceeds from the issuance and sale of the
Trust Securities. See "Description of Debentures." If the Company does not
make interest payments on the Debentures, the Property Trustee will not have
funds available to pay Distributions on the Par Securities.
 
  Following the Remarketing Settlement Date, the Company will have the right
under the Indenture to defer the payment of interest on the Debentures at any
time or from time to time for a period not exceeding 10 consecutive semi-
annual periods (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the Debentures. Accordingly,
there could be multiple Extension Periods of varying terms throughout the term
of the Debentures. As a consequence of any such extension, semi-annual
Distributions on the Par Securities will be deferred by the Trust during any
such Extension Period. Distributions to which holders of the Par Securities
are entitled will accumulate and compound semi-annually at the Adjusted
Distribution Rate from the relevant payment date for such Distributions. The
term Distributions as used herein includes any such compounded amounts unless
the context otherwise requires. During any such Extension Period, the Company
may not, and may not permit any subsidiary of the Company to, (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or
(ii) make any payment of principal, interest or premium, if any, on or repay,
 
                                      147

 
repurchase or redeem any debt securities of the Company that rank on a parity
with or junior to the Debentures or make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any subsidiary of
the Company if such guarantee ranks on a parity with or junior in interest to
the Debentures (other than (a) dividends or distributions in common stock of
the Company, (b) payments under the Trust Guarantee, (c) any declaration of a
dividend in connection with the implementation of a stockholders' rights plan,
or the issuance of stock under any such plan in the future, or the redemption
or repurchase of any such rights pursuant thereto, and (d) purchases of common
stock related to the issuance of common stock or rights under any of the
Company's benefit plans). Prior to the termination of any such Extension
Period, the Company may further extend the Extension Period, provided that no
Extension Period may exceed 10 consecutive semi-annual periods or extend
beyond the Stated Maturity of the Debentures. Upon the termination of any such
Extension Period and the payment of all amounts then due on any Interest
Payment Date, the Company may elect to begin a new Extension Period, subject
to the foregoing requirements. See "Description of Debentures--Option to
Extend Interest Payment Period" and "United States Federal Income Tax
Consequences--Interest Income and Original Issue Discount." The Company has no
current intention of exercising its right, following the Remarketing
Settlement Date, to defer payments of interest by extending the interest
payment period of the Debentures.
 
REDEMPTION
 
  Upon the repayment or redemption, in whole or in part, of the Debentures
held by the Trust, whether at Stated Maturity or upon earlier redemption as
provided in the Indenture, the proceeds from such repayment or redemption will
be applied by the Property Trustee to redeem the Trust Securities. See
"Description of Debentures--Redemption" for a description of the Company's
options to redeem the Debentures. If less than all of the Debentures held by
the Trust are to be repaid or redeemed on a redemption date, then the proceeds
from such repayment or redemption will be allocated pro rata to the redemption
of the Trust Securities. In addition, if the Remarketing Agent is unable to
remarket all of the Par Securities tendered or deemed tendered for purchase in
the Remarketing, the Company will be required to redeem the Debentures as
described under "--Remarketing--Special Mandatory Redemption."
 
 Special Event Redemption or Distribution of Debentures; Shortening of Stated
Maturity
 
  If, at any time, either a Tax Event or an Investment Company Event (each, a
"Special Event") shall occur and be continuing, the Regular Trustees may,
within 90 days following the occurrence of such Special Event, elect to
dissolve the Trust upon not less than 30 nor more than 60 days' notice and,
after satisfaction of liabilities to creditors, if any, cause the Debentures
to be distributed to the holders of the Trust Securities in liquidation of the
Trust. If an Investment Company Event shall occur and be continuing, the
Company also has the option, after the Remarketing Settlement Date, to redeem
the Debentures, in whole but not in part (and thereby cause a mandatory
redemption of the Securities), at any time within 90 days following the
occurrence of such an Investment Company Event at a redemption price equal to
100% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of redemption. In addition, if a Tax Event shall occur
and be continuing and in the opinion of independent tax counsel to the Trust
experienced in such matters, there would in all cases, after effecting the
termination of the Trust and the distribution of the Debentures to the holders
of the Trust Securities in exchange therefor upon liquidation of the Trust, be
more than an insubstantial risk that the Tax Event would continue to exist,
then the Company will have the right (a) to shorten the Stated Maturity of the
Debentures to a date not earlier than June 14, 2012 (a "Maturity Advancement")
such that, in the opinion of such independent tax counsel, after advancing the
Stated Maturity of the Debentures, interest paid on the Debentures will be
deductible by the Company for United States federal income tax purposes or (b)
after the Scheduled Remarketing Date, to redeem the Debentures, in whole but
not in part (and thereby cause a mandatory redemption of the Par Securities),
at any time within 90 days following the occurrence of a Tax Event at a
redemption price equal to 100% of the aggregate principal amount thereof, plus
accrued and unpaid interest to the date of redemption. Under current United
States federal income tax law and interpretations thereof and assuming that,
as expected, the Trust is treated as a grantor trust, a distribution of the
Debentures should not be a taxable event to holders of the Par Securities.
Should there be a change in law, a change in legal interpretation, certain Tax
Events or other circumstances, however, the distribution could be a taxable
event to holders of the
 
                                      148

 
Par Securities. See "United States Federal Income Tax Consequences--
Distribution of Debentures or Cash upon Liquidation of the Trust."
 
  If the Company does not elect any of the options described above, the Par
Securities will remain outstanding until the repayment of the Debentures,
whether at maturity or redemption, and in the event a Tax Event has occurred
and is continuing, the Company will be obligated to pay any additional taxes,
duties, assessments and other governmental charges (other than withholding
taxes) to which the Trust has become subject as a result of a Tax Event. See
"Description of Debentures."
 
  A "Tax Event" means the receipt by the Company of an opinion of independent
tax counsel to the Company, experienced in such matters, to the effect that,
as a result of any amendment to, change in or announced proposed change in the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is adopted or
which proposed change, pronouncement or decision is announced on or after the
date of original issuance of the Par Securities, there is more than an
insubstantial risk that (i) the Trust is, or will be within 90 days of the
date of such opinion, subject to United States federal income tax with respect
to income received or accrued on the Debentures, (ii) interest payable by the
Company on such Debentures is not, or within 90 days of the date of such
opinion, will not be, deductible by the Company, in whole or in part, for
United States federal income tax purposes, or (iii) the Trust is, or will be
within 90 days of the date of such opinion, subject to more than a de minimis
amount of other taxes, duties or other governmental charges. "Investment
Company Event" means the receipt by the Trust of an opinion of counsel,
rendered by a law firm having a recognized national securities practice, to
the effect that, as a result of the occurrence of a change in law or
regulation or a change in interpretation or application of law or regulation
by any legislative body, court, governmental agency or regulatory authority (a
"Change in 1940 Act Law"), the Trust is or will be considered an "investment
company" that is required to be registered under the Investment Company Act of
1940, as amended (the "1940 Act"), which Change in 1940 Act Law becomes
effective on or after the date of original issuance of the Securities.
 
 Tax Opinion Redemption
 
  If the Company receives a Tax Opinion at least 35 business days prior to the
Election Date, the Remarketing may be cancelled at the option of the Company,
in which case the Debentures (and, thus, the Securities) would be redeemed by
the Company on the Scheduled Remarketing Settlement Date, in whole but not in
part, at a redemption price equal to 100% of the principal amount of such
Debentures plus accrued and unpaid interest thereon to such Scheduled
Remarketing Settlement Date.
 
  As used herein, "Tax Opinion" means an opinion of an independent tax counsel
to the Company experienced in such matters to the effect that, as a result of
(a) any amendment to, or change (including any announced proposed change) in,
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or (b) any official
administrative pronouncement or judicial decision interpreting or applying
such laws or regulations, or which amendment or change is effective or such
proposed change, pronouncement or decision is announced on or after the date
of original issuance of the Par Securities, that it is more likely than not
that (i) the Trust will be, following the Remarketing Settlement Date, subject
to United States federal income tax with respect to interest accrued or
received on the Debentures, (ii) the Trust will be, following the Remarketing
Settlement Date, subject to more than a de minimis amount of taxes, duties or
other governmental charges, or (iii) interest payable to the Trust on the
Debentures, following the Remarketing Settlement Date, will not be deductible,
in whole or in part, by the Company for United States federal income tax
purposes.
 
 Transfer Restricted Security Redemption
 
  Upon consummation of the Exchange Offer, the Company will be required, on
the Remarketing Settlement Date, to redeem, in whole (but not in part),
certain Debentures (the ownership of which is represented by the Par
 
                                      149

 
Securities) which were not exchanged pursuant to the Exchange Offer (a
"Transfer Restricted Security Redemption"). As part of a Transfer Restricted
Security Redemption, on the Schedule Remarketing Settlement Date such Old Par
Securities will be exchanged with the Trust for Debentures having an aggregate
principal amount equal to the aggregate liquidation of such Old Par Securities
and such Debentures shall immediately be redeemed by the Company at a
redemption price equal to 100% of the principal amount thereof plus accrued
and unpaid interest (including Additional Interest), if any, to the date of
redemption.
 
REDEMPTION PROCEDURES
 
  Set forth below are procedures applicable to a redemption of Par Securities
other than a Special Mandatory Redemption of all of the Par Securities.
Procedures applicable to a Special Mandatory Redemption are set forth under
"--Remarketing--Special Mandatory Redemption."
 
  Par Securities redeemed on each redemption date will be redeemed at the
redemption price in respect of the Debentures plus an amount equal to accrued
and unpaid Distributions thereon through the date of redemption (the
"Redemption Price") with the applicable proceeds from the contemporaneous
redemption or payment of the Debentures. Redemptions of the Par Securities
will be made and the Redemption Price will be payable on each redemption date
only to the extent that the Trust has sufficient funds available for the
payment of such Redemption Price. See also "--Subordination of Common
Securities."
 
  Notice of any redemption (other than a Special Mandatory Redemption) will be
mailed at least 30 days but not more than 60 days before the redemption date
to each holder of Par Securities to be redeemed at its registered address. If
the Trust gives a notice of redemption in respect of the Par Securities or if
the Par Securities are to be redeemed following a Special Mandatory Redemption
of all of the Debentures, then, by 12:00 noon, New York City time, on the
redemption date (including the Remarketing Settlement Date), to the extent
funds are available, the Property Trustee will deposit irrevocably with DTC
funds sufficient to pay the applicable Redemption Price for all securities
held in DTC and will give DTC irrevocable instructions and authority to pay
the Redemption Price to the holders of the Par Securities. See "Book-Entry
Issuance." If any Par Securities are not represented by one or more Global
Certificates, the Trust, to the extent funds are available, will irrevocably
deposit with the Paying Agent (as defined herein) for such Par Securities
funds sufficient to pay the applicable Redemption Price and will give the
paying agent irrevocable instructions and authority to pay the Redemption
Price to the holders thereof upon surrender of their certificates evidencing
the Par Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the redemption date for any Par Security called for redemption will
be payable to the holders of such Par Security on the relevant record dates
for the related Distribution Dates. If notice of redemption shall have been
given and funds deposited as required, then immediately prior to the close of
business on the date of such deposit, all rights of the holders of such Par
Securities so called for redemption will cease, except the right of the
holders of such Par Securities to receive the Redemption Price, but without
interest on such Redemption Price, and such Par Securities will cease to be
outstanding. In the event that any date fixed for redemption of Par Securities
is not a Business Day, then payment of the Redemption Price payable on such
date will be made on the next succeeding day which is a Business Day (and
without any interest or other payment in respect of any such delay), except
that, if such Business Day falls in the next calendar year, such payment will
be made on the immediately preceding Business Day, in each case with the same
force and effect as if made on the date such payment was originally payable.
 
  In the event that payment of the Redemption Price in respect of Par
Securities called for redemption is improperly withheld or refused and not
paid either by the Trust or by the Company pursuant to the Trust Guarantee as
described under "Description of Trust Guarantee," Distributions on such Par
Securities will continue to accumulate at the then Applicable Distribution
Rate in effect at the beginning of the related interest period, or increased,
to the extent permitted by applicable law, if the Remarketing has not occurred
on a Scheduled Remarketing Date, from the redemption date originally
established by the Trust for the Par Securities to the date such Redemption
Price is actually paid, in which case the actual payment date will be the date
fixed for redemption for purposes of calculating the Redemption Price. See "--
Distributions."
 
                                      150

 
  The Trust may not redeem fewer than all of the outstanding Par Securities
unless all accrued and unpaid distributions have been paid on all Par
Securities for all semi-annual distribution periods terminating on or prior to
the date of redemption. If fewer than all of the Trust Securities issued by
the Trust are to be redeemed on a redemption date, then the aggregate amount
of such Trust Securities to be redeemed will be allocated pro rata among the
Par Securities and the Common Securities. If Par Securities are represented by
one or more Global Certificates, they will be redeemed as described below
under "Book-Entry Issuance." The particular Par Securities to be redeemed will
be selected on a pro rata basis not more than 60 days prior to the redemption
date by the Property Trustee from the outstanding Par Securities not
previously called for redemption, by such method as the Property Trustee shall
deem fair and appropriate and which may provide for the selection for
redemption of portions (equal to $1,000 or integral multiples of $1,000 in
excess thereof) of the liquidation preference of Par Securities of
denominations larger than $1,000. The Property Trustee will promptly notify
the Trust registrar in writing of the Par Securities selected for redemption
and, in the case of any Par Security selected for partial redemption, the
liquidation amount thereof to be redeemed. For all purposes of the
Declaration, unless the context otherwise requires, all provisions relating to
the redemption of Par Securities shall relate, in the case of any Par Security
redeemed or to be redeemed only in part, to the portion of the aggregate
liquidation amount of Par Securities which has been or is to be redeemed.
 
  Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Par Securities by tender, in the open
market or by private agreement.
 
 Change of Control
 
  The Declaration provides that upon the occurrence of a Change of Control on
or prior to the Remarketing Settlement Date, each holder of Par Securities
will have the right to require the Trust to cause all or any part (equal to
$1,000 liquidation amount or any integral multiple thereof) of the Par
Securities to be exchanged for an equivalent principal amount of Debentures.
Promptly thereafter, such Debentures will be repurchased by the Company
pursuant to the Indenture, as described below (the "Change of Control Offer"),
at an offer price in cash equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest thereon to the date of purchase (the
"Change of Control Payment").
 
  Within 10 days following any Change of Control, the Company will notify the
Trust of such Change of Control and the Trust will mail a notice to each
holder describing the transaction or transactions that constitute the Change
of Control and offering to exchange the Par Securities for the Debentures
pursuant to the procedures required by the Declaration and described in such
notice. The Trust and the Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in
connection with the exchange of the Par Securities and the repurchase of the
Debentures as a result of a Change of Control.
 
  The Change of Control Offer will remain open for a period of 20 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Change of Control Offer
Period"). No later than five Business Days after the termination of the Change
of Control Offer Period (the "Change of Control Purchase Date"), the Trust
will accept all Par Securities tendered in response to the Change of Control
Offer and the Company will repurchase all Debentures exchanged for such Par
Securities. Payment for the Debentures exchanged for any Par Securities so
accepted will be made in the same manner as interest payments are made.
 
  On the Change of Control Purchase Date, the Trust will, to the extent
lawful, (a) accept for exchange all Par Securities or portions thereof
properly tendered pursuant to the Change of Control Offer, (b) deliver or
cause to be delivered to the Property Trustee the Par Securities so accepted
together with a certificate of the Regular Trustees stating the aggregate
liquidation amount of Par Securities or portions thereof being exchanged by
the Trust and (c) the Trust will then exchange, for such Par Securities,
Debentures having an equivalent aggregate principal amount. The Company will
promptly deposit with the Indenture Trustee an amount equal to the Change
 
                                      151

 
of Control Payment in respect of all Par Securities or portions thereof so
exchanged. The Indenture Trustee will promptly mail to each holder of Par
Securities so exchanged the Change of Control Payment for such Par Securities,
and the Trust will promptly authenticate and mail (or cause to be transferred
by book entry) to each holder a new Par Security equal in liquidation amount
to any unexchanged portion of the Par Securities surrendered, if any; provided
that each such new Par Securities will be in a liquidation amount of $1,000 or
an integral multiple thereof. The Trust and the Company will publicly announce
the results of the Change of Control Offer on or as soon as practicable after
the Change of Control Payment Date.
 
 Asset Sales
 
  The Declaration provides that if the Trust owns all of the Debentures and if
the aggregate amount of Excess Proceeds under the covenant entitled
"Description of Debentures--Certain Covenants of the Company--Asset Sales"
exceeds $5.0 million, the Trust will be required to make an offer to all
holders of Par Securities (an "Asset Sale Offer") to exchange, for such Par
Securities the maximum principal amount of Debentures that may be exchanged
under such covenant out of the Excess Proceeds, which Debentures shall then be
repurchased by the Company at a price equal to 100% of the principal amount
thereof plus accrued and unpaid interest thereon to the date of purchase, in
accordance with the procedures set forth in the Declaration and the Indenture.
 
  An Asset Sale Offer will remain open for a period of 20 Business Days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Asset Sale Offer Period"). No later
than five Business Days after the termination of the Asset Sale Offer Period
(the "Asset Sale Purchase Date"), the Trust will accept for exchange up to the
liquidation amount of Par Securities required to be exchanged pursuant to this
covenant (the "Asset Sale Offer Amount") or, if less than the Asset Sale Offer
Amount has been tendered, all Par Securities tendered in response to the Asset
Sale Offer.
 
  On or before the Asset Sale Purchase Date, the Trust will, to the extent
lawful, accept for exchange, on a pro rata basis to the extent necessary, the
Asset Sale Offer Amount of Par Securities or portions thereof tendered
pursuant to the Asset Sale Offer, or if less than the Asset Sale Offer Amount
has been tendered, all Par Securities tendered, and the Regular Trustees will
deliver to the Property Trustee a certificate stating that such Par Securities
or portions thereof were accepted for exchange by the Trust in accordance with
the terms of this covenant. Promptly following such exchange, the Company will
(but in any case not later than five days after the Asset Sale Purchase Date)
mail or deliver to each tendering holder an amount equal to the purchase price
of the Debentures exchanged with such holder by the Trust, and the Trust will
promptly issue a new Par Security, and the Trust will authenticate and mail or
deliver such new Par Security to such holder, in a liquidation amount equal to
any unexchanged portion of the Par Security surrendered. Any Par Security not
so accepted will be promptly mailed or delivered by the Trust to the holder
thereof. The Trust and the Company will publicly announce the results of the
Asset Sale Offer on the Asset Sale Purchase Date.
 
REMARKETING
 
 Remarketing Procedures
 
  Set forth below is a summary of the procedures to be followed in connection
with the Remarketing of the Par Securities (or, if the Debentures have been
distributed to holders of the Par Securities in liquidation of the Trust, the
Debentures):
 
  If the Company receives a Tax Opinion at least 35 Business Days prior to the
Election Date, the Company has the option to cancel the Remarketing by giving,
to the Property Trustee, DTC and the Remarketing Agent written notice of such
cancellation. In such event, all of the Debentures (and, thus, the Par
Securities) are subject to a Tax Opinion Redemption by the Company on the
Scheduled Remarketing Date. See "--Redemption--Tax Opinion Redemption."
 
  If the Company does not receive such a Tax Opinion or if the Company does
not elect to cancel the Remarketing after receiving such a Tax Opinion, not
less than 20 nor more than 35 Business Days prior to the
 
                                      152

 
Election Date, the Trust is required to give a Notice of Remarketing of the
Securities to DTC. Such notice will describe the Remarketing and will be
accompanied by (i) an offering memorandum relating to the Par Securities and
to the Remarketing and (ii) a Notice of Election to be completed and delivered
by the holders of Par Securities. In addition, if the Company is required to
redeem Debentures (and, thus, Par Securities) in connection with a Transfer
Restricted Security Redemption, holders of such Par Securities will receive
notice of such redemption at or prior to the time when the Notice of
Remarketing of the Par Securities is given to DTC. Such holders may not tender
their Par Securities for repurchase in the Remarketing.
 
  Not later than 4:00 P.M., New York City time, on the Election Date, each
holder of Par Securities may give, through the facilities of DTC, a notice to
the Property Trustee of its election ("Notice of Election") (i) to retain and
not to have all or any portion of the Par Securities owned by it remarketed in
the Remarketing to be conducted on the Scheduled Remarketing Date or (ii) to
tender all or any portion of such Par Securities for purchase in the
Remarketing (such portion, in either case, is required to be in the
liquidation amount of $1,000 or any integral multiple thereof). Any Notice of
Election given to the Property Trustee will be irrevocable and may not be
conditioned upon the level at which the Adjusted Distribution Rate is
established in the Remarketing. Promptly after 4:30 P.M., New York City time,
on the Election Date, the Property Trustee, based on the Notices of Election
received by it through DTC prior to such time, will notify the Trust, the
Company and the Remarketing Agent of the number of Par Securities to be
retained by holders of Par Securities and the number of Par Securities
tendered for purchase in the Remarketing.
 
  If any holder of Par Securities gives a Notice of Election to tender Par
Securities as described in clause (ii) in the prior paragraph, the Par
Securities so subject to such Notice of Election will be deemed tendered for
purchase in the Remarketing, notwithstanding any failure by such holder to
deliver or properly deliver such Par Securities to the Remarketing Agent for
purchase.
 
  IF ANY HOLDER OF PAR SECURITIES FAILS TIMELY TO DELIVER A NOTICE OF
ELECTION, AS DESCRIBED ABOVE, SUCH PAR SECURITIES WILL BE DEEMED TENDERED FOR
PURCHASE IN THE REMARKETING, NOTWITHSTANDING SUCH FAILURE OR THE FAILURE BY
SUCH HOLDER TO DELIVER OR PROPERLY DELIVER SUCH PAR SECURITIES TO THE
REMARKETING AGENT FOR PURCHASE.
 
  The right of each holder of Par Securities to have Par Securities tendered
for purchase shall be limited to the extent that (i) the Remarketing Agent
conducts a remarketing pursuant to the terms of the Remarketing Agreement (as
defined herein), (ii) Par Securities tendered have not been called for
redemption, (iii) the Remarketing Agent is able to find purchasers for the
tendered Par Securities at an Adjusted Distribution Rate that does not exceed
the Maximum Distribution Rate and (iv) such purchaser or purchasers deliver
the purchase price therefor to the Remarketing Agent.
 
  If a holder of Par Securities has indicated by timely delivery of a Notice
of Election that it wishes to tender securities held by it for purchase in the
Remarketing and such holder desires to purchase Par Securities in the
Remarketing at or above a specified rate, such holder should separately notify
the Remarketing Agent in accordance with the procedures specified in the
Notice of Remarketing and indicate the specified rate per annum at or above
which such holder will purchase Par Securities. In such case, the Remarketing
Agent will give priority to a holder's purchase of a number of Securities
equal to the number of Par Securities tendered by such holder in the
Remarketing, provided that the Adjusted Distribution Rate is not less than the
specified rate.
 
  If holders of Par Securities submit Notices of Election to retain all of the
Par Securities then outstanding, the Adjusted Distribution Rate will be the
rate determined by the Remarketing Agent in its sole discretion, as the rate
that would have been established had a Remarketing been held on the Scheduled
Remarketing Date.
 
  On the Scheduled Remarketing Date, the Remarketing Agent will use
commercially reasonable efforts to remarket, at a price equal to 100% of the
liquidation amount thereof, Par Securities tendered or deemed tendered for
purchase. Prior to 4:00 P.M., New York City time, on the Scheduled Remarketing
Date, the Remarketing Agent will determine the Adjusted Distribution Rate,
which will be the rate per annum (rounded to the nearest
 
                                      153

 
one-thousandth (0.001) of one percent per annum) which the Remarketing Agent
determines, in its sole judgment, to be the lowest rate per annum, if any, not
exceeding the Maximum Adjusted Distribution Rate, that will enable it to
remarket all Par Securities tendered or deemed tendered for remarketing at a
price of $1,000 per Security. Notwithstanding the foregoing, if the
Remarketing Agent is able to remarket some, but is unable to remarket all, of
the Par Securities tendered or deemed tendered for purchase in the
Remarketing, the Adjusted Distribution Rate will be the highest rate, not
exceeding the Maximum Adjusted Distribution Rate, required to remarket the Par
Securities sold in the Remarketing.
 
  If the Remarketing Agent is unable to remarket by 4:00 P.M., New York City
time, on the Scheduled Remarketing Date, all Par Securities tendered or deemed
tendered for purchase at a price of $1,000 per Security, each holder that
tendered Par Securities for sale shall sell a number of Par Securities on a
pro rata basis, to the extent practicable, or by lot, as determined by the
Remarketing Agent in its sole discretion, based on the number of orders to
purchase Par Securities in the Remarketing. If the allocation procedures
described in the preceding sentence would result in the sale of a fraction of
a Par Security, the Remarketing Agent will, in its sole discretion, round up
or down the number of Par Securities sold by each holder in the Remarketing so
that each Security sold in the Remarketing will be a whole Security and the
total number of Par Securities sold equals the total number of Par Securities
purchased in the Remarketing.
 
  By approximately 4:30 P.M., New York City time, on the Scheduled Remarketing
Date, the Remarketing Agent will advise, by telephone (i) DTC, the Property
Trustee, the Indenture Trustee, the Trust and the Company of the Adjusted
Distribution Rate determined in the Remarketing and the number of Par
Securities sold in the Remarketing, (ii) each purchaser (or the DTC
Participant thereof) of the Adjusted Distribution Rate determined in the
Remarketing and the number of Par Securities such purchaser is to purchase and
(iii) each purchaser to give instructions to its DTC Participant to pay the
purchase price on the Scheduled Remarketing Settlement Date in same day funds
against delivery of the Par Securities purchased through the facilities of
DTC.
 
  All Par Securities tendered or deemed tendered in the Remarketing will be
automatically delivered to the account of the Remarketing Agent through the
facilities of DTC against payment of the purchase price therefor on the
Scheduled Remarketing Settlement Date. The Remarketing Agent will make payment
to the DTC Participant of each tendering holder of Par Securities in the
Remarketing through the facilities of DTC by the close of business on the
Scheduled Remarketing Settlement Date.
 
  In accordance with DTC's normal procedures, on the Remarketing Settlement
Date, the transactions described above with respect to each Par Security
tendered for purchase and sold in the Remarketing will be executed through DTC
and the accounts of the DTC Participants will be debited and credited and such
Par Securities delivered by book entry as necessary to effect purchases and
sales of such Par Securities. DTC is expected to make payment in accordance
with its normal procedures.
 
  If any holder selling Par Securities in the Remarketing fails to deliver
such Par Securities, the DTC Participant of such selling holder and of any
other person that was to have purchased Par Securities in the Remarketing may
deliver to any such other person a number of Par Securities that is less than
the number of Par Securities that otherwise was to be purchased by such
person. In such event, the number of Par Securities to be so delivered will be
determined by such DTC Participant and delivery of such lesser number of Par
Securities will constitute good delivery.
 
  The Remarketing Agent is not obligated to purchase any Par Securities that
would otherwise remain unsold in the Remarketing. Neither the Trust, any
Trustee, the Company nor the Remarketing Agent shall be obligated in any case
to provide funds to make payment upon tender of Par Securities for
Remarketing.
 
 Special Mandatory Redemption
 
  If, by 4:00 P.M., New York City time, on any Scheduled Remarketing Date, the
Remarketing Agent is unable to remarket, at a price of $1,000 per Par
Security, all of the Par Securities tendered or deemed tendered for purchase
in the Remarketing on such Scheduled Remarketing Date, then (i) such unsold
Par Securities shall
 
                                      154

 
be exchanged on the related Scheduled Remarketing Settlement Date with the
Trust for Debentures having an aggregate principal amount equal to the
aggregate liquidation amount of such unsold Par Securities and such Debentures
shall be immediately redeemed, unless (ii) as a result of such redemption,
less than $25.0 million principal amount of Debentures would remain
outstanding. In such latter event, the Company is required to redeem on such
Scheduled Remarketing Settlement Date all of the Debentures (thereby causing
the Trust to redeem all of the outstanding Par Securities) and the Remarketing
will be cancelled. In either case of (i) or (ii) above, the redemption price
of the Debentures shall be 100% of the principal amount of the outstanding
Debentures so redeemed. Because the Remarketing Settlement Date will also be a
Distribution Date, Distributions to be paid on such Distribution Date for the
Par Securities will be paid to the person in whose name the Par Securities are
registered on the corresponding record date.
 
  AS A RESULT OF THE SPECIAL MANDATORY REDEMPTION, ALL PAR SECURITIES TENDERED
OR DEEMED TENDERED FOR PURCHASE IN THE REMARKETING WILL BE PURCHASED IN THE
REMARKETING, OR MANDATORILY REDEEMED, ON THE REMARKETING SETTLEMENT DATE.
 
  If the Company is required to redeem the Debentures on the Scheduled
Remarketing Settlement Date as part of a Special Mandatory Redemption, by
12:00 Noon, New York City time, on the Business Day prior to the Scheduled
Remarketing Settlement Date, the Company is required to deposit irrevocably
with the Indenture Trustee funds sufficient to pay the redemption price with
respect to the Debentures to be redeemed.
 
 Remarketing Agent
 
  The Company and the Trust have entered into a Remarketing Agreement (the
"Remarketing Agreement") with the Remarketing Agent which provides, among
other things, that Lehman Brothers Inc. will act as exclusive Remarketing
Agent and will use commercially reasonable efforts to remarket Par Securities
tendered or deemed tendered for purchase in the Remarketing at a price of
$1,000 per Par Security and determine the Adjusted Distribution Rate. Under
certain circumstances, some portion of the Par Securities tendered in the
Remarketing may be purchased by the Remarketing Agent. See "--Remarketing
Procedures."
 
  The Remarketing Agreement provides that the Remarketing Agent shall incur no
liability to the Company or to any holder of Par Securities in its individual
capacity or as Remarketing Agent for any action or failure to act in
connection with a Remarketing or otherwise, except as a result of gross
negligence or willful misconduct on its part.
 
  The Company has agreed to indemnify the Remarketing Agent against certain
liabilities, including liabilities under the Securities Act, arising out of or
in connection with its duties under the Remarketing Agreement.
 
  The Remarketing Agreement also provides that any Remarketing Agent may
resign and be discharged from its duties and obligations thereunder; provided,
however, that no such resignation will become effective until the Company has
appointed at least one nationally recognized broker-dealer as successor
Remarketing Agent and such successor Remarketing Agent has entered into a
remarketing agreement with the Company on terms no less favorable than those
set forth in the Remarketing Agreement. In such case, the Company will use its
best efforts to appoint a successor Remarketing Agent and enter into such a
remarketing agreement with such person as soon as reasonably practicable.
 
SUBORDINATION OF COMMON SECURITIES
 
  Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the liquidation
amount of such Trust Securities; provided, however, that if on any
Distribution Date or redemption date an Indenture Event of Default shall have
occurred and be continuing, no payment of any Distribution on, or Redemption
Price of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of such Common Securities, shall
be made unless payment in full in cash of all accumulated and unpaid
Distributions on all of the outstanding Par Securities for all Distribution
periods terminating on or prior thereto, or in the case of payment of the
Redemption Price the full
 
                                      155

 
amount of such Redemption Price on all of the outstanding Par Securities then
called for redemption, shall have been made or provided for, and all funds
available to the Property Trustee shall first be applied to the payment in
full in cash of all Distributions on, or Redemption Price of the Par
Securities then due and payable.
 
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
 
  Pursuant to the Declaration, the Trust shall automatically dissolve on the
first to occur of: (i) certain events of bankruptcy, dissolution or
liquidation of the Company; (ii) the distribution of the Debentures to the
holders of the Trust Securities; (iii) the redemption of all of the Par
Securities in connection with the maturity or redemption of all of the
Debentures and (iv) the entry by a court of competent jurisdiction of an order
for the dissolution of the Trust.
 
  If an early dissolution occurs as described in clause (i), (ii) or (iv)
above, the Trust shall be liquidated by the Trustees as expeditiously as the
Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, to the
holders of the Trust Securities their pro rata interest in the Debentures,
unless such distribution is determined by the Property Trustee not to be
practical, in which event such holders will be entitled to receive out of the
assets of the Trust available for distribution to holders, after satisfaction
of liabilities to creditors of the Trust as provided by applicable law, an
amount equal to, in the case of holders of Par Securities, the aggregate of
the liquidation amount plus accrued and unpaid Distributions thereon to the
date of payment (such amount being the "Liquidation Distribution"). If such
Liquidation Distribution can be paid only in part because the Trust has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then the amounts payable directly by the Trust on the Par
Securities shall be paid on a pro rata basis. The holder(s) of the Common
Securities will be entitled to receive distributions upon any such liquidation
pro rata with the holders of the Par Securities, except that if an Indenture
Event of Default has occurred and is continuing, the Par Securities shall have
a priority over the Common Securities.
 
  After the liquidation date is fixed for any distribution of Debentures to
holders of the Par Securities (i) the Par Securities will no longer be deemed
to be outstanding, (ii) DTC or its nominee, as a record holder of Par
Securities, will receive a registered Global Certificate or Certificates
representing the Debentures to be delivered upon such distribution and (iii)
any certificates representing Par Securities not held by DTC or its nominee
will be deemed to represent Debentures having a principal amount equal to the
liquidation amount of such Par Securities, and bearing accrued and unpaid
interest in an amount equal to the accrued and unpaid Distributions on such
Par Securities until such certificates are presented for cancellation
whereupon the Company will issue to such holder, and the Indenture Trustee
will authenticate, a certificate representing such Debentures.
 
TRUST ENFORCEMENT EVENTS
 
  An Indenture Event of Default that has occurred and is continuing
constitutes a "Trust Enforcement Event" under the Declaration with respect to
the Trust Securities, provided that pursuant to the Declaration, the holder of
the Common Securities will be deemed to have waived any Trust Enforcement
Event with respect to the Common Securities until all Trust Enforcement Events
with respect to the Par Securities have been cured, waived or otherwise
eliminated. Until such Trust Enforcement Event with respect to the Par
Securities has been so cured, waived or otherwise eliminated, the Property
Trustee will be deemed to be acting solely on behalf of the holders of the Par
Securities and only the holders of the Par Securities will have the right to
direct the Property Trustee with respect to certain matters under the
Declaration, and therefore the Indenture.
 
  Upon the occurrence of a Trust Enforcement Event, the Indenture Trustee or
the Property Trustee as the holder of the Debentures will have the right under
the Indenture to declare the principal of and interest on the Debentures to be
immediately due and payable. Each of the Company and the Trust is required to
file annually with the Property Trustee an officers' certificate as to its
compliance with all conditions and covenants under the Declaration.
 
  If the Property Trustee fails to enforce its rights with respect to the
Debentures, any holder of Par Securities may institute a legal proceeding
directly against the Company to enforce the Property Trustee's rights under
such
 
                                      156

 
Debentures without first instituting any legal proceeding against the Property
Trustee or any other person or entity. In addition, if a Trust Enforcement
Event has occurred and is continuing and such event is attributable to the
failure of the Company to pay interest, principal or other required payments
on the Debentures on the date such interest, principal or other payment is
otherwise payable, then a holder of Par Securities may, on or after the
respective due dates specified in the Debentures, institute a proceeding
directly against the Company under the Indenture for enforcement of payment on
Debentures having a principal amount equal to the aggregate liquidation amount
of the Par Securities held by such holder (a "Direct Action"). In connection
with such Direct Action, the rights of the Company will be subrogated to the
rights of such holder of Par Securities to the extent of any payment made by
the Company to such holder of Par Securities.
 
VOTING RIGHTS; AMENDMENT OF THE DECLARATION
 
  Except as provided below and under "Description of Trust Guarantee--
Amendments and Assignment" and as otherwise required by law and the
Declaration, the holders of the Securities will have no voting rights.
 
  So long as any Debentures are held by the Property Trustee, the holders of a
majority in liquidation amount of the Par Securities shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Property Trustee, or to direct the exercise of any trust or
power conferred upon the Property Trustee under the Declaration, including the
right to direct the Property Trustee, as holder of the Debentures, to (i)
exercise the remedies available to it under the Indenture as a holder of the
Debentures, (ii) consent to any amendment or modification of the Indenture or
the Debentures where such consent shall be required or (iii) waive any past
default and its consequences that is waivable under the Indenture; provided,
however, that if an Indenture Event of Default has occurred and is continuing,
then the holders of 25% of the aggregate liquidation amount of the Par
Securities may direct the Property Trustee to declare the principal of and
interest on the Debentures due and payable; provided, further, that where a
consent or action under the Indenture would require the consent or act of the
holders of more than a majority of the aggregate principal amount of
Debentures affected thereby, only the holders of the percentage of the
aggregate stated liquidation amount of the Par Securities which is at least
equal to the percentage required under the Indenture may direct the Property
Trustee to give such consent to take such action. The Property Trustee shall
notify each holder of the Par Securities of any notice of any Indenture Event
of Default which it receives from the Company with respect to the Debentures.
Except with respect to directing the time, method, and place of conducting a
proceeding for a remedy, the Property Trustee shall be under no obligation to
take any of the actions described in clauses (i) and (ii) above unless the
Property Trustee has obtained an opinion of independent tax counsel to the
effect that the Trust will not fail to be classified as a grantor trust for
United States federal income tax purposes, as a result of such action, and
each holder will be treated as owning an undivided beneficial ownership
interest in the Debentures.
 
  The Declaration may be amended from time to time by the Company and a
majority of the Regular Trustees (and in certain circumstances the Property
Trustee and the Delaware Trustee), without the consent of the holders of the
Par Securities, (i) to cure any ambiguity, correct or supplement any
provisions in the Declaration that may be defective or inconsistent with any
other provision, or to make any other provisions with respect to matters or
questions arising under the Declaration that shall not be inconsistent with
the other provisions of the Declaration, or (ii) to modify, eliminate or add
to any provisions of the Declaration to such extent as shall be necessary to
ensure that the Trust will be classified for United States federal income tax
purposes as a grantor trust at all times that any Trust Securities are
outstanding or to ensure that the Trust will not be required to register as an
"investment company" under the 1940 Act, provided, however, that such action
shall not adversely affect in any material respect the interests of any holder
of Trust Securities, and any amendments of the Declaration shall become
effective when notice thereof is given to the holders of Trust Securities. The
Declaration may be amended by the Company and a majority of the Regular
Trustees with (i) the consent of holders representing not less than a majority
in liquidation amount of the outstanding Trust Securities and (ii) receipt by
the Regular Trustees of an opinion of counsel to the effect that such
amendment or the exercise of any power granted to the Regular Trustees in
accordance with such amendment will not affect the Trust's status for United
States federal income tax purposes as a grantor trust or the Trust's exemption
from status as an "investment company" under
 
                                      157

 
the 1940 Act, provided, further that without the consent of each holder of
Trust Securities affected thereby, the Declaration may not be amended to (i)
change the amount or timing of any Distribution on the Trust Securities or
otherwise adversely affect the amount of any Distribution required to be made
in respect of the Trust Securities as of a specified date or (ii) restrict the
right of a holder of Trust Securities to institute suit for the enforcement of
any such payment on or after such date.
 
  Any required approval or direction of holders of Par Securities may be given
at a meeting of holders of Par Securities convened for such purpose or
pursuant to written consent. The Regular Trustees will cause a notice of any
meeting at which holders of Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be
given to each holder of record of Par Securities in the manner set forth in
the Declaration.
 
  No vote or consent of the holders of Par Securities will be required for the
Trust to redeem and cancel its Par Securities in accordance with the
Declaration.
 
  Notwithstanding that holders of Par Securities are entitled to vote or
consent under any of the circumstances described above, any of the Par
Securities that are owned by the Company, the Trustees or any affiliate of the
Company or any Trustees, shall, for purposes of such vote or consent, be
treated as if they were not outstanding.
 
EXPENSES AND TAXES
 
  In the Indenture, the Company, as borrower, has agreed to pay all debts and
other obligations (other than with respect to the Par Securities) and all
costs and expenses of the Trust (including costs and expenses relating to the
organization of the Trust, the fees and expenses of the Trustees and the costs
and expenses relating to the operation of the Trust) and to pay any and all
taxes and all costs and expenses with respect thereto (other than United
States withholding taxes) to which the Trust might become subject. The
foregoing obligations of the Company under the Indenture are for the benefit
of, and shall be enforceable by, any person to whom any such debts,
obligations, costs, expenses and taxes are owed (a "Creditor") whether or not
such Creditor has received notice thereof. Any such Creditor may enforce such
obligations of the Company directly against the Company, and the Company has
irrevocably waived any right or remedy to require that any such Creditor take
any action against the Trust or any other person before proceeding against the
Company. The Company has also agreed in the Indenture to execute such
additional agreements as may be necessary or desirable to give full effect to
the foregoing.
 
REGISTRAR AND TRANSFER AGENT
 
  The Property Trustee acts as registrar and transfer agent for the Par
Securities.
 
  Registration of transfers or exchanges of Par Securities will be effected
without charge by or on behalf of the Trust, but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange, the Trust may charge a sum sufficient to cover any such payment.
The Trust will not be required (i) to issue, register or cause to be
registered the transfer or exchange of any Par Securities during a period
beginning at the opening of business 15 days before the day of the mailing of
the relevant notice of redemption and ending at the close of business on the
day of such mailing or (ii) to register or cause to be registered the transfer
or exchange of any Par Securities so selected for redemption, except in the
case of any Par Securities being redeemed in part, any portion thereof not to
be redeemed.
 
INFORMATION CONCERNING THE PROPERTY TRUSTEE
 
  The Property Trustee, other than during the occurrence and continuance of a
Trust Enforcement Event, undertakes to perform only such duties as are
specifically set forth in the Declaration and, after such Trust Enforcement
Event (which has not been cured or waived), must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Property Trustee is under
no obligation to exercise any of the powers vested in it by the Declaration at
the request
 
                                      158

 
of any holder of Par Securities unless it is offered reasonable security and
indemnity against the costs, expenses and liabilities that might be incurred
thereby. If no Trust Enforcement Event has occurred and is continuing and the
Property Trustee is required to decide between alternative causes of action,
construe ambiguous provisions in the Declaration or is unsure of the
application of any provision of the Declaration, and the matter is not one on
which holders of Par Securities are entitled under the Declaration to vote,
then the Property Trustee may, but shall be under no duty to, take such action
as is directed by the Company and, if not so directed, shall take such action
as it deems advisable and in the best interests of the holders of the Trust
Par Securities and will have no liability except for its own bad faith,
negligence or willful misconduct.
 
PAYMENT AND PAYING AGENCY
 
  Payments in respect of the Global Certificates shall be made to DTC, which
shall credit the relevant accounts at DTC on the applicable Distribution Dates
or, if the Par Securities are not represented by one or more Global
Certificates, such payments shall be made by check mailed to the address of
the holder entitled thereto as such address shall appear on the register in
respect of the registrar. The paying agent (the "Paying Agent") shall
initially be the Property Trustee and any co-paying agent chosen by the
Property Trustee and acceptable to the Regular Trustees and the Company. The
Paying Agent shall be permitted to resign as Paying Agent upon 30 days'
written notice to the Property Trustee and the Company. In the event that the
Property Trustee shall no longer be the Paying Agent, the Regular Trustees
shall appoint a successor (which shall be a bank or trust company acceptable
to the Regular Trustees and the Company) to act as Paying Agent.
 
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
 
  The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other Person (as defined in
the Declaration), except as described below. The Trust may, at the request of
the Company, with the consent of the Regular Trustees and without the consent
of the holders of the Par Securities, the Delaware Trustee or the Property
Trustee merge with or into, consolidate, amalgamate, be replaced by or convey,
transfer or lease its properties and assets substantially as an entirety to a
trust organized as such under the laws of any State; provided that (i) such
successor entity (if not the Trust) either (a) expressly assumes all of the
obligations of the Trust with respect to the Par Securities or (b) substitutes
for the Securities other securities having substantially the same terms as the
Par Securities (the "Successor Securities") so long as the Successor
Securities rank the same as the Par Securities rank in priority with respect
to distributions and payments upon liquidation, redemption and otherwise, (ii)
if the Trust is not the successor entity, the Company expressly appoints a
trustee of such successor entity possessing the same powers and duties as the
Property Trustee as the holder of the Debentures, (iii) the Par Securities or
any Successor Securities are listed, or any Successor Securities will be
listed upon notification of issuance, on any national securities exchange or
with any other organization on which the Par Securities are then listed or
quoted; (iv) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not cause the Par Securities (including any
Successor Securities) to be downgraded by any nationally recognized
statistical rating organization, (v) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the
rights, preferences and privileges of the holders of the Par Securities
(including any Successor Securities) in any material respect, (vi) such
successor entity has a purpose identical to that of the Trust, (vii) prior to
such merger, consolidation, amalgamation, replacement, conveyance, transfer,
or lease, the Company has received an opinion from independent counsel to the
Trust experienced in such matters to the effect that (a) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does
not adversely affect the rights, preferences and privileges of the holders of
the Par Securities (including any Successor Securities) in any material
respect and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, (1) neither the Trust nor such
successor entity will be required to register as an investment company under
the Investment Company Act and (2) the Trust or the successor entity will
continue to be classified as a grantor trust for United States federal income
tax purposes, (viii) the Company or any permitted successor or assignee owns
all of the Common Securities of such successor entity and guarantees the
obligations of such successor entity under the Successor Securities at least
to the extent provided by the Trust Guarantee and (ix) such successor entity
expressly assumes all of the obligations
 
                                      159

 
of the Trust with respect to the Trustees. Notwithstanding the foregoing, the
Trust shall not, except with the consent of holders of 100% in aggregate
liquidation amount of the Par Securities, consolidate, amalgamate, merge with
or into, be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or
lease would cause the Trust or the successor entity to be classified as other
than a grantor trust for United States federal income tax purposes and each
holder of the Par Securities not to be treated as owning an undivided interest
in the Debentures.
 
MERGER OR CONSOLIDATION OF TRUSTEES
 
  Any corporation into which the Property Trustee, the Delaware Trustee or any
Regular Trustee that is not a natural person may be merged or converted or
with which such Trustee may be consolidated, or any corporation resulting from
any merger, conversion or consolidation to which such Trustee shall be a
party, or any corporation succeeding to all or substantially all the corporate
trust business of such Trustee, shall be the successor of such Trustee under
the Declaration, provided such corporation shall be otherwise qualified and
eligible.
 
MISCELLANEOUS
 
  The Regular Trustees are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust will not be deemed to be
an "investment company" required to be registered under the Investment Company
Act or classified as other than a grantor trust for United States federal
income tax purposes and so that the Debentures will be treated as indebtedness
of the Company for United States federal income tax purposes. In this
connection, the Company and the Regular Trustees are authorized to take any
action, not inconsistent with applicable law, the Certificate of Trust or the
Declaration, that the Company and the Regular Trustees determine in their
discretion to be necessary or desirable for such purposes, as long as such
action does not materially adversely affect the interests of the holders of
the Par Securities.
 
  The Trust may not borrow money, issue debt, reinvest proceeds derived from
investments, mortgage or pledge any of its assets. In addition the Trust may
not undertake any activity that would cause the Trust not to be classified as
a grantor trust for United States federal income tax purposes.
 
                                      160

 
                           DESCRIPTION OF DEBENTURES
 
  The Debentures were issued under an Indenture (the "Indenture"), between the
Company and Chase Trust Company of California, as trustee (the "Indenture
Trustee"). This summary of certain terms and provisions of the Debentures and
the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Indenture. For purposes of this
summary, the term "Company" refers only to ICII and not to any of its
subsidiaries.
 
GENERAL
 
  Concurrently with the issuance of the Par Securities, the Trust invested the
proceeds thereof and the consideration paid by the Company for the Common
Securities in the Debentures issued by the Company. The Debentures are in the
principal amount equal to the aggregate liquidation amount of the Par
Securities plus the Company's concurrent investment in the Common Securities.
The Debentures accrue interest at the Applicable Interest Rate of the
principal amount thereof, payable semi-annually in arrears on June 15th (June
14 in 2002) and December 15th of each year, commencing December 15, 1997, and
on the Scheduled Remarketing Settlement Date (each, an "Interest Payment
Date"). From the date of original issuance of the Par Securities (the "Closing
Date") to but excluding the Remarketing Settlement Date, the "Applicable
Interest Rate" will be 10 1/4% per annum (the "Initial Interest Rate"). From
the Remarketing Settlement Date to but excluding the date of redemption of the
Debentures, the Applicable Interest Rate will equal the Adjusted Distribution
Rate that results from the Remarketing consummated on the Remarketing
Settlement Date.
 
  Interest on the Debentures is payable to the person in whose name the
Debentures are registered, at the close of business on the June 1 or December
1 next preceding the relevant Interest Payment Date. It is anticipated that,
until the liquidation, if any, of the Trust, each Debenture will be held in
the name of the Property Trustee in trust for the benefit of the holders of
the Trust Securities. The amount of interest payable for any period will be
computed (i) for any full 180-day semi-annual interest payment period, on the
basis of a 360-day year consisting of twelve 30-day months and (ii) for any
period shorter than a full 180-day semi-annual interest payment, a 30-day
month and for periods of less than a month, the actual number of days elapsed
per 30-day month. In the event that any date on which interest is payable on
the Debentures is not a Business Day, then payment of the interest payable on
such date will be made on the next succeeding day that is a Business Day (and
without any additional interest or other payment in respect of any such
delay), except that, if such Business Day is in the next succeeding calendar
year, such payment shall be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on the date such payment
was originally payable. Accrued interest that is not paid on the applicable
Interest Payment Date will bear additional interest on the amount thereof (to
the extent permitted by law) at the Applicable Interest Rate in effect at the
beginning of such period, compounded semi-annually. The term "interest" as
used herein shall include interest payments, Additional Interest and interest
on interest payments not paid on the applicable Interest Payment Date.
 
  The Debentures will mature on June 15, 2032, or earlier, in certain
circumstances, upon the occurrence and continuation of a Tax Event. See
"Description of Securities--Special Event Redemption or Distribution of
Debentures; Shortening of Stated Maturity."
 
  Until the Remarketing Settlement Date, the Debentures will be jointly and
severally and fully and unconditionally guaranteed on a senior unsecured basis
by each of the Subsidiary Guarantors, which consist of all of the Company's
Restricted Subsidiaries other than the Trust, SPB and the Special Purpose
Subsidiaries. The Subsidiary Guarantees will be released on the Remarketing
Settlement Date.
 
  Until the Remarketing Settlement Date, the Debentures will be general
unsecured obligations of the Company ranking on a parity with all Indebtedness
of the Company, if any, that is not subordinated to the Debentures and senior
to any Indebtedness of the Company that is subordinated to the Debentures.
Until the Remarketing Settlement Date, when the Subsidiary Guarantees will be
released, the Subsidiary Guarantees will rank on a parity with all
Indebtedness of the Subsidiary Guarantors, if any, that is not subordinated to
the
 
                                      161

 
Subsidiary Guarantees and senior to any Indebtedness of the Subsidiary
Guarantors that is subordinated to the Subsidiary Guarantees. After the
Remarketing Settlement Date, the Debentures will be subordinated and junior in
right of payment to all Senior Debt of the Company. After the Remarketing
Settlement Date, the Indenture does not limit the incurrence or issuance of
other secured or unsecured debt of the Company, whether under the Indenture or
any existing or other indenture that the Company may enter into in the future
or otherwise. See "--Ranking."
 
OPTION TO EXTEND INTEREST PAYMENT PERIOD
 
  Following the Remarketing Settlement Date, so long as no Indenture Event of
Default has occurred and is continuing, the Company has the right under the
Indenture to defer the payment of interest and Additional Interest, if any, at
any time or from time to time for a period not exceeding 10 consecutive semi-
annual periods with respect to each Extension Period, provided that no
Extension Period may extend beyond the Stated Maturity of the Debentures. At
the end of such Extension Period, the Company must pay all interest and
Additional Interest, if any, then accrued and unpaid (together with interest
thereon at the Applicable Interest Rate in effect at the beginning of such
period, compounded semi-annually, to the extent permitted by applicable law).
During an Extension Period, interest and Additional Interest, if any, will
continue to accrue and holders of Debentures (or holders of Par Securities
while the Par Securities are outstanding) will be required to accrue interest
income (as OID) for United States federal income tax purposes. See "United
States Federal Income Tax Consequences--Interest Income and Original Issue
Discount."
 
  During any such Extension Period, the Company may not, and may not permit
any subsidiary of the Company to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock or (ii) make any payment
of principal, interest or premium, if any, on or repay, repurchase or redeem
any debt securities of the Company that rank on a parity with or junior in
interest to the Debentures or make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu or junior in interest to the
Debentures (other than (a) dividends or distributions in common stock of the
Company, (b) payments under the Trust Guarantee, (c) any declaration of a
dividend in connection with the implementation of a stockholders' rights plan,
or the issuance of stock under any such plan in the future, or the redemption
or repurchase of any such rights pursuant thereto, and (d) purchases of common
stock related to the issuance of common stock or rights under any of the
Company's benefit plans). Prior to the termination of any such Extension
Period, the Company may further extend the Extension Period, provided that no
Extension Period may exceed 10 consecutive semi-annual periods or extend
beyond the Stated Maturity of the Debentures. Upon the termination of any such
Extension Period and the payment of all amounts then due on any Interest
Payment Date, the Company may elect to begin a new Extension Period subject to
the above requirements. No interest or Additional Interest shall be due and
payable during an Extension Period, except at the end thereof. The Company
must give the Property Trustee, the Regular Trustees and the Indenture Trustee
notice of its election of such Extension Period not less than one Business Day
prior to such record date. The Property Trustee shall give notice of the
Company's election to begin a new Extension Period to the holders of the
Securities.
 
REDEMPTION
 
  Optional Redemption. The Debentures are redeemable at the option of the
Company, in whole or in part, at any time or from time to time through and
including June 15, 2001 at a redemption price (the "Initial Optional
Redemption Price") equal to the greater of (i) 100% of the principal amount of
such Debentures and (ii) as determined by a Quotation Agent (as defined
herein), the sum of the present values of the principal amount of such
Debentures as if redeemed on June 14, 2002, together with scheduled
prepayments of interest from the prepayment date to but excluding June 14,
2002, discounted to the prepayment date on a semi-annual basis (assuming a
360-day year consisting of 30-day months) at the Adjusted Treasury Rate, plus,
in each case, accrued and unpaid interest and Additional Interest, if any, to
the date of redemption.
 
  In addition, if certain circumstances are met, the Debentures are redeemable
at any time after the Remarketing Settlement Date in whole (but not in part),
within 90 days of the occurrence and continuation of a
 
                                      162

 
Special Event, at a redemption price equal to 100% of the principal amount of
such Debentures, plus, in each case, accrued and unpaid interest and
Additional Interest, if any, thereon to the date of redemption. See
"Description of Securities--Redemption--Special Event Redemption or
Distribution of Debentures; Shortening of Stated Maturity."
 
  On and after June 15, 2012, the Debentures are redeemable prior to maturity
at the option of the Company, in whole or in part, at any time at the
redemption prices described in the next sentence, plus accrued and unpaid
interest and Additional Interest, if any, to the date of redemption. The
redemption price (expressed as a percentage of principal amount) shall be
equal to 100% plus the product of (x) the Adjusted Distribution Rate and (y)
the applicable Factor (as defined below) if redeemed during the twelve-month
period beginning on June 15th of the years indicated below, the applicable
"Factor" shall equal:
 


       YEAR                                                           PERCENTAGE
       ----                                                           ----------
                                                                   
       2012..........................................................    50%
       2013..........................................................    45%
       2014..........................................................    40%
       2015..........................................................    35%
       2016..........................................................    30%
       2017..........................................................    25%
       2018..........................................................    20%
       2019..........................................................    15%
       2020..........................................................    10%
       2021..........................................................     5%

 
  On and after June 15, 2022, the redemption price will be 100% of the
principal amount of the Debentures to be redeemed, plus accrued and unpaid
interest and Additional Interest, if any, to the date of redemption.
 
  If the Debentures are redeemed, the Trust must redeem the Trust Securities
having an aggregate liquidation amount equal to the aggregate principal amount
of Debentures so redeemed. See "Description of Securities--Redemption."
 
  Notice of any redemption (other than a redemption of Debentures in
connection with a Special Mandatory) will be mailed at least 30 days but not
more than 60 days before the redemption date to each holder of Debentures to
be redeemed at its registered address. Unless the Company defaults in payment
of the redemption price, on and after the redemption date interest ceases to
accrue on such Debentures or portions thereof called for redemption.
 
  As used herein, "Adjusted Treasury Rate" means, with respect to any
prepayment date, the Treasury Rate plus 0.50%.
 
  "Treasury Rate" means (i) the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently
published statistical release designated "H.15(519)" or any successor
publication which is published weekly by the Federal Reserve and which
establishes yields on actively traded United States Treasury securities
adjusted to constant maturity under the caption "Treasury Constant
Maturities", for the maturity corresponding to the Remaining Life (if no
maturity is within three months before or after the Remaining Life, yields for
the two published maturities most closely corresponding to the Remaining Life
shall be determined and the Treasury Rate shall be interpolated or
extrapolated from such yields on a straight-line basis, rounding to the
nearest month) or (ii) if such release (or any successor release) is not
published during the week preceding the calculation date or does not contain
such yields, the rate per annum equal to the semi-annual equivalent yield to
maturity of the Comparable Treasury Issue, calculated using a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price for such prepayment date. The Treasury
Rate shall be calculated on the third business day preceding the prepayment
date.
 
                                      163

 
  "Comparable Treasury Issue" means with respect to any prepayment date the
United States Treasury security selected by the Quotation Agent as having a
maturity comparable to the Remaining Life that would be utilized, at the time
of selection and in accordance with customary financial practice, in pricing
new issues of corporate debt securities of comparable maturity to the
Remaining Life. If no United States Treasury security has a maturity which is
within a period from three months before to three months after the last day of
the Remaining Life, the two most closely corresponding United States Treasury
securities shall be used as the Comparable Treasury Issue, and the Treasury
Rate shall be interpolated or extrapolated on a straight-line basis, rounding
to the nearest month using such securities.
 
  "Quotation Agent" means Lehman Brothers Inc. and their respective
successors; provided, however, that if the foregoing shall cease to be a
primary United States Government securities dealer in New York City (a
"Primary Treasury Dealer"), the Company shall substitute therefor another
Primary Treasury Dealer.
 
  "Comparable Treasury Price" means (A) the average of five Reference Treasury
Dealer Quotations for such prepayment date, after excluding the highest and
lowest such Reference Treasury Dealer Quotations, or (B) if the Indenture
Trustee obtains fewer than three such Reference Treasury Dealer Quotations,
the average of all such Quotations.
 
  "Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any prepayment date, the average, as determined by the
Indenture Trustee, of the bid and asked prices for the Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) quoted
in writing to the Indenture Trustee by such Reference Treasury Dealer at 5:00
p.m. New York City time, on the third business day preceding such prepayment
date.
 
 Special Mandatory Redemption
 
  If the Remarketing Agent is unable to remarket all of the Par Securities
tendered or deemed tendered for purchase in the Remarketing, the Company will
be required to redeem Debentures as described under "Description of
Securities--Remarketing--Special Mandatory Redemption."
 
 Tax Opinion Redemption
 
  If the Company receives a Tax Opinion at least 35 business days prior to the
Election Date, the Company has the option to cancel the Remarketing by giving,
to the Property Trustee, DTC and the Remarketing Agent written notice of such
cancellation. In such event, all of the Debentures (and, thus, the Par
Securities) are subject to a Tax Opinion Redemption by the Company on the
Scheduled Remarketing Date.
 
 Transfer Restricted Security Redemption
 
  In addition, upon consummation of the Exchange Offer, the Company will be
required , on the Remarketing Settlement Date, to redeem, in whole (but not in
part), all of the Debentures (and, thus, the Par Securities) which were not
exchanged pursuant to the Exchange Offer pursuant to a Transfer Restricted
Security Redemption. As part of a Transfer Restricted Security Redemption, on
the Scheduled Remarketing Settlement Date such Old Par Securities will be
exchanged with the Trust for Debentures having an aggregate principal amount
equal to the aggregate liquidation amount of such Old Par Securities and such
Debentures shall immediately be redeemed by the Company at a redemption price
equal to 100% of the principal amount thereof plus accrued and unpaid interest
(including Additional Interest), if any, to the date of redemption.
 
REMARKETING
 
  If the holders of Par Securities receive Debentures upon the liquidation or
dissolution of the Trust, the Debentures will be subject to the remarketing
procedures that would have been applicable to the Securities. See "Description
of Securities--Remarketing."
 
                                      164

 
RANKING
 
  Until the Remarketing Settlement Date, the Debentures will be general
unsecured obligations of the Company ranking on a parity with all Indebtedness
of the Company, if any, that is not subordinated to the Debentures or Trust
Guarantee and senior to any Indebtedness of the Company that is subordinated
to the Debentures or Trust Guarantee. Until the Remarketing Settlement Date,
when the Subsidiary Guarantees will be released, the Subsidiary Guarantees
will rank on a parity with all Indebtedness of the Subsidiary Guarantors, if
any, that is not subordinated to the Subsidiary Guarantees and senior to any
Indebtedness of the Subsidiary Guarantors that is subordinated to the
Subsidiary Guarantees. Until the Remarketing Settlement Date, the Debentures
will be effectively subordinated to all Indebtedness and other liabilities of
SPB and any Special Purpose Subsidiaries, and the Debentures, and the
Subsidiary Guarantees will be effectively subordinated to secured Indebtedness
of the Company and the Subsidiary Guarantors. As of December 31, 1997, after
giving effect to the Offering and the application of proceeds thereof, the
Debentures and Trust Guarantee would have been effectively subordinated to
approximately $1.3 billion of deposits and other borrowings at SPB and the
Debentures, the Trust Guarantee and the Subsidiary Guarantees would have been
effectively subordinated to approximately $109.8 million of secured
Indebtedness of the Subsidiary Guarantors, excluding FMC on a pro forma basis.
 
  After the Remarketing Settlement Date, the Debentures will be subordinated
and junior in right payment to all Senior Debt of the Company. Upon any
distribution to creditors of the Company in a liquidation or dissolution of
the Company or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Company or its property, an assignment for
the benefit of creditors or any marshalling of the Company's assets and
liabilities, the holders of Senior Debt will be entitled to receive payment in
full of all Obligations due in respect of such Senior Debt (including interest
after the commencement of any such proceeding at the rate specified in the
applicable Senior Debt) before the holders of Debentures will be entitled to
receive any payment with respect to the Debentures, and until all Obligations
with respect to Senior Debt are paid in full, any distribution to which the
holders of Debentures would be entitled shall be made to the holders of Senior
Debt (except that holders of Debentures may receive Permitted Junior
Securities and payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance").
 
  The Company also may not make any payment upon or in respect of the
Debentures (except in Permitted Junior Securities or from the trust described
under "--Legal Defeasance and Covenant Defeasance") if (i) a default in the
payment of the principal of, premium, if any, or interest on Designated Senior
Debt occurs and is continuing beyond any applicable period of grace or (ii)
any other default occurs and is continuing with respect to Designated Senior
Debt that permits holders of the Designated Senior Debt as to which such
default relates to accelerate its maturity and the Trustee receives a notice
of such default (a "Payment Blockage Notice") from the Company or the holders
of any Designated Senior Debt. Payments on the Debentures may and shall be
resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived and (b) in case of a nonpayment default, the
earlier of the date on which such nonpayment default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Designated Senior Debt has been
accelerated. No new period of payment blockage may be commenced unless and
until (i) 360 days have elapsed since the effectiveness of the immediately
prior Payment Blockage Notice and (ii) all scheduled payments of principal,
premium, if any, and interest on the Debentures that have come due have been
paid in full in cash. No nonpayment default that existed or was continuing on
the date of delivery of any Payment Blockage Notice to the Trustee shall be,
or be made, the basis for a subsequent Payment Blockage Notice.
 
  The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Debentures is accelerated because of an Event of
Default.
 
  In addition to the subordination provision described above, the Debentures
will be effectively subordinated to secured Indebtedness of the Company and
will be effectively subordinated to all Indebtedness and other liabilities of
all of the Subsidiaries of the Company. As of December 31, 1997, after giving
effect to the Offering
 
                                      165

 
and the application of proceeds thereof, the Debentures would have been
subordinated to approximately $219.8 million of Senior Debt of the Company and
would have been effectively subordinated to approximately $1.4 billion of
Indebtedness of the Company's Subsidiaries (including approximately $1.3
billion of deposits and other borrowings at SPB and approximately $109.8
million of secured Indebtedness of the Company's subsidiaries, but not
including the Trust's guarantee of $200.0 million of the 9 7/8% Senior Notes).
See "Risk Factors--Ranking of Obligations under the Debentures, the Trust
Guarantee and the Subsidiary Guarantees of Note to Investors."
 
INDENTURE EVENTS OF DEFAULT
 
  The Indenture provides that, on or prior to the Remarketing Settlement Date,
any one or more of the following described events with respect to the
Debentures that has occurred and is continuing constitutes an "Indenture Event
of Default" with respect to the Debentures: (i) default for 30 days in the
payment when due of interest on the Debentures; (ii) default in payment when
due of the principal of or premium, if any, on the Debentures; (iii) failure
by the Company to comply with the provisions described under the captions
"Certain Covenants of the Company--Change of Control," "--Asset Sales," "--
Restricted Payments" or "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; (iv) failure by the Company for 60 days after notice to
comply with any of its other agreements in the Indenture or the Debentures;
(v) default under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any Indebtedness for
money borrowed by the Company or any of its Subsidiaries (or the payment of
which is guaranteed by the Company or any of its Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the date of the
Indenture, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5.0 million or more; (vi) failure
by the Company or any of its Subsidiaries to pay final judgments aggregating
in excess of $5.0 million, which judgments are not paid, discharged or stayed
for a period of 60 days; (vii) except as permitted by the Indenture or if, at
the time thereof, any Subsidiary Guarantee of a Subsidiary Guarantor that is a
Significant Subsidiary shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect, or any Subsidiary Guarantor, or any Person acting on behalf of any
such Subsidiary Guarantor, shall deny or disaffirm, in writing, its obligation
under its Subsidiary Guarantee; and (viii) certain events of bankruptcy or
insolvency with respect to the Company or any of its Subsidiaries. After the
Remarketing Settlement Date, only the events described in subparagraphs (i),
(ii), (iv) and (vii) will constitute "Indenture Events of Default."
 
  If an Indenture Event of Default occurs and is continuing, the Indenture
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Debentures may declare all the Debentures to be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency, with respect to the
Company or any Subsidiary, all outstanding Debentures will become due and
payable without further action or notice. Holders of the Debentures may not
enforce the Indenture or the Notes except as provided in the Indenture.
Subject to certain limitations, holders of a majority in principal amount of
the then outstanding Debentures may direct the Indenture Trustee in its
exercise of any trust or power. The Indenture Trustee may withhold from
holders of the Debentures notice of any continuing Indenture Default or Event
of Default (except a Default or Indenture Event of Default relating to the
payment of principal or interest) if it determines that withholding notice is
in their interest.
 
  In the case of any Indenture Event of Default occurring by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the
Company with the intention of avoiding payment of the premium that the Company
would have had to pay if the Company then had elected to redeem the Debentures
pursuant to the optional redemption provisions of the Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Debentures. If an Event of
Default occurs prior to June 14, 2012 by reason of any willful action (or
inaction) taken (or not taken) by or on behalf of
 
                                      166

 
the Company with the intention of avoiding the prohibition on redemption after
the Remarketing Settlement Date of the Debentures prior to June 14, 2012, then
the initial optional redemption premium specified in the Indenture shall also
become immediately due and payable to the extent permitted by law upon the
acceleration of the Debentures.
 
  The holders of a majority in aggregate principal amount of the Debentures
then outstanding by notice to the Indenture Trustee may on behalf of the
holders of all of the Debentures waive any existing Default or Event of
Default and its consequences under the Indenture except a continuing Default
or Indenture Event of Default in the payment of interest or Additional
Interest on, the principal of the Debentures.
 
  The Company is required to deliver to the Indenture Trustee annually a
statement regarding compliance with the Indenture, and the Company is required
upon becoming aware of any Default or Indenture Event of Default, to deliver
to the Indenture Trustee a statement specifying such Default or Indenture
Event of Default.
 
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
 
  No director, officer, employee, incorporator, organizer, member, manager or
shareholder of the Company, as such, shall have any liability for any
obligations of the Company under the Debentures, the Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of Debentures by accepting a Debenture waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Debenture. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of
the Commission that such waiver is against public policy.
 
SUBSIDIARY GUARANTEES
 
  On or prior to the Scheduled Remarketing Settlement Date, the Company's
obligations under the Indenture and the Debentures will be jointly and
severally and fully and unconditionally guaranteed through the Subsidiary
Guarantees by each of the Subsidiary Guarantors, which consist of all
Restricted Subsidiaries other than SPB and the Special Purpose Subsidiaries.
Each Subsidiary Guarantor will unconditionally guarantee, jointly and
severally, the full and prompt performance of the Company's obligations under
the Indenture and the Debentures, including payment of principal and interest
on the Debentures. The obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee will be limited to the maximum amount as will, after
giving effect to all other contingent and fixed liabilities of such Subsidiary
Guarantor and after giving effect to any collections from or payments made by
or on behalf of any other Subsidiary Guarantor in respect of the obligations
of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant
to the contributions obligations under the Indenture, result in the
obligations of such Subsidiary Guarantor under the Subsidiary Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law.
 
  The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person), another corporation, Person or entity whether or not affiliated with
such Subsidiary Guarantor unless (i) subject to the provisions of the
following paragraph, the Person formed by or surviving any such consolidation
or merger (if other than such Subsidiary Guarantor) assumes all the
obligations of such Subsidiary Guarantor pursuant to a supplemental indenture
in form and substance reasonably satisfactory to the Trustee; (ii) immediately
after giving effect to such transaction, no Indenture Default or Indenture
Event of Default exists; and (iii) such Subsidiary Guarantor, or any Person
formed by or surviving any such consolidation or merger, would have
Consolidated Net Worth (immediately after giving effect to such transaction)
equal to or greater than the Consolidated Net Worth of such Subsidiary
Guarantor immediately preceding the transaction.
 
  The Indenture provides that in the event of (i) the designation of any
Subsidiary Guarantor as an Unrestricted Subsidiary or (ii) a sale or other
disposition of all or substantially all of the assets of any Subsidiary
Guarantor to a third party or any Unrestricted Subsidiary, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Subsidiary Guarantor, in either case, in a transaction or
manner that does not violate any of the covenants in the Indenture, then such
Subsidiary Guarantor (in the event
 
                                      167

 
of such a designation or a sale or other disposition, by way of such a merger,
consolidation or otherwise, of all of the capital stock of such Subsidiary
Guarantor) or the Person acquiring the property (in the event of a sale or
other disposition of all or substantially all of the assets of such Subsidiary
Guarantor) will be released from and relieved of any obligations under its
Subsidiary Guarantee; provided that any Net Proceeds of such sale or other
disposition are applied in accordance with the covenant described under the
caption "--Certain Covenants of the Company--Asset Sales," and provided
further, however, that any such termination shall occur only to the extent
that all obligations of such Subsidiary Guarantor under all of its guarantees
of, and under all of its pledges of assets or other security interests that
secure, any other Indebtedness of the Company or its Restricted Subsidiaries
shall also terminate upon such release, sale or disposition.
 
CERTAIN COVENANTS OF THE COMPANY
 
 Fees and Expenses
 
  The Company has covenanted in the Indenture that if and so long as the Trust
is the holder of all Debentures, the Company, as borrower, will pay to the
Trust all fees and expenses related to the Trust and the offering of the Par
Securities and will pay, directly or indirectly, all ongoing costs, expenses
and liabilities of the Trust (including any taxes, duties, assessments or
governmental charges of whatever nature (other than withholding taxes) imposed
by the United States or any domestic taxing authority upon the Trust but
excluding obligations under the Securities).
 
 Change of Control
 
  The Indenture provides that upon the occurrence of a Change of Control on or
prior to the Remarketing Settlement Date, each holder of Debentures will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Debentures pursuant
to the offer described below (the "Change of Control Offer") at an offer price
in cash equal to 101% of the aggregate principal amount thereof plus accrued
and unpaid interest and Additional Interest, if any, thereon to the date of
purchase (the "Change of Control Payment"). If at the time of the Change of
Control the Trust is the owner of all of the Debentures, the Trust shall make
the Change of Control Offer for the Par Securities as set forth in
"Description of Securities--Redemption Procedures--Change of Control," and the
Company will repurchase the Debentures exchanged by the Trust for the Par
Securities as set forth in the Declaration. Accordingly, the description of
the Change of Control Offer set forth in this section only applies to a Change
of Control Offer when the Trust is not the owner of all of the Debentures.
 
  Within 10 days following any Change of Control, the Company will mail a
notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Debentures
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Debentures as a result of a Change of Control.
 
  The Change of Control Offer will remain open for a period of 20 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Change of Control Offer
Period"). No later than five Business Days after the termination of the Change
of Control Offer Period (the "Change of Control Purchase Date"), the Company
will purchase all Debentures tendered in response to the Change of Control
Offer. Payment for any Debentures so purchased will be made in the same manner
as interest payments are made.
 
  If the Change of Control Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and
unpaid interest will be paid to the Person in whose name a Debenture is
registered at the close of business on such record date, and no additional
interest or Additional Interest, if any, will be payable to holders who tender
Debentures pursuant to the Change of Control Offer.
 
                                      168

 
  On the Change of Control Payment Date, the Company will, to the extent
lawful, (a) accept for payment all Debentures or portions thereof properly
tendered pursuant to the Change of Control Offer, (b) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Debentures or portions thereof so tendered and (c) deliver or cause to be
delivered to the Trustee the Debentures so accepted together with an officers'
certificate stating the aggregate principal amount of Debentures or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
each holder of Debentures so tendered the Change of Control Payment for such
Debentures, and the Trustee will promptly authenticate and mail (or cause to
be transferred by book entry) to each holder a new Debenture equal in
principal amount to any unpurchased portion of the Debentures surrendered, if
any; provided that each such new Debenture will be in a principal amount of
$1,000 or an integral multiple thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
 
  Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of Debentures to require
that the Company repurchase or redeem the Debentures in the event of a
takeover, recapitalization or other restructuring.
 
 Asset Sales
 
  The Indenture provides that, on or prior to the Remarketing Settlement Date,
the Company will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale in excess of $1.0 million unless (i) the Company
(or the Restricted Subsidiary, as the case may be) receives consideration at
the time of such Asset Sale at least equal to the fair market value (evidenced
by a resolution of the Board of Directors, except for sales of Securitization
Related Assets, which require no such resolution) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary
is in the form of cash or Cash Equivalents; provided that the amount of (x)
any liabilities (as shown on the Company's or such Restricted Subsidiary's
most recent balance sheet, excluding contingent liabilities and trade
payables), of the Company or any such Restricted Subsidiary that are assumed
by the transferee of any such assets pursuant to a customary novation
agreement that releases the Company or such Restricted Subsidiary from further
liability and (y) any securities, notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that are
promptly, but in no event more than 30 days after receipt, converted by the
Company or such Restricted Subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision.
 
  Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or the Restricted Subsidiary may apply such Net Proceeds, (a) to
permanently reduce Senior Indebtedness (other than the Debentures or the 9
7/8% Senior Notes or the Subsidiary Guarantees thereof) of the Company or of
the Subsidiary Guarantors, or (b) to an Investment (excluding guarantees of
Indebtedness or other obligations), the making of a capital expenditure or the
acquisition of other tangible assets, in each case in or with respect to a
Related Business. Any Net Proceeds from Asset Sales that are not applied or
invested as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds."
 
  When the aggregate amount of Excess Proceeds exceeds $5.0 million, the
Company will be required to make an offer to all holders of Debentures and, at
the Company's election, the 9 7/8% Senior Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Debentures (and, if applicable, the 9
7/8% Senior Notes) that may be purchased out of the Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest and Additional Interest, if any, thereon to
the date of purchase, in accordance with the procedures set forth in the
Indenture and in the indenture governing the 9 7/8% Senior Notes. If at the
time of the Asset Sale Offer the Trust is the owner of all of the Debentures,
the Trust shall make the Asset Sale Offer for the Par Securities as set forth
in "Description of Securities--Asset Sales," and the Company will repurchase
the Debentures exchanged by the Trust for the Securities as set forth in the
Declaration. Accordingly, the description of the Asset Sale Offer set forth in
this section only applies to an Asset Sale Offer when the Trust is not the
owner of all the Debentures.
 
                                      169

 
  To the extent that the aggregate amount of Debentures (and, if applicable,
the 9 7/8% Senior Notes) tendered pursuant to an Asset Sale Offer is less than
the Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be reset at zero.
 
  An Asset Sale Offer will remain open for a period of 20 Business Days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Asset Sale Offer Period"). No later
than five Business Days after the termination of the Asset Sale Offer Period
(the "Asset Sale Purchase Date"), the Company will purchase the principal
amount of Debentures (and, if applicable, the 9 7/8% Senior Notes) required to
be purchased pursuant to this covenant (the "Asset Sale Offer Amount") or, if
less than the Asset Sale Offer Amount has been tendered, all Debentures (and,
if applicable, the 9 7/8% Senior Notes) tendered in response to the Asset Sale
Offer. Payment for any Debentures (and, if applicable, the 9 7/8% Senior
Notes) so purchased will be made in the same manner as interest payments are
made.
 
  If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid
interest and Additional Interest, if any, will be paid to the Person in whose
name a Debenture is registered at the close of business on such record date,
and no additional interest will be payable to holders who tender Debentures
pursuant to the Asset Sale Offer.
 
  On or before the Asset Sale Purchase Date, the Company will, to the extent
lawful, accept for payment, on a pro rata basis to the extent necessary, the
Asset Sale Offer Amount of Debentures (and, if applicable, the 9 7/8% Senior
Notes) or portions thereof tendered (and, if applicable, the 9 7/8% Senior
Notes) pursuant to the Asset Sale Offer, or if less than the Asset Sale Offer
Amount has been tendered, all Debentures (and, if applicable, the 9 7/8%
Senior Notes) tendered, and will deliver to the Trustee an officers'
certificate stating that such Debentures (and, if applicable, the 9 7/8%
Senior Notes) or portions thereof were accepted for payment by the Company in
accordance with the terms of this covenant. The Company, the Depository or the
Paying Agent, as the case may be, will promptly (but in any case not later
than five days after the Asset Sale Purchase Date) mail or deliver to each
tendering holder an amount equal to the purchase price of the Debentures (and,
if applicable, the 9 7/8% Senior Notes) tendered by such holder and accepted
by the Company for purchase. The Company will promptly issue a new Debenture,
and the Trustee, upon written request from the Company will authenticate and
mail or deliver such new Debenture to such holder, in a principal amount equal
to any unpurchased portion of the Debenture surrendered. Any Debenture not so
accepted will be promptly mailed or delivered by the Company to the holder
thereof. The Company will publicly announce the results of the Asset Sale
Offer on the Asset Sale Purchase Date.
 
 Restricted Payments
 
  The Indenture provides that, on or prior to the Remarketing Settlement Date,
the Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly: (i) declare or pay any dividend or make any other
payment or distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving the Company) or to the
direct or indirect holders of the Company's or any of its Subsidiaries' Equity
Interests in their capacity as such (other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company or
dividends or distributions payable to the Company or any Restricted Subsidiary
that is a Subsidiary Guarantor or to SPB); (ii) purchase, redeem or otherwise
acquire or retire for value (including without limitation in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company or any direct or indirect parent of the Company or other Affiliate of
the Company (other than any such Equity Interests owned by the Company or any
Restricted Subsidiary of the Company that is a Subsidiary Guarantor or by
SPB); (iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Debentures (other than Debentures), except a payment of
interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
 
                                      170

 
    (a) no Indenture Default or Indenture Event of Default shall have
  occurred and be continuing or would occur as a consequence thereof;
 
    (b) at the time of and immediately after giving effect to such Restricted
  Payment, the Company would be able to incur at least $1.00 of additional
  Indebtedness pursuant to the test described in the first sentence of the
  covenant described in "Incurrence of Indebtedness and Issuance of Preferred
  Stock"; and
 
    (c) such Restricted Payment, together with the aggregate of all other
  Restricted Payments made by the Company and its Subsidiaries after the
  Issue Date (excluding Restricted Payments permitted by clauses (x) and (y)
  of the next succeeding paragraph), is less than the sum of (i) 25% of the
  Consolidated Net Income of the Company for the period (taken as one
  accounting period) from the beginning of the first fiscal quarter
  commencing after the Issue Date to the end of the Company's most recently
  ended fiscal quarter for which internal financial statements are available
  at the time of such Restricted Payment (or, if such Consolidated Net Income
  for such period is a deficit, less 100% of such deficit), plus (ii) 100% of
  the aggregate net cash proceeds received by the Company from the issue or
  sale since the Issue Date of Equity Interests (other than Disqualified
  Stock) of the Company or of debt securities of the Company that have been
  converted into such Equity Interests (other than Equity Interests (or
  convertible debt securities) sold to a Subsidiary of the Company and other
  than Disqualified Stock or debt securities that have been converted into
  Disqualified Stock), (iii) to the extent that any Restricted Investment
  that was made after the Issue Date is sold for cash or otherwise liquidated
  or repaid for cash, the lesser of (A) the cash return of capital with
  respect to such Restricted Investment (less the cost of disposition, if
  any) and (B) the initial amount of such Restricted Investment, (iv) 25% of
  any dividends received by the Company or a Wholly Owned Restricted
  Subsidiary that is a Subsidiary Guarantor or by SPB after the Issue Date
  from an Unrestricted Subsidiary of the Company, plus (v) $15.0 million.
 
  The foregoing provisions will not prohibit (v) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (w) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company or any Restricted Subsidiary in exchange
for, or out of the proceeds of, the substantially concurrent sale (other than
to a Subsidiary of the Company) of other Equity Interests of the Company
(other than any Disqualified Stock); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (x) the defeasance, redemption or repurchase of
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness or the substantially concurrent sale (other
than to a Subsidiary of the Company) of Equity Interests of the Company (other
than Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement or
other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (y) the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of the Company or any Subsidiary of the
Company held by any member of the Company's (or any of its Subsidiaries')
management pursuant to any management equity subscription agreement or stock
option agreement or other management agreement or plan; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $500,000 in any twelve-month period plus the
aggregate cash proceeds received by the Company during such twelve-month
period from any reissuance of Equity Interests by the Company to members of
management of the Company and its Subsidiaries; and (z) the repurchase,
redemption or other retirement for value of any Equity Interests of any
Restricted Subsidiary in a Strategic Investor Repurchase Transaction; and no
Indenture Default or Indenture Event of Default shall have occurred and be
continuing immediately after such transaction.
 
  The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at
the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the greatest of (x) the net book value of such
 
                                      171

 
Investments at the time of such designation, (y) the fair market value of such
Investments at the time of such designation and (z) the original fair market
value of such Investments at the time they were made. Such designation will
only be permitted if such Restricted Payment would be permitted at such time
and if such Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
 
  The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an officers' certificate delivered to the Trustee) on the date of the
Restricted Payment of the asset(s) proposed to be transferred by the Company
or such Subsidiary, as the case may be, pursuant to the Restricted Payment.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.
 
 Incurrence of Indebtedness and Issuance of Preferred Stock
 
  The Indenture provides that, on or prior to the Remarketing Settlement Date,
the Company will not, and will not permit any of its Subsidiaries to, directly
or indirectly, create, incur, assume, guaranty or otherwise become directly or
indirectly liable with respect to (collectively, "incur") any Indebtedness
(including Acquired Debt) and that the Company will not permit any of its
Restricted Subsidiaries to issue any shares of preferred stock; provided,
however, that the Company or any Subsidiary Guarantor may incur Indebtedness
(including Acquired Debt) or any Subsidiary Guarantor may issue preferred
stock or SPB may incur Permitted SPB Preferred Stock if, on the date of such
incurrence and after giving effect thereto, the Company's Consolidated
Leverage Ratio does not exceed 2.0 to 1.0.
 
  The foregoing provisions will not apply to:
 
    (i) Indebtedness of the Company existing on the Issue Date;
 
    (ii) the incurrence by the Company of Indebtedness represented by the
  Debentures or by the Subsidiary Guarantors of Indebtedness represented by
  the Subsidiary Guarantees;
 
    (iii) the incurrence of Permitted Warehouse Indebtedness by the Company
  or any of its Restricted Subsidiaries, and any Guarantee by the Company of
  such Indebtedness incurred by a Restricted Subsidiary, provided, however,
  that to the extent any such Indebtedness of the Company or a Subsidiary
  Guarantor ceases to constitute Permitted Warehouse Indebtedness, such
  Indebtedness shall be deemed to be incurred at such time by the Company or
  such Subsidiary Guarantor, as the case may be;
 
    (iv) the incurrence by the Company or any of its Restricted Subsidiaries
  of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
  of which are used to extend, refinance, renew, replace, defease or refund,
  Indebtedness that was permitted by the Indenture to be incurred or that was
  outstanding at the Issue Date;
 
    (v) the incurrence by the Company or a Restricted Subsidiary of Hedging
  Obligations directly related to (A) Indebtedness of the Company or a
  Restricted Subsidiary incurred in conformity with the provisions of the
  Indenture, (B) Receivables held by the Company or its Restricted
  Subsidiaries pending sale in a Qualified Securitization Transaction, (C)
  Receivables of the Company or its Restricted Subsidiaries that have been
  sold pursuant to a Warehouse Facility, (D) Receivables that the Company or
  the Restricted Subsidiary reasonably expects to purchase or commit to
  purchase, finance or accept as collateral, or (E) Securitization Related
  Assets and other assets owned or financed by the Company or its Restricted
  Subsidiaries in the ordinary course of business; provided, however, that,
  in the case of each of the foregoing clauses (A) through (E), such Hedging
  Obligations are eligible to receive hedge accounting treatment in
  accordance with GAAP as applied by the Company and its Restricted
  Subsidiaries on the Issue Date; and
 
    (vi) Indebtedness of the Subsidiary Guarantors or of SPB to the Company
  or Permitted SPB Preferred Stock issued to the Company to the extent that
  such Indebtedness or such Permitted SPB Preferred Stock constitutes a
  Permitted Investment of the Company of the type permitted under the
  definition of Permitted Investments;
 
                                      172

 
    (vii) the incurrence by the Company or any of its Restricted Subsidiaries
  other than a Special Purpose Subsidiary of intercompany Indebtedness owing
  to the Company or any of its Restricted Subsidiaries other than a Special
  Purpose Subsidiary; provided, however, that (i) any subsequent issuance or
  transfer of any Capital Stock which results in any such Indebtedness being
  held by a Person other than a Restricted Subsidiary and (ii) any sale or
  transfer of any such Indebtedness to a Person that is not either the
  Company or a Restricted Subsidiary (other than a Special Purpose
  Subsidiary) shall be deemed, in each case, to constitute the incurrence of
  such Indebtedness by the Company or such Subsidiary, as the case may be;
 
    (viii) the incurrence by a Special Purpose Subsidiary of Non-Recourse
  Debt in a Qualified Securitization Transaction and the incurrence by the
  Company's Unrestricted Subsidiaries of Non-Recourse Debt; provided,
  however, that if any such Indebtedness ceases to be Non-Recourse Debt of
  the Special Purpose Subsidiary or other Unrestricted Subsidiary, such event
  shall be deemed to constitute an incurrence of Indebtedness by a Restricted
  Subsidiary of the Company; and
 
    (ix) the incurrence by the Company and its Restricted Subsidiaries of
  Indebtedness in an aggregate principal amount which, together with the
  principal amount of all Indebtedness of the Company and its Restricted
  Subsidiaries outstanding on the date of Incurrence (other than Indebtedness
  permitted by clauses (ii) through (vii) above, or the first paragraph of
  this covenant), does not exceed $10.0 million.
 
 Liens
 
  The Indenture provides that, on or prior to the Remarketing Settlement Date,
Company will not, and will not permit any of its Restricted Subsidiaries to,
create, incur or otherwise cause or suffer to exist or become effective any
Lien for the benefit of any Indebtedness ranking pari passu with or junior to
the Debentures, other than Permitted Liens, upon any property or assets of the
Company or any Restricted Subsidiary of the Company or any shares of stock or
debt of any Restricted Subsidiary of the Company which owns property or
assets, now owned or hereafter acquired, unless (i) if such lien secures
Indebtedness which is pari passu with the Debentures, then the Debentures are
secured on an equal and ratable basis or (ii) if such lien secures
Indebtedness which is junior to the Debentures, any such lien shall be junior
to a lien granted to the holders of the Debentures. The Indenture will provide
that the Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien on
any asset now owned or hereafter acquired, or any income or profits therefrom
or assign or convey any right to receive income therefrom, except Permitted
Liens.
 
 Dividend and Other Payment Restrictions Affecting Subsidiaries
 
  The Indenture provides that, on or prior to the Remarketing Settlement Date,
the Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (i)(a) pay dividends or make any other distributions
to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any indebtedness owed to the Company or any of its
Restricted Subsidiaries, (ii) make loans or advances to the Company or any of
its Restricted Subsidiaries or (iii) transfer any of its properties or assets
to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the Issue Date, (b) the Warehouse Facilities as
in effect as of the Issue Date, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, additions,
replacements or refinancings thereof; provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
additions, replacements or refinancings are no more restrictive with respect
to such dividend and other payment restrictions than those contained in the
Warehouse Facilities as in effect on the Issue Date, (c) Indebtedness or other
contractual requirements of a Special Purpose Subsidiary in connection with a
Qualified Securitization Transaction; provided that such restrictions apply
only to such Special Purpose Subsidiary, (d) the Indenture and the Debentures,
(e) applicable law, (f) any instrument governing Indebtedness or Capital Stock
of a Person acquired by the Company or any of its Restricted Subsidiaries as
in effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the
 
                                      173

 
properties or assets of any Person, other than the Person, or the property or
assets of the Person, so acquired; provided that, in the case of Indebtedness,
such Indebtedness was permitted by the terms of the Indenture to be incurred,
(g) by reason of customary nonassignment provisions in leases entered into in
the ordinary course of business and consistent with past practices, (h)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii)
above on the property so acquired, or (i) Permitted Refinancing Indebtedness;
provided that the restrictions contained in the agreements governing such
Permitted Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being refinanced.
 
 Transactions with Affiliates
 
  The Indenture provides that, on or prior to the Remarketing Settlement Date,
the Company will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any
of its properties or assets to, or purchase any property or assets from, or
enter into or make or amend any contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of the
foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction
is on terms that are no less favorable to the Company or the relevant
Restricted Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Subsidiary with an unrelated Person and
(ii) the Company delivers to the Trustee (a) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $2.0 million, a resolution of the Board of
Directors set forth in an officers' certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, in addition to such officers' certificate, an opinion as to the
fairness to the Holders of such Affiliate Transaction from a financial point
of view issued by an investment banking firm of national standing which is not
an Affiliate of the Company; provided, however, that such fairness opinion
shall not be required with respect to a Qualified Securitization Transaction
or other transaction that is made in the ordinary course of business of the
Company or such Restricted Subsidiary, as the case may be, and is consistent
with the past business practice of the Company or such Restricted Subsidiary.
Notwithstanding the foregoing, the following shall not be deemed Affiliate
Transactions: (i) any employment agreement entered into by the Company or any
of its Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Restricted
Subsidiary, (ii) any issuance of securities, or other payments, compensation,
benefits, awards or grants in cash, securities or otherwise pursuant to, or
the funding of, employment arrangements, stock options and stock ownership
plans approved by the Board of Directors in the ordinary course of business
and consistent with the past practice of the Company or such Restricted
Subsidiary, (iii) the grant of stock options or similar rights to employees
and directors of the Company pursuant to plans approved by the Board of
Directors in the ordinary course of business and consistent with the past
practice of the Company or such Restricted Subsidiary, (iv) loans or advances
to employees in the ordinary course of business in accordance with the past
practices of the Company or its Restricted Subsidiaries, but in any event not
to exceed $500,000 in aggregate principal amount outstanding at any one time,
(v) the payment of reasonable fees to directors of the Company and its
Restricted Subsidiaries who are not employees of the Company or its Restricted
Subsidiaries, (vi) transactions between or among the Company and/or its
Restricted Subsidiaries, (vii) Restricted Payments and Permitted Investments
(other than Strategic Investor Repurchase Transactions) that are permitted by
the provisions of the Indenture described above under the caption "--
Restricted Payments," and (viii) transactions between a Special Purpose
Subsidiary and any Person in which the Special Purpose Subsidiary has an
Investment.
 
 Business Activities
 
  The Indenture provides that, on or prior to the Remarketing Settlement Date,
Company will not, and will not permit any Restricted Subsidiary to, engage in
any line of business that is not a Related Business (except as a result of
Investments in other businesses made or acquired in connection with the
activities or conduct of the Related Businesses in the ordinary course of
business by the Company and its Restricted Subsidiaries, including
 
                                      174

 
Investments obtained as a result of the foreclosure of Liens securing amounts
lent by the Company or any of its Restricted Subsidiaries).
 
 Reports
 
  The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Debentures are outstanding, the
Company will furnish to the holders of Debentures (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K even if the Company were not required to
file such forms, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K even if the Company were not required to file
such reports. In addition, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability (unless
the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, the Company and the Subsidiary Guarantors have agreed that, for so
long as any Debentures remain outstanding, they will furnish to the holders
and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
 
 Additional Subsidiary Guarantees
 
  The Indenture provides that, on or prior to the Remarketing Settlement Date,
the Company will not, and will not permit any of the Subsidiary Guarantors to,
make any Investment in any Subsidiary that is not a Subsidiary Guarantor
unless either (i) such Investment is permitted by the covenant entitled
"Restricted Payments," or (ii) such Subsidiary executes a Subsidiary Guarantee
and delivers an opinion of counsel in accordance with the provisions of the
Indenture.
 
 Merger, Consolidation, or Sale of Assets
 
  The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Debentures and the Indenture pursuant to
a supplemental indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Indenture Default or Indenture
Event of Default exists; and (iv) except in the case of a merger of the
Company with or into a Wholly Owned Restricted Subsidiary of the Company, the
Company or the entity or Person formed by or surviving any such consolidation
or merger (if other than the Company), or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made (A) will
have Consolidated Net Worth immediately after the transaction equal to or
greater than the Consolidated Net Worth of the Company immediately preceding
the transaction and (B) will, at the time of such transaction and after giving
pro forma effect thereto as if such transaction had occurred at the beginning
of the applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the test described in the first sentence
of the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
 
                                      175

 
AMENDMENT, SUPPLEMENT AND WAIVER
 
  Except as provided in the next two succeeding paragraphs, the Indenture or
the Debentures may be amended or supplemented with the consent of the holders
of at least a majority in principal amount of the Debentures then outstanding
(including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Debentures), and any
existing default or compliance with any provision of the Indenture or the
Debentures may be waived with the consent of the holders of a majority in
principal amount of the then outstanding Debentures (including consents
obtained in connection with a tender offer or exchange offer for Debentures).
 
  Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Debentures held by a non-consenting holder): (i) reduce
the principal amount of Debentures whose holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed
maturity of any Debenture or alter the provisions with respect to the
redemption of the Debentures; provided that the covenants entitled "Asset
Sales" and "Change of Control" are not redemption provisions; (iii) reduce the
rate of or change the time for payment of interest on any Debenture; (iv)
waive an Indenture Default or Indenture Event of Default in the payment of
principal of or premium, if any, or interest the Debentures (except a
rescission of acceleration of the Debentures by the holders of at least a
majority in aggregate principal amount of the Debentures and a waiver of the
payment default that resulted from such acceleration); (v) make any Debenture
payable in money other than that stated in the Debentures; (vi) make any
change in the provisions of the Indenture relating to waivers of past Defaults
or the rights of holders of Debentures to receive payments of principal of or
premium, if any, or interest on, the Debentures; (vii) waive a redemption
payment with respect to any Debenture; or (viii) make any change in the
foregoing amendment and waiver provisions.
 
  Notwithstanding the foregoing, without the consent of any holder of
Debentures, the Company and the Trustee may amend or supplement the Indenture
or the Debentures to cure any ambiguity, defect or inconsistency, to provide
for uncertificated Debentures in addition to or in place of certificated
Debentures, to provide for the assumption of the Company's obligations to
holders of Debentures in the case of a merger or consolidation, to make any
change that would provide any additional rights or benefits to the holders of
Debentures or that does not adversely affect the legal rights under the
Indenture of any such holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act. For purposes of the foregoing, any amendment or
supplement which extends period of time during which the Debentures may not be
redeemed at the option of the Company shall not be deemed to adversely affect
the legal rights under the Indenture of any holders.
 
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
 
  The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Debentures ("Legal
Defeasance") except for (i) the rights of holders of outstanding Debentures to
receive payments in respect of the principal of, premium, if any, and interest
and Additional Interest, if any, on such Debentures when such payments are due
from the trust referred to below, (ii) the Company's obligations with respect
to the Debentures concerning issuing temporary Debentures, registration of
Debentures, mutilated, destroyed, lost or stolen Debentures and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute an Indenture Default or Indenture Event of
Default with respect to the Debentures. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Indenture Event of Default with respect to the
Debentures.
 
  In order to exercise either Legal Defeasance or Covenant Defeasance: (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Debentures, cash in U.S. dollars, non-
 
                                      176

 
callable Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest and Additional Interest, if any, on the outstanding Debentures on the
stated maturity or on the applicable redemption date, as the case may be, and
the Company must specify whether the Debentures are being defeased to maturity
or to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that (A) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the Issue Date, there has been a change
in the applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, the holders of
the outstanding Debentures will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that the holders of the outstanding Debentures will
not recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred; (iv) no Indenture Default
or Indenture Event of Default shall have occurred and be continuing on the
date of such deposit (other than an Indenture Default or Indenture Event of
Default resulting from the borrowing of funds to be applied to such deposit)
or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Debentures over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an officers' certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
 
DISTRIBUTIONS OF DEBENTURES; BOOK-ENTRY ISSUANCE
 
  Under certain circumstances involving the termination of the Trust,
Debentures may be distributed to the holders of the Securities in liquidation
of the Trust after satisfaction of liabilities to creditors of the Trust as
provided by applicable law. If distributed to holders of Securities in
liquidation, the Debentures will initially be issued in the form of Global
Certificates and, if distributed after the Remarketing Settlement Date,
certificated securities not represented by Global Certificates. DTC, or any
successor depositary, will act as depositary for such Global Certificates. It
is anticipated that the depositary arrangements for such Global Certificates
would be substantially identical to those in effect for the Securities.
 
  There can be no assurance as to the market price of any Debentures that may
be distributed to the holders of Securities.
 
PAYMENT AND PAYING AGENTS
 
  The Company initially will act as Paying Agent with respect to the
Debentures except that, if the Debentures are distributed to the holders of
the Securities in liquidation of such holders' interests in the Trust, the
Indenture Trustee will act as the Paying Agent. The Company at any time may
designate additional Paying Agents or rescind the designation of any Paying
Agent or approve a change in the office through which any Paying Agent acts,
except that the Company will be required to maintain a Paying Agent at the
place of payment.
 
                                      177

 
  Any moneys deposited with the Indenture Trustee or any Paying Agent, or then
held by the Company in trust, for the payment of the principal of and premium,
if any, or interest or Additional Interest, if any, on any Debentures and
remaining unclaimed for two years after such principal and premium, if any, or
interest has become due and payable shall, at the request of the Company, be
repaid to the Company and the holder of such Debentures shall thereafter look,
as a general unsecured creditor, only to the Company for payment thereof.
 
GOVERNING LAW
 
  The Indenture and the Debentures are governed by and construed in accordance
with the laws of the State of New York.
 
CONCERNING THE INDENTURE TRUSTEE
 
  The Indenture contains certain limitations on the rights of the Indenture
Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Indenture Trustee will be
permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days or apply
to the Commission for permission to continue or resign.
 
  The holders of a majority in principal amount of the then outstanding
Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Indenture
Trustee, subject to certain exceptions. The Indenture provides that in case an
Indenture Event of Default shall occur (which shall not be cured), the
Indenture Trustee will be required, in the exercise of its power, to use the
degree of care of a prudent man in the conduct of his own affairs. Subject to
such provisions, the Indenture Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of any holder
of Debentures, unless such holder shall have offered to the Indenture Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
 
CERTAIN DEFINITIONS
 
  Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
 
  "Acquired Debt" means, with respect to any specified Person (i) Indebtedness
of any other Person existing at the time such other Person is merged with or
into or became a Subsidiary of such specified Person, including, without
limitation, Indebtedness incurred in connection with, or in contemplation of,
such other Person merging with or into or becoming a Subsidiary of such
specified Person and (ii) Indebtedness secured by a Lien encumbering any asset
acquired by such specified Person.
 
  "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, control
(including, with correlative meanings, the terms controlling, controlled by
and under common control with), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control. Notwithstanding the foregoing, no Person (other than
the Company or any Restricted Subsidiary of the Company) in whom a Special
Purpose Subsidiary makes an Investment in connection with a Qualified
Securitization Transaction shall be deemed to be an Affiliate of the Company
or any of its Restricted Subsidiaries solely by reason of such Investment.
 
  "Asset Sale" means (a) any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (other than as permitted under "--Certain
Covenants of the
 
                                      178

 
Company--Merger, Consolidation or Sale of Assets" or "--Subsidiary
Guaranties") (each referred to for the purposes of this definition as a
"disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary
(other than directors' qualifying shares or shares required by applicable law
to be held by a Person other than the Company or a Restricted Subsidiary, as
the case may be), (ii) all or substantially all the assets of any division or
line of business of the Company or any Restricted Subsidiary, (iii) any other
assets of the Company or any Restricted Subsidiary outside of the ordinary
course of business of the Company or such Restricted Subsidiary, as the case
may be, including any sale of the stock of a Restricted Subsidiary, or (iv)
any Securitization Related Asset, or (b) any issuance of Capital Stock (other
than non-convertible preferred stock that is not Disqualified Stock) by any of
the Company's Restricted Subsidiaries, except any such issuance to the Company
or any Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor.
Notwithstanding the foregoing, an "Asset Sale" does not include (a) a
disposition by a Subsidiary to the Company or a Wholly Owned Restricted
Subsidiary or by the Company to a Wholly Owned Restricted Subsidiary, (b) a
disposition that constitutes a Restricted Payment permitted by the covenant
described under "--Certain Covenants--Restricted Payments"), (c) sales of
Receivables in Qualified Securitization Transactions for the fair market value
thereof, including cash in an amount at least equal to 75% of the book value
thereof as determined in accordance with GAAP, (d) transfers of Receivables by
a Special Purpose Subsidiary to third parties in a Qualified Securitization
Transaction and (e) any trade or exchange by the Company or any Restricted
Subsidiary of any assets for similar assets of a Related Business owned or
held by another Person; provided that (1) the fair market value of the assets
traded or exchanged by the Company or such Restricted Subsidiary (including
any cash or Cash Equivalents to be delivered by the Company or such Restricted
Subsidiary) is reasonably equivalent to the fair market value of the asset or
assets (together with any cash or Cash Equivalents) to be received by the
Company or such Restricted Subsidiary and (2) such exchange is approved by a
majority of the directors of the Company who are not employees of the Company
or its Restricted Subsidiaries.
 
  "Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
 
  "Capitalized Excess Servicing Fees Receivables" mean, with respect to the
sale of Receivables in a Qualified Securitization Transaction, the present
value of the excess of the weighted average coupon on the Receivables sold
over the sum of (i) the coupon in the pass-through certificates, (ii) a base
servicing fee paid to the loan or lease servicer and (iii) expected losses to
be incurred on the portfolio of Receivables sold, considering prepayment
assumptions.
 
  "Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
 
  "Cash Equivalents" means: (i) United States dollars; (ii) Government
Securities (except that for purpose of this definition, Government Securities
must have a remaining Weighted Average Life to Maturity of not more than one
year from the date of investment therein); (iii) commercial paper or other
short-term corporate obligation that has received a rating of at least A-1 or
AA from Standard & Poor's Corporation ("S&P"), P-1 or Aa2 from Moody's
Investor Services, Inc. ("Moody's"), F-1 or AA from Fitch Investor Service,
Inc. ("Fitch"), or D-1 or AA from Duff & Phelps Credit Rating Co., ("Duff");
(iv) time deposits, certificates of deposit, bank acceptances or bank notes
issued by any bank having capital surplus and undivided profits aggregating at
least $500 million (or the foreign currency equivalent thereof) and at least a
high A rating (or the equivalent) from any two of the following: S&P, Moody's,
Thomson Bankwatch, Inc. or IBCA, Inc.; (v) money market preferred stocks
which, at the date of acquisition and at all times thereafter, are accorded
ratings of at least mid AA by any two of the following: S&P, Moody's, Fitch or
Duff; (vi) tax-exempt obligations that are accorded ratings at the time of
investment therein of at least mid AA (or equivalent short-term ratings) by
any two of the following; S&P, Moody's, Fitch or Duff; (vii) master repurchase
agreements with foreign or domestic banks having capital
 
                                      179

 
and surplus of not less than $500 million (or the foreign equivalent thereof)
or primary dealers so long as (a) such bank or dealer has a rating of at least
mid AA from any two of the following: S&P, Moody's, Fitch or Duff; (b) such
agreements are collateralized with obligations of the United States government
or its agencies at a ratio of 102%, or with other collateral rated at least
mid AA from any two of the following: S&P, Moody's, Fitch or Duff, at a rate
of 103% and, in either case marked to market weekly and (c) such securities
shall be held by a third-party agent; (viii) guaranteed investment contracts
and/or agreements of a bank, insurance company or other institution whose
unsecured, uninsured and unguaranteed obligations (or claims-paying ability)
are, at the time of investment therein, rated AAA by any two of the following:
S&P, Moody's, Fitch or Duff; (ix) money market funds, the portfolio of which
is limited to investments described in clauses (i) through (viii); (x) with
respect to Non-Domestic Persons, instruments that are comparable to those
described in clauses (i), (ii), (iv) and (vii) in the country in which such
Non-Domestic Person is organized or has its principal business operations; and
(xii) up to $1.0 million in the aggregate of other financial assets held by
Restricted Subsidiaries. In no event shall any of the Cash Equivalents
described in clauses (iii) through (viii), (x) and (xi) above have a final
maturity more than one year from the date of investment therein.
 
  "Change of Control" means the occurrence of one or more of the following
events: (i) a person or entity or group (as that term is used in Section
13(d)(3) of the Exchange Act) of persons or entities shall have become the
beneficial owner of a majority of the securities of the Company ordinarily
having the right to vote in the election of directors; (ii) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any directors
who are members of such Board of Directors of the Company on the date hereof
and any new directors whose election by such Board of Directors of the Company
or whose nomination for election by the shareholders of the Company was
approved by a vote of 66 2/3% of the directors then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in office;
(iii) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, the assets of
the Company and its Restricted Subsidiaries, taken as a whole, to any person
or entity or group (as so defined) of persons, or entities (other than to any
Wholly Owned Restricted Subsidiary of the Company); (iv) the merger or
consolidation of the Company with or into another corporation or the merger of
another corporation into the Company with the effect that immediately after
such transaction any person or entity or group (as so defined) of persons or
entities shall have become the beneficial owner of securities of the surviving
corporation of such merger or consolidation representing a majority of the
combined voting power of the outstanding securities of the surviving
corporation ordinarily having the right to vote in the election of directors;
or (v) the adoption of a plan relating to the liquidation or dissolution of
the Company.
 
  "Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of all consolidated Indebtedness of the
Company and its Restricted Subsidiaries, excluding Warehouse Indebtedness and
Guarantees thereof permitted to be incurred pursuant to clause (iii) of the
covenant described under "--Incurrence of Indebtedness and Issuance of
Preferred Stock" to (ii) the Consolidated Net Worth of the Company.
 
  "Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof that is a Subsidiary Guarantor, (ii) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary of
that Net Income is not at the date of determination permitted without any
prior governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders, (iii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting
 
                                      180

 
principles shall be excluded, and (v) the Net Income of any Unrestricted
Subsidiary shall be excluded, whether or not distributed to the Company or one
of its Subsidiaries.
 
  "Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the Issue Date in
the book value of any asset owned by such Person or a consolidated Restricted
Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Restricted Subsidiaries and in Persons that are not Restricted
Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
 
  "Designated Senior Debt" means any Senior Debt permitted under the Indenture
the principal amount of which is $25.0 million or more and that has been
designated by the Company as "Designated Senior Debt."
 
  "Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
date that is 91 days after the Stated Maturity of the Debentures.
 
  "Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
 
  "Equity Offering" means an underwritten primary public offering of Equity
Interests (other than Disqualified Stock) of the Company pursuant to an
effective registration statement under the Securities Act.
 
  "Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other then Indebtedness under the Warehouse Facilities) in
existence on the Issue Date, until such amounts are repaid.
 
  "GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
 
  "Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
 
  "Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates, in either case in the ordinary course of business and not for
speculative or investment purposes.
 
  "Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or liable,
(ii) all Capital Lease Obligations of such Person, (iii) all obligations of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations of such Person and all obligations of such Person
under any title retention agreement (but excluding trade account
 
                                      181

 
payable and expense accruals arising in the ordinary course of business), (iv)
all obligations of such Person for the reimbursement of any obligor on any
letter of credit, banker's acceptance or similar credit transaction (other
than obligations with respect to letters of credit securing obligations (other
than obligations described in (i) through (iii) above) entered into in the
ordinary course of business of such Person to the extent such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the tenth Business Day following receipt by such
Person of a demand for reimbursement following payment on the letter of
credit), (v) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock other than
Permitted SPB Preferred Stock (but excluding any accrued dividends), (vi) all
Warehouse Indebtedness, (vii) all obligations of the type referred to in
clauses (i) through (vi) of other Persons and all dividends of other Persons
for the payment of which, in either case, such Person is responsible or
liable, directly or indirectly, as obligor, guarantor or otherwise, including
by means of any Guaranty, (viii) all obligations of the type referred to in
clauses (i) through (vii) of other Persons secured by any Lien on any property
or asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of the
value of such property or assets or the amount of the obligation so secured
and (ix) to the extent not otherwise included in this definition, Hedging
Obligations of such Person. Except in the case of Warehouse Indebtedness (the
amount of which shall be determined in accordance with the definition thereof)
the amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and
the maximum liability, upon the occurrence of the contingency giving rise to
the obligation, of any contingent obligations at such date. Notwithstanding
the foregoing, the term "Indebtedness" does not include deposit liabilities of
any Restricted Subsidiary, the deposits of which are insured by the Federal
Deposit Insurance Corporation or any successor agency or Indebtedness of any
Restricted Subsidiary to the Federal Home Loan Bank of San Francisco or any
successor thereto incurred in the ordinary course of business and secured by
qualifying mortgage loans or mortgage-backed securities.
 
  "Indenture Default" means any event that is or with the passage of time or
the giving of notice or both would be an Indenture Event of Default.
 
  "Investments" means, with respect to any Person, all investment by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interest or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities
by the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Equity
Interests of any Restricted Subsidiary of the Company such that, after giving
effect to any such sale or disposition, such Person is no longer a Subsidiary
of the Company, the Company shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value (as
determined as set forth in the last paragraph under the covenant entitled "--
Restricted Payment") of the Equity Interests of such Restricted Subsidiary not
sold or disposed of; provided, however, that this requirement shall not apply
if (i) the class of Equity Interests of the Restricted Subsidiary owned by the
Company is registered under Section 12 of the Exchange Act and is listed on a
national securities exchange or quoted on a national quotations system and
(ii) if the Company has entered into an agreement with the Restricted
Subsidiary that provides the Company with the right to demand (subject to
customary restrictions) registration of all of is Equity Interests under the
Securities Act.
 
  "Issue Date" means the date on which the Debenture are originally issued.
 
  "Lien" means, with respect to any Person, any mortgage, pledge, security
interest, encumbrance, lien or charge of any kind on the assets of such Person
(including (i) any conditional sale or other title retention agreement or
lease in the nature thereof, and (ii) any claim (whether direct or indirect
through subordination or other structural encumbrance against any
Securitization Related Asset sold or otherwise transferred by such Person to a
buyer, unless such Person is not liable for any losses thereon).
 
                                      182

 
  "Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and after any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain
(but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
 
  "Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness secured by a Lien on the asset or assets that
were the subject of such Asset Sale and any reserve for adjustment in respect
of the sale price of such asset or assets established in accordance with GAAP.
 
  "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), or (b) is directly or indirectly liable (as a guarantor or
otherwise); and (ii) no default with respect to which (including any rights
that the holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any other Indebtedness (other than the Debentures being offered
hereby) of the Company or any of its Restricted Subsidiaries to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of the Company or any of its Restricted Subsidiaries.
 
  "Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other labilities payable under
the documentation governing any Indebtedness.
 
  "Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary (i) in a Subsidiary Guarantor or in SPB or a Person that will, upon
the making of such Investment, become a Subsidiary Guarantor, provided,
however, that the primary business of such Subsidiary Guarantor is a Related
Business; and provided further, that any Investment by the Company in SPB must
be in the form of Permitted SPB Preferred Stock or in a security senior to
such stock; (ii) in another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys
all or substantially all its assets to, the Company or a Subsidiary Guarantor,
provided, however, that such Person's primary business is a Related Business,
(iii) comprised of Cash Equivalents, (iv) comprised of Receivables owing to
the Company or any Restricted Subsidiary if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms, (v) comprised of payroll, travel and similar advances
to cover matters that are expected at the time of such advances ultimately to
be treated as expenses for accounting purposes and that are made in the
ordinary course of business, (vi) comprised of stock, obligations or
securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments, (vii) in any Person to the extent such Investment
represents the noncash portion of the consideration received for an Asset Sale
as permitted pursuant to the covenant described under "--Certain Covenants of
the Company--Asset Sales," (viii) comprised of Receivables of the Company or
any of its Wholly Owned Restricted Subsidiaries, or (ix) comprised of
Securitization Related Assets arising in a Qualified Securitization
Transaction.
 
  "Permitted Liens" means, with respect to any Person: (a) pledges or deposits
by such Person under worker's compensation laws, unemployment insurance laws
or similar legislation, or good faith deposits in
 
                                      183

 
connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits of cash or United
States government bonds to secure surety or appeal bonds to which such Person
is a party, or deposits as security for contested taxes or import duties or
for the payment of rent, in each case Incurred in the ordinary course of
business; (b) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested in good
faith by appropriate proceedings or other Liens arising out of judgments or
awards against such Person with respect to which such Person shall then be
proceeding with an appeal or other proceedings for review; (c) Liens for
property taxes not yet subject to penalties for non-payment or which are being
contested in good faith and by appropriate proceedings; (d) Liens in favor of
issuers of surety bonds or letters of credit issued pursuant to the request of
and for the account of such Person in the ordinary course of its business;
provided, however, that such letters of credit do not constitute Indebtedness;
(e) minor survey exceptions, minor encumbrances, easements or reservations of,
or rights of others for, licenses, rights of way, sewers, electric lines,
telegraph and telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real property or Liens incidental to the conduct
of the business of such Person or to the ownership of its properties which
were not Incurred in connection with Indebtedness and which do not in the
aggregate materially adversely affect the value of said properties or
materially impair their use in the operation of the business of such Person;
(f) Liens securing Indebtedness Incurred to finance the construction, purchase
or lease of, or repairs, improvements or additions to, property of such Person
(but excluding Capital Stock of another Person); provided, however, that the
Lien may not extend to any other property owned by such Person or any of its
Subsidiaries at the time the Lien is Incurred, and the Indebtedness secured by
the Lien may not be Incurred more than 180 days after the latest of the
acquisition, completion of construction, repair, improvement, addition or
commencement of full operation of the property subject to the Lien; (g) Liens
on Receivables owned by the Company or a Restricted Subsidiary, as the case
may be, to secure Indebtedness permitted under the provisions described in
clause (ii) under "--Certain Covenants of the Company--Incurrence of
Indebtedness and Issuance of Preferred Stock" and Liens to secure Indebtedness
under mortgage loan repurchase agreements or repurchase facilities permitted
under the provisions described in clause (iii) under "Certain Covenants of the
Company--Incurrence of Indebtedness and Issuance of Preferred Stock"; (h)
Liens on Securitization Related Assets (or on the Capital Stock of any
Subsidiary of such Person substantially all the assets of which are
Securitization Related Assets); provided, however, that, (x) any such Liens
may only encumber Securitization Related Assets, in an amount not to exceed
75% of the excess, if any, of (i) the total amount of Securitization Related
Assets, determined on a consolidated basis in accordance with GAAP, as of the
creation of such Lien over (ii) an amount equal to 150% of all unsecured
Senior Indebtedness of the Company and its Restricted Subsidiaries as of the
time of creation of such Lien; and (y) the balance of Securitization Related
Assets, not permitted to be encumbered by the foregoing proviso (x) shall
remain unencumbered by any Lien; (i) Liens on Receivables and other assets of
a Special Purpose Subsidiary incurred in connection with a Qualified
Securitization Transaction; (j) Liens existing on the Issue Date; (k) Liens on
property or shares of Capital Stock of another Person at the time such other
Person becomes a Subsidiary of such Person; provided, however, that such Liens
are not created, incurred or assumed in connection with, or in contemplation
of, such other Person becoming such a Subsidiary; provided further, however,
that such Lien may not extend to any other property owned by such Person or
any of its Subsidiaries; (l) Liens on property at the time such Person or any
of its Subsidiaries acquires the property, including, any acquisition by means
of a merger or consolidation with or into such Person or a Subsidiary of such
Person; provided, however, that such Liens are not created, incurred or
assumed in connection with, or in contemplation of such acquisition; provided
further, however, that the Liens may not extend to any other property owned by
such Person or any of its Subsidiaries; (m) Liens securing Indebtedness or
other obligations of a Subsidiary of such Person owing to such Person or a
Restricted Subsidiary of such Person; (n) Liens (other than on any
Securitization Related Assets) securing Hedging Obligations; (o) Liens on cash
or other assets (other than Securitization Related Assets) securing Warehouse
Indebtedness of the Company or its Restricted Subsidiaries; (p) Liens to
secure any Permitted Refinancing Indebtedness as a whole, or in part, with any
Indebtedness permitted under the Indenture to be Incurred and secured by any
Lien referred to in the foregoing clauses (f), (j), (k) and (1); provided,
however, that (x) such new Lien shall be limited to all or part of the same
property that secured the original Lien (plus improvements to or on such
property) (y) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (A) the
 
                                      184

 
outstanding, principal amount or, if greater, committed amount of the
Indebtedness described under clauses (f), (j), (k) or (1), as the case may be,
at the time the original Lien became a Permitted Lien and (B) an amount
necessary to pay any fees and expenses, including premiums, related to such
refinancing, refunding, extension, renewal or replacement; (q) Liens securing
deposit liabilities of any Restricted Subsidiary, the deposits of which are
insured by the Federal Deposit Insurance Corporation or any successor agency
or Indebtedness of any Restricted Subsidiary to the Federal Home Loan Bank of
San Francisco or any successor thereto incurred in the ordinary course of
business and secured by qualifying mortgage loans or mortgage-backed
securities; and (r) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries. Notwithstanding the foregoing,
"Permitted Liens" will not include any Lien described in clauses (f), (j) or
(k) above to the extent such Lien applies to any Additional Assets acquired
directly or indirectly from Net Proceeds pursuant to the covenant described
under "--Certain Covenants of the Company--Sale of Assets."
 
  "Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted
Subsidiaries; provided that (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Debentures, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the Debentures
on terms at least as favorable to the Holders of Debentures as those contained
in the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; (iv) such Indebtedness is incurred
either by the Company or by the Restricted Subsidiary who is the obligor on
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (v) such Indebtedness may not include a Guaranty of Indebtedness
of a Person that is not a Subsidiary of the Company.
 
  "Permitted SPB Preferred Stock" means nonvoting (except as provided in the
second proviso below), noncumulative, perpetual preferred stock of SPB, which
would qualify as Tier 1 capital or the equivalent thereof on an unrestricted
basis for purposes of the capital requirements contained in 12 C.F.R. Part
325, Subpart A, or any successor provision; provided that the total
liquidation preference of such preferred stock outstanding at any time shall
not exceed 20% of the Consolidated Net Worth of SPB (after giving effect to
the issuance of such preferred stock); and provided further, that the holders
of such stock may be granted the right to elect directors constituting less
than a majority of the board of directors of SPB if dividends on such have not
been paid for six dividend periods, whether consecutive or not, and until such
time as SPB has paid or declared and set apart for payment dividends for four
consecutive dividend periods.
 
  "Permitted Warehouse Indebtedness" means Warehouse Indebtedness in
connection with a Warehouse Facility; provided, however, that (i) the assets
as to which such Warehouse Indebtedness relates are or, prior to any funding
under the related Warehouse Facility with respect to such assets, were
eligible to be recorded as held for sale on the consolidated balance sheet of
the Company in accordance with GAAP, (ii) such Warehouse Indebtedness will be
deemed to be Permitted Warehouse Indebtedness (a) in the case of a Purchase
Facility, only to the extent the holder of such Warehouse Indebtedness has no
contractual recourse to the Company and its Restricted Subsidiaries to satisfy
claims in respect of such Permitted Warehouse Indebtedness in excess of the
realizable value of the Receivables financed thereby, and (b) in the case of
any other Warehouse Facility, only to the extent of the lesser of (A) the
amount advanced by the lender with respect to the Receivables financed under
such Warehouse Facility, and (B) the principal amount of such Receivables and
(iii) any such Indebtedness has not been outstanding in excess of 364 days.
 
                                      185

 
  "Purchase Facility" means any Warehouse Facility in the form of a purchase
and sale facility pursuant to which the Company or a Restricted Subsidiary of
the Company sells Receivables to a financial institution and retains a right
of first refusal upon the subsequent resale of such Receivables by such
financial institution.
 
  "Qualified Securitization Transaction" means any transaction or series of
transactions pursuant to which (i) the Company or any of its Restricted
Subsidiaries (other than a Special Purpose Subsidiary) sells, convey or
otherwise transfers to a Special Purpose Subsidiary or (ii) the Company, any
of its Restricted Subsidiaries or a Special Purpose Subsidiary sells, conveys
or otherwise transfers to a special purpose owner trust or other Person
Receivables (together with any assets related to such Receivables, including,
without limitation, all collateral securing such Receivables, all contracts
and all guarantees or other obligations in respect of such Receivables,
proceeds of such Receivables and other assets which are customarily
transferred in connection with asset securitization transactions involving
Receivables) of the Company or any of its Restricted Subsidiaries in
transactions constituting "true sales" under the Bankruptcy Laws and as
"sales" under GAAP, as evidenced by an Opinion of Counsel to such effect.
 
  "Receivables" means consumer, mortgage and commercial loans, equipment or
other lease receivables and receivables purchased or originated by the Company
or any Restricted Subsidiary in the ordinary course of business; provided,
however, that for purposes of determining the amount of a Receivable at any
time, such amount shall be determined in accordance with GAAP, consistently
applied, as of the most recent practicable date.
 
  "Related Business" means any consumer or commercial finance business or any
financial advisory or financial service business.
 
  "Residual Certificates" means, with respect to the sale of Receivables in a
Qualified Securitization Transaction, any certificates representing
Receivables not sold or transferred in such transaction or otherwise retained
by or returned to the Person transferring such Receivables.
 
  "Restricted Investment" means an Investment other than a Permitted
Investment.
 
  "Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
 
  "Retained Interest" means, with respect to the sale of Receivables in a
Qualified Securitization Transaction, the interest and rights retained by the
Person in the Receivables transferred or sold in a Qualified Securitization
Transaction, including any rights to receive cash flow attributable to such
Receivables.
 
  "Securitization Related Assets" means, with respect to a Qualified
Securitization Transaction: (i) the Capitalized Excess Servicing Fees
Receivable retained by the Person who transfers or sells Receivables in such a
transaction, (ii) the Retained Interest held by such Person in the Receivables
sold or transferred in such transaction and (iii) Residual Certificates
retained by such Person in such transaction.
 
  "Senior Debt" means all Indebtedness permitted to be incurred by the Company
under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Debentures and all Obligations with
respect to the foregoing. Notwithstanding anything to the contrary in the
foregoing, Senior Debt will not include (i) any liability for federal, state,
local or other taxes owed or owing by the Company, (ii) any Indebtedness of
the Company to any of its Subsidiaries or other Affiliates, (iii) any trade
payables or (iv) any Indebtedness that is incurred in violation of the
Indenture.
 
  "Senior Indebtedness" means all Indebtedness of the Company or the
Subsidiary Guarantors that is not by its terms, subordinated in right of
payment to the Debentures or the Subsidiary Guarantees, respectively.
 
                                      186

 
  "Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
 
  "SPB" means Southern Pacific Bank, a California corporation and a Subsidiary
of the Company.
 
  "Special Purpose Subsidiary" means a Wholly Owned Restricted Subsidiary of
the Company (a) that is designated (as set forth below) as a "Special Purpose
Subsidiary" by the Board of Directors of the Company, (b) that does not engage
in, and whose charter prohibits it from engaging in, any activities other than
Qualified Securitization Transactions, (c) no portion of the Indebtedness or
any other Obligations (contingent or otherwise) of which (i) is guaranteed by
the Company or any other Restricted Subsidiary of the Company, (ii) is
recourse to or obligates the Company or any other Restricted Subsidiary of the
Company in any way other than pursuant to representations, warranties,
covenants and indemnities entered into in the ordinary course of business in
connection with a Qualified Securitization Transaction or (iii) subjects any
property or asset of the Company or any other Restricted Subsidiary of the
Company, directly or indirectly, contingently or otherwise, to the
satisfaction thereof, other than pursuant to representations, warranties,
covenants and indemnities entered into in the ordinary course of business in
connection with a Qualified Securitization Transaction, (d) with which neither
the Company nor any other Restricted Subsidiary of the Company has any
material contract, agreement, arrangement or understanding other than on terms
no less favorable to the Company or such Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of the Company and
(e) with which neither the Company nor any other Restricted Subsidiary of the
Company has any obligation to maintain or preserve such Restricted
Subsidiary's financial condition or cause such Restricted Subsidiary to
achieve certain levels of operating results. Any such designation by the Board
of Directors of the Company shall be evidenced to the Trustee by filing with
the Trustee a certified copy of the resolution of the Board of Directors of
the Company giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing conditions.
 
  "SPFC" means Southern Pacific Funding Corporation, a California corporation
and a partially owned Subsidiary of the Company.
 
  "Stated Maturity" means, with respect to any installment of principal or
interest on any series of Indebtedness, the date on which such payment of
principal or interest was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such principal or interest prior to the
date originally scheduled for the payment thereof.
 
  "Strategic Investor Repurchase Transaction" means the repurchase, redemption
or other retirement for value of any Equity Interests of any Restricted
Subsidiary (a) from a strategic partner or investor owning such Equity
Interests that, except for such Investment, would not be an Affiliate of the
Company or its Restricted Subsidiaries and (b) in a transaction whose terms
comply with the provisions set forth in "--Affiliate Transactions."
 
  "Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof); provided, that SPFC and ICIFC shall not be considered Subsidiaries
of the Company unless the Company owns more than 50% of the total voting power
of shares of Capital Stock on or after March 31, 1997.
 
  "Subsidiary Guarantors" means each of (i) the Restricted Subsidiaries other
than SPB and the Special Purpose Subsidiaries and (ii) any other subsidiary
that executes a Subsidiary Guarantee in accordance with the provisions of the
Indenture, and their respective successors and assigns.
 
                                      187

 
  "Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) is not party to
any agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company or
such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (b) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; (c) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (d) has
at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an officers' certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "--Certain Covenants of the Company--
Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail
to meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness of such Subsidiary shall be deemed to be
incurred by a Restricted Subsidiary of the Company as of such date (and, if
such Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption "--Certain Covenants of the Company--
Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall
be in default of such covenant). The Board of Directors of the Company may at
any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only
be permitted if (i) such Indebtedness is permitted under the covenant
described under the caption "--Certain Covenants of the Company--Incurrence of
Indebtedness and Issuance of Preferred Stock," (ii) such Subsidiary becomes a
Subsidiary Guarantor, and (iii) no Indenture Default or Indenture Event of
Default would be in existence following such designation.
 
  "Warehouse Facility" means any funding arrangement, including a Purchase
Facility, with a financial institution or other lender or purchaser, to the
extent (and only to the extent) funding thereunder is used exclusively to
finance or refinance the purchase or origination of Receivables by the Company
or a Restricted Subsidiary of the Company for the purpose of (i) pooling such
Receivables prior to securitization or (ii) sale, in each case in the ordinary
course of business.
 
  "Warehouse Indebtedness" means the greater of (x) the consideration received
by the Company or its Restricted Subsidiaries under a Warehouse Facility and
(y) in the case of a Purchase Facility, the book value of the Receivables
financed under such Warehouse Facility until such time as such Receivables are
(i) securitized, (ii) repurchased by the Company or its Restricted
Subsidiaries or (iii) sold by the counterparty under the Warehouse Facility to
a Person who is not an Affiliate of the Company.
 
  "Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
product obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
 
  "Wholly Owned Restricted Subsidiary" of any Person means a Subsidiary of
such Person all of the outstanding Capital Stock or other ownership interests
of which (other than directors' qualifying shares) shall at the time be owned
by such Person or by one or more Wholly Owned Restricted Subsidiaries of such
Person and one or more Wholly Owned Subsidiaries of such Person.
 
                                      188

 
                        DESCRIPTION OF TRUST GUARANTEE
 
  The Trust Guarantee was executed and delivered by the Company concurrently
with the issuance by the Trust of the Par Securities for the benefit of the
holders from time to time of such Securities. Chase Trust Company of
California acts as Guarantee Trustee under the Trust Guarantee. This summary
of certain provisions of the Trust Guarantee does not purport to be complete
and is subject to, and qualified in its entirety by reference to, all of the
provisions of the Trust Guarantee, including the definitions therein of
certain terms. The Guarantee Trustee holds the Trust Guarantee for the benefit
of the holders of the Securities.
 
GENERAL
 
  The Company has irrevocably and unconditionally agreed to pay in full, to
the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Securities, as and when due, regardless of any defense, right
of set-off or counterclaim that the Trust may have or assert. The following
payments or distributions with respect to the Par Securities, to the extent
not paid by or on behalf of the Trust (the "Guarantee Payments"), will be
subject to the Trust Guarantee: (i) any accumulated and unpaid Distributions
required to be paid on the Par Securities, to the extent that the Trust has
sufficient funds available therefor at the time, (ii) the Redemption Price
with respect to any Par Securities called for redemption, to the extent that
the Trust has sufficient funds available therefor at such time, or (iii) upon
a voluntary or involuntary dissolution, winding up or liquidation of the Trust
(unless the Debentures are distributed to holders of the Par Securities), the
lesser of (a) the aggregate liquidation amount of the Par Securities and all
accrued and unpaid Distributions thereon to the date of payment and (b) the
amount of assets of the Trust remaining available for distribution to holders
of Par Securities. The Company's obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by the Company to the
holders of the applicable Par Securities or by causing the Trust to pay such
amounts to such holders.
 
  Taken together, the Company's obligations under the Declaration of Trust,
the Debentures, the Indenture and the Trust Guarantee provide, in the
aggregate, a full and unconditional guarantee of payments of distributions and
other amounts due on the Par Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full and unconditional guarantee
of the Trust's obligations under the Par Securities.
 
  If the Company does not make interest payments on the Debentures held by the
Trust, the Trust will not be able to pay Distributions on the Par Securities
and will not have funds legally available therefor. Until the Remarketing
Settlement Date, the Trust Guarantee will rank on a parity with all senior
unsecured obligations of the Company and, thereafter, the Trust Guarantee will
rank subordinate and junior in right of payment to all Indebtedness of the
Company. See "--Status of the Trust Guarantee." The Trust Guarantee does not
limit the incurrence or issuance of other secured or unsecured debt of the
Company, whether under the Indenture or any existing or other indenture that
the Company may enter into in the future or otherwise.
 
  The Company has, through the Trust Guarantee, the Debentures and the
Indenture, taken together, fully and unconditionally guaranteed all of the
Trust's obligations under the Par Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full and unconditional guarantee
of the Trust's obligations under the Securities. See "Relationship Among the
Par Securities, the Debentures and the Trust Guarantee."
 
STATUS OF THE TRUST GUARANTEE
 
  Until the Remarketing Settlement Date, the Trust Guarantee will be a general
unsecured obligation of the Company ranking on a parity with all Indebtedness
of the Company, if any, that is not subordinated to the Trust Guarantee and
senior to any Indebtedness of the Company that is subordinated to the Trust
Guarantee. After the Remarketing Settlement Date, the Trust Guarantee will be
subordinated and junior in right of payment to all Senior Debt of the Company.
The Trust Guarantee does not place a limitation on the amount of additional
Indebtedness that may be incurred by the Company.
 
                                      189

 
  The Trust Guarantee constitutes a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Trust Guarantee without first
instituting a legal proceeding against any other person or entity). The Trust
Guarantee is held by the Guarantee Trustee for the benefit of the holders of
the Par Securities. The Trust Guarantee will not be discharged except by
payment of the Guarantee Payments in full to the extent not paid by the Trust
or upon distribution of the Debentures to the holders of the Par Securities in
exchange for all of the Par Securities.
 
AMENDMENTS AND ASSIGNMENT
 
  Except with respect to any changes that do not materially adversely affect
the rights of holders of the Par Securities (in which case no consent of such
holders will be required), the Trust Guarantee may not be amended without the
prior approval of the holders of not less than a majority of the aggregate
liquidation amount of the outstanding Par Securities. The manner of obtaining
any such approval will be as set forth under "Description of Securities--
Voting Rights; Amendment of the Declaration." All guarantees and agreements
contained in the Trust Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Company and shall inure to the
benefit of the holders of the Par Securities then outstanding.
 
EVENTS OF DEFAULT
 
  An event of default under the Trust Guarantee will occur upon the failure of
the Company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate liquidation amount of the Par
Securities have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Guarantee Trustee in respect of
the Trust Guarantee or to direct the exercise of any trust or power conferred
upon the Guarantee Trustee under the Trust Guarantee.
 
  If the Guarantee Trustee fails to enforce the Trust Guarantee, then any
holder of the Par Securities may institute a legal proceeding directly against
the Company to enforce the Guarantee Trustee's rights under the Trust
Guarantee without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity.
 
  The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with
all the conditions and covenants applicable to it under the Trust Guarantee.
 
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
 
  The Guarantee Trustee, other than during the occurrence and continuance of a
default by the Company in performance of the Trust Guarantee, undertakes to
perform only such duties as are specifically set forth in the Trust Guarantee
and, after default with respect to the Trust Guarantee (that has not been
cured or waived) that is actually known to a responsible officer of the
Guarantee Trustee, must exercise the same degree of care and skill as a
prudent person would exercise or use under the circumstances in the conduct of
his or her own affairs. Subject to this provision, the Guarantee Trustee is
under no obligation to exercise any of the powers vested in it by the Trust
Guarantee at the request of any holder of any Par Security unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
 
TERMINATION OF THE TRUST GUARANTEE
 
  The Trust Guarantee will terminate and be of no further force and effect
upon full payment of the Redemption Price of all of the Par Securities, upon
full payment of the amounts payable upon liquidation of the Trust or upon
distribution of Debentures to the holders of the Par Securities in exchange
for all of the Par Securities. The Trust Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of the Par Securities must restore payment of any sums paid under the Par
Securities or the Trust Guarantee.
 
GOVERNING LAW
 
  The Trust Guarantee is governed by and construed and interpreted in
accordance with the laws of the State of New York.
 
                                      190

 
                    RELATIONSHIP AMONG THE PAR SECURITIES,
                    THE DEBENTURES AND THE TRUST GUARANTEE
 
  Payments of Distributions and other amounts due on the Par Securities (to
the extent the Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of Trust Guarantee." If and to the extent that
the Company does not make payments under the Debentures, the Trust will not
pay Distributions or other amounts due on the Par Securities. The Trust
Guarantee does not cover payment of Distributions when the Trust does not have
sufficient funds to pay such Distributions. In such event, a holder of Par
Securities may institute a legal proceeding directly against the Company to
enforce payment of such Distributions to such holder after the respective due
dates. Taken together, the Company's obligations under the Declaration of
Trust, the Debentures, the Indenture and the Trust Guarantee provide, in the
aggregate, a full and unconditional guarantee of payments of distributions and
other amounts due on the Par Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full and unconditional guarantee
of the Trust's obligations under the Par Securities. Following the Remarketing
Settlement Date, the obligations of the Company under the Trust Guarantee and
the Debentures will be subordinate and junior in right of payment to all
Senior Debt of the Company.
 
SUFFICIENCY OF PAYMENTS
 
  As long as payments of interest, principal and other payments are made when
due on the Debentures, such payments will be sufficient to cover Distributions
and other payments due on the Par Securities, primarily because (i) the
aggregate principal amount of the Debentures will be equal to the sum of the
aggregate stated liquidation amount of the Trust Securities; (ii) the interest
rate and interest and other payment dates on the Debentures will match the
Distribution rate and Distribution and other payment dates for the related Par
Securities; (iii) the Company will pay for all and any costs, expenses and
liabilities of the Trust except the Trust's obligations under the Par
Securities; and (iv) the Declaration further provides that the Trust will not
engage in any activity that is not consistent with the limited purposes of the
Trust.
 
  Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a related payment under the Trust Guarantee.
 
ENFORCEMENT RIGHTS OF HOLDERS OF PAR SECURITIES
 
  A holder of Par Securities may institute a legal proceeding directly against
the Company to enforce its rights under the Trust Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Trust or any
other person or entity.
 
  Following the Remarketing Settlement Date, a default or event of default
under any Senior Debt of the Company will not constitute a default or
Indenture Event of Default. In addition, in the event of payment defaults
under, or acceleration of, Senior Debt of the Company, the subordination
provisions of the Indenture provide that no payments may be made in respect of
the Debentures until such Senior Debt has been paid in full or any payment
default thereunder has been cured or waived. Failure to make required payments
on the Debentures would constitute an Indenture Event of Default under the
Indenture.
 
LIMITED PURPOSE OF TRUST
 
  The Par Securities evidence a beneficial ownership interest in the Trust,
and the Trust exists for the sole purpose of issuing the Trust Securities and
investing the proceeds thereof in Debentures. A principal difference between
the rights of a holder of Par Securities and a holder of Debentures is that a
holder of Debentures is entitled to receive from the Company the principal
amount of and interest accrued on Debentures held, while a holder of Par
Securities is entitled to receive Distributions from the Trust (or from the
Company under the Trust Guarantee) if and to the extent the Trust has funds
available for the payment of such Distributions.
 
                                      191

 
RIGHTS UPON TERMINATION
 
  Upon any voluntary or involuntary termination, winding-up or liquidation of
the Trust involving the liquidation of the Debentures, the holders of the Par
Securities will be entitled to receive, out of assets held by the Trust, the
liquidation distribution in cash. See "Description of Securities--Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation
or bankruptcy of the Company on or prior to the Remarketing Settlement Date,
the Property Trustee, as holder of the Debentures, would be a senior unsecured
creditor of the Company, on a parity in right of payment to all other senior
unsecured indebtedness of the Company. Upon any voluntary or involuntary
liquidation or bankruptcy of the Company which commences following the
Remarketing Settlement Date, the Property Trustee, as holder of the
Debentures, would be a subordinated creditor of the Company, subordinated in
right of payment to all Indebtedness, but entitled to receive payment in full
of principal and interest before any stockholders of the Company receive
payments or distributions. Because the Company is the guarantor under the
Trust Guarantee and has agreed to pay for all costs, expenses and liabilities
of the Trust (other than the Trust's obligations to the holders of the Par
Securities), the positions of a holder of Par Securities and a holder of the
Debentures relative to other creditors and to shareholders of the Company in
the event of liquidation or bankruptcy of the Company would be substantially
the same.
 
                                      192

 
                 UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
 
  In the opinion of Simpson Thacher & Bartlett (a partnership which includes
professional corporations), special United States federal income tax counsel
to the Company and the Trust ("Tax Counsel"), the following summary describes
the material United States federal income tax consequences of the purchase,
ownership and disposition of the Par Securities. Unless otherwise stated, this
summary deals only with Par Securities held as capital assets by United States
Persons (defined below) who purchase the Par Securities upon original issuance
at their original issue price. As used herein, a "United States Person" means
(i) a person that is a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an
estate the income of which is subject to United States federal income taxation
regardless of its source, or (iv) a trust if a court within the United States
is able to exercise primary supervision over the administration of such trust
and one or more United States fiduciaries have the authority to control all
the substantial decisions of such trust. The tax treatment of a holder may
vary depending on such holder's particular situation. This summary does not
address all the tax consequences that may be relevant to a particular holder
or to holders who may be subject to special tax treatment, such as banks, real
estate investment trusts, regulated investment companies, insurance companies,
dealers in securities or currencies, or tax-exempt investors. In addition,
this summary does not include any description of any alternative minimum tax
consequences or the tax laws of any state, local or foreign government that
may be applicable to a holder of Par Securities. This summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. The authorities on which this summary
is based are subject to various interpretations and the opinions of Tax
Counsel are not binding on the Internal Revenue Service ("IRS") or the courts,
either of which could take a contrary position. Moreover, no rulings have been
or will be sought by the Company from the IRS with respect to the transactions
described herein. Accordingly, there can be no assurance that the IRS will not
challenge the opinions expressed herein or that a court would not sustain such
a challenge. Nevertheless, Tax Counsel has advised that it is of the view
that, if challenged, the opinions expressed herein would be sustained by a
court with jurisdiction in a properly presented case.
 
  HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PAR
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN, AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR
OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE PAR
SECURITIES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS SEE "DESCRIPTION OF
SECURITIES--REDEMPTION--SPECIAL EVENT REDEMPTION OR DISTRIBUTION OF
DEBENTURES; SHORTENING OF STATED MATURITY."
 
CLASSIFICATION OF THE TRUST
 
  In connection with the issuance of the Par Securities, Tax Counsel is of the
opinion that under current law and assuming full compliance with the terms of
the Declaration, the Trust will not be taxable as a corporation. Accordingly,
for United States federal income tax purposes, each beneficial owner (each a
"holder") of Par Securities generally will be required to include in gross
income its allocable share of the income earned on or with respect to the
Debentures.
 
CLASSIFICATION OF THE DEBENTURES
 
  The Company, the Trust and the holders of the Par Securities (by the
acceptance of a beneficial interest in a Par Security) will agree to treat the
Debentures as indebtedness for all United States tax purposes. Accordingly,
the Company intends to take the position that the Debentures will be
classified as indebtedness for United States federal income tax purposes. If
the Debentures were not classified as indebtedness for United States tax
purposes, such Debentures would be classified as equity and, as a result, the
holders of the Par Securities would be required
 
                                      193

 
to take the dividend payments thereon into income in accordance with their
regular method of tax accounting. The following discussion is based on the
classification of the Debentures as indebtedness for United States tax
purposes.
 
EXCHANGE OF PAR SECURITIES
 
  The Exchange will not constitute a taxable event for United States federal
income tax purposes. Consequently, no gain or loss should be recognized by a
holder upon receipt of a New Par Security, the holding period of the New Par
Security should include the holding period of the Old Par Security and the
adjusted tax basis of the New Par Security should be the same as the adjusted
tax basis of the Old Par Security immediately before the Exchange.
 
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
 
  Because the Company has the right to defer the payment of stated interest on
the Debentures, the stated interest on the Debentures will be considered to be
original issue discount ("OID") (within the meaning of Section 1273(a) of the
Code). Consequently, holders must include such stated interest in gross income
on a daily economic accrual basis (using the constant-yield-to-maturity method
of accrual described in Section 1272 of the Code), regardless of their regular
method of tax accounting and in advance of receipt of the cash attributable to
such income. The application of these OID accrual rules may accelerate the
timing of a holder's recognition of such income in certain situations. Actual
payments of stated interest on the Debentures, however, will not be separately
reported as taxable income. Any amount of OID included in a holder's gross
income with respect to a Par Security will increase such holder's adjusted tax
basis in such Security, and the amount of Distributions received by a holder
in respect of such OID will reduce such holder's adjusted tax basis in such
Par Security.
 
  Corporate holders of Par Securities will not be entitled to a dividends-
received deduction with respect to any income recognized by such holders with
respect to the Par Securities.
 
DISTRIBUTION OF DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
 
  As described under the caption "Description of Debentures--Distribution of
Debentures; Book-Entry Issuance," Debentures may be distributed to holders in
exchange for the Par Securities and in liquidation of the Trust. Under current
law, such a distribution would be non-taxable, and will result in the holder
receiving directly its pro rata share of the Debentures previously held
indirectly through the Trust, with a holding period and aggregate tax basis
equal to the holding period and aggregate tax basis such holder had in its Par
Securities before such distributions. If, however, the liquidation of the
Trust were to occur because the Trust is subject to United States federal
income tax with respect to income accrued or received on the Debentures, the
distribution of the Debentures to holders would be a taxable event to the
Trust and to each holder and a holder would recognize gain or loss as if the
holder had exchanged its Par Securities for the Debentures it received upon
liquidation of the Trust.
 
  A holder would accrue interest in respect of the Debentures received from
the Trust in the manner described above under "--Interest Income and Original
Issue Discount."
 
  Under certain circumstances described herein (see "Description of
Securities--Redemption--Special Event Redemption or Distribution of
Debentures; Shortening of Stated Maturity"), the Debentures may be redeemed
for cash, with the proceeds of such redemption distributed to holders in
redemption of their Par Securities. Under current law, such a redemption would
constitute a taxable disposition of the redeemed Par Securities for United
States federal income tax purposes, and a holder would recognize gain or loss
as if it sold such redeemed Par Securities for cash. See "--Sales of
Securities."
 
SALES OF PAR SECURITIES
 
  A holder that sells Par Securities (pursuant to the Remarketing or
otherwise) will recognize gain or loss equal to the difference between the
amount realized by the holder on the sale or redemption of the Par Securities
 
                                      194

 
(except to the extent that such amount realized is characterized as a payment
in respect of accrued but unpaid interest on such holder's allocable share of
the Debentures which such holder has not previously included in gross income)
and the holder's adjusted tax basis in the Securities sold or redeemed. Such
gain or loss generally will be a capital gain or loss and generally will be a
long-term capital gain or loss if the Par Securities have been held for more
than one year. Under recently enacted legislation, capital gains of
individuals derived in respect of capital assets held for at least one year
are eligible for reduced rates of taxation depending upon the holding period
of such capital assets. Prospective investors should consult their own tax
advisors with respect to the tax consequences of the new legislation. Subject
to certain limited exceptions, capital losses cannot be applied to offset
ordinary income for United States federal income tax purposes.
 
  A holder will be required to add any accrued and unpaid OID to its adjusted
tax basis for its Par Securities. To the extent the selling price of such
holder's Par Securities is less than the adjusted tax basis (which will
include any accrued and unpaid OID), a holder will recognize a capital loss.
 
NON-UNITED STATES HOLDERS
 
  Prospective purchasers of Par Securities that are Non-United States Holders
should consult their tax advisors with respect to the tax consequences, United
States federal and otherwise, of the purchase, ownership and disposition of
Par Securities. A "Non-United States Holder" includes any person that is not a
United States Person.
 
INFORMATION REPORTING AND BACKUP WITHHOLDING
 
  Income on the Par Securities held of record by holders (other than
corporations and other exempt holders) will be reported annually to such
holders and to the IRS. The Regular Trustees currently intend to deliver such
reports to holders of record prior to January 31 following each calendar year.
It is anticipated that persons who hold Par Securities as nominees for
beneficial holders will report the required tax information to beneficial
holders on Form 1099.
 
  "Backup withholding" at a rate of 31% will apply to payments of interest to
non-exempt United States holders unless the holder furnishes its taxpayer
identification number in the manner prescribed in applicable Treasury
regulations, certifies that such number is correct, certifies as to no loss of
exemption from backup withholding and meets certain other conditions.
 
  Payment of the proceeds from disposition of Par Securities to or through a
United States office of a broker is subject to information reporting and
backup withholding unless the holder or beneficial owner establishes an
exemption from information reporting and backup withholding.
 
  Any amounts withheld from a holder of the Par Securities under the backup
withholding rules will generally be allowed as a refund or a credit against
such holder's United States federal income tax liability, provided the
required information is furnished to the IRS.
 
                                      195

 
                             ERISA CONSIDERATIONS
 
  Generally, employee benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975
of the Code ("Plans"), may purchase Securities, subject to the investing
fiduciary's determination that the investment in Securities satisfies ERISA's
fiduciary standards and other requirements applicable to investments by the
Plan.
 
  The Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) (the "DOL Regulation") concerning the definition of what
constitutes the assets of a Plan. The DOL Regulation provides that as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a plan makes an
"equity" investment will be deemed for purposes of ERISA to be assets of the
investing plan unless certain exceptions apply.
 
  There can be no assurance that any of the exceptions set forth in the DOL
regulation will apply to the purchase of Securities offered hereby and, as a
result, an investing Plan's assets could be considered to include an undivided
interest in the Debentures held by the Trust. In the event that assets of the
Trust are considered assets of an investing Plan, the Company, the Trustees
and other persons, in providing services with respect to the Debentures, may
be considered fiduciaries to such Plan and subject to the fiduciary
responsibility provisions of Title I of ERISA (including the prohibited
transaction provisions thereof). In addition, the prohibited transaction
provisions of Section 4975 of the Code could apply with respect to
transactions engaged in by any "disqualified person," as defined below,
involving such assets unless a statutory or administrative exemption applies.
 
  Even if they are not fiduciaries, the Company and/or any of its affiliates
may be considered a "party in interest" (within the meaning of ERISA) or a
"disqualified person" (within the meaning of Section 4975 of the Code) with
respect to certain Plans. The acquisition and ownership of Securities by a
Plan (or by an individual retirement arrangement or other plan described in
Section 4975(e)(1) of the Code) may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless such Securities
are acquired pursuant to and in accordance with an applicable exemption. As a
result, Plans with respect to which the Company or any of its affiliates is a
party in interest or a disqualified person should not acquire Securities
unless such Securities are acquired pursuant to and in accordance with an
applicable prohibited transaction exemption. Any purchaser or holder of the
Securities or any interest therein will be deemed to have represented by its
purchase and holding thereof that either (i) the purchaser and holder is not a
Plan or any entity whose underlying assets include "plan assets" by reason of
any Plan's investment in the entity and is not purchasing such securities on
behalf of or with "plan assets" of any Plan or (ii) the purchase and holding
of the Securities is covered by an applicable prohibited transaction
exemption.
 
  Notwithstanding the foregoing, it is possible that the New Securities may
qualify as "publicly offered securities" under the DOL Regulation if, in
addition to an effective registration statement filed in connection with the
Exchange Offer, they are also "widely held" and "freely transferable" at the
time of the Exchange Offer. Under the DOL Regulation, a class of securities is
"widely held" only if it is a class of securities owned by 100 or more
investors independent of the issuer and each other. Although it is possible
that at the time of the Exchange Offer the New Securities will be "widely
held", no assurances can be given that will be true. If the New Securities are
"publicly offered securities" at the time of the Exchange Offer, the assets of
the Trust would not be assets of the Investing Plans as of such time. If the
New Securities did not qualify as "publicly offered securities", the foregoing
discussion about plan assets in the preceding paragraphs would also be
available to the New Securities.
 
  Any Plans or other entities whose assets include Plan assets subject to
ERISA or Section 4975 of the Code proposing to acquire Securities or New
Securities should consult with their own counsel.
 
                                      196

 
                             PLAN OF DISTRIBUTION
 
  The Company will not receive any proceeds from any sale of New Par
Securities by broker-dealers. New Par Securities received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Par Securities or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such New Par
Securities. Any broker-dealer that resells New Par Securities that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such New Par
Securities may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Par Securities and any
commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. Each broker-dealer that
receives New Par Securities for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Par Securities. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Par Securities received in exchange for Old Par Securities
where such Old Par Securities were acquired as a result of market-making
activities or other trading activities. The Letter of Transmittal states that,
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. The Company has agreed that, for a period
of one year from the date hereof, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale.
 
  For a period of one year from the date hereof, the Company will promptly
send additional copies of this Prospectus and any amendment or Supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Company has agreed, pursuant to the Registration
Rights Agreement, to pay all expenses incident to the Exchange Offer
(including the expenses of one counsel for all the holders of the Notes as a
single class) other than commissions or concessions of any brokers or dealers
and will indemnify the holders of the Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
 
                                 LEGAL MATTERS
 
  Certain matters of Delaware law relating to the validity of the Securities
will be passed upon for the Trust by Richards, Layton & Finger, P.A., special
Delaware counsel to the Company and the Trust. The validity of the Debentures
and the Trust Guarantee will be passed upon for the Company and the Trust by
Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, Beverly Hills,
California. Certain United States federal income taxation matters also will be
passed upon for the Company and the Trust by Simpson Thacher & Bartlett, (a
partnership which includes professional corporations), New York, New York.
Freshman, Marantz, Orlanski, Cooper & Klein and Simpson Thacher & Bartlett
will rely on the opinion of Richards, Layton & Finger, P.A. as to matters of
Delaware Law.
 
                                    EXPERTS
 
  The consolidated financial statements of Imperial Credit Industries, Inc.
and subsidiaries as of December 31, 1997 and 1996, and for each of the years
in the three-year period ended December 31, 1997, have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
 
  The consolidated financial statements of Southern Pacific Funding
Corporation and subsidiaries as of December 31, 1996 and 1997, and for each of
the years in the three-year period ended December 31, 1997, have been included
herein in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
 
                                      197

 
                         INDEX OF PRINCIPAL DEFINITIONS


                                                                          PAGE
                                                                         -------
                                                                      
Additional Distributions................................................     136
Additional Interest.....................................................     135
Adjusted Distribution Rate..............................................      17
Adjusted Treasury Rate..................................................     163
Advanta.................................................................     121
Affiliate............................................................... 103,178
Affiliate Transaction...................................................     174
ALD.....................................................................       4
AMN.....................................................................   Cover
APB 25..................................................................    F-17
Applicable Distribution Rate............................................       9
Applicable Interest Rate................................................     161
Acquired Debt...........................................................     178
ARMs....................................................................      35
Asset Sale..............................................................     178
Asset Sale Offer........................................................     152
Asset Sale Offer Amount.................................................     152
Asset Sale Offer Period.................................................     152
Asset Sale Purchase Date................................................     152
Average Invested Assets.................................................     130
Awards..................................................................     115
Bancorp.................................................................     108
Benton..................................................................      78
BHCA....................................................................     107
BIF.....................................................................     106
Book-Entry Confirmation.................................................     137
Book-Entry Transfer Facility............................................     137
Business Day............................................................       1
Capital Lease Obligation................................................     179
Capitalized Excess Servicing Fees Receivables...........................     179
Capital Stock...........................................................     179
Cash Equivalents........................................................     179
CBC.....................................................................       3
CBCC....................................................................      76
CCD.....................................................................       4
CEBA....................................................................     107
CERCLA..................................................................     100
Change in 1940 Act Law..................................................     149
Change of Control.......................................................     180
Change of Control Offer.................................................     151
Change of Control Offer Period..........................................     151
Change of Control Payment...............................................     151
Change of Control Purchase Date.........................................     151
Closing Date............................................................     161
CMBS....................................................................     131
CMO.....................................................................     129
CNAI....................................................................      96
Code....................................................................     115
Commission..............................................................       7
Commissioner............................................................      17

 
                                      198

 


                                                                           PAGE
                                                                           -----
                                                                        
Committee.................................................................   116
Common Securities.........................................................     i
Common Stock..............................................................   115
Company................................................................... Cover
Comparable Treasury Issue.................................................   164
Comparable Treasury Price.................................................   164
Consolidated Leverage Ratio...............................................   180
Consolidated Net Income...................................................   180
Consolidated Net Worth....................................................   181
Covered Loans.............................................................    99
Creditor..................................................................   158
Debentures................................................................     i
Declaration...............................................................     1
Deconsolidation...........................................................    53
Delaware Trustee..........................................................     2
Designated Senior Debt....................................................   181
DFI.......................................................................    31
Direct Action.............................................................    37
Disqualified Person.......................................................   196
Disqualified Stock........................................................   181
Distribution Date.........................................................     1
Distributions.............................................................   146
DLJ.......................................................................    96
DOL.......................................................................   196
DOL Regulation............................................................   196
DRI.......................................................................    50
DTC.......................................................................   136
Duff......................................................................   179
ECOA......................................................................    99
Effective Date............................................................   122
Effectiveness Target Date.................................................   135
Election Date.............................................................    18
Eligible Institution......................................................   137
Equity Interests..........................................................   181
Equity Offering...........................................................   181
ERISA.....................................................................   196
Excess Proceeds...........................................................   169
Exchange.................................................................. Cover
Exchange Act..............................................................     i
Exchange Agent............................................................   137
Exchange Offer............................................................ Cover
Expiration Date........................................................... Cover
Existing Indebtedness.....................................................   181
Extension Period..........................................................    10
FASB......................................................................  F-13
FCAC......................................................................    50
FDIC......................................................................     7
FDICIA....................................................................   105
FHLB......................................................................     6
FICO......................................................................   107
FIRREA....................................................................   106

 
                                      199

 


                                                                           PAGE
                                                                           -----
                                                                        
Fitch.....................................................................   179
FMAC......................................................................     2
FMC.......................................................................     2
Funds Act.................................................................   106
Funds from Operations.....................................................   130
GAAP......................................................................   181
Global Certificates.......................................................   147
Greenwich.................................................................    65
Guarantee.................................................................   181
Guarantee Payments........................................................   189
Guarantee Trustee.........................................................   144
Hedging Obligations.......................................................   181
IBC....................................................................... Cover
ICAI...................................................................... Cover
ICCAMC.................................................................... Cover
ICG.......................................................................     4
ICIFC.....................................................................     6
ICII......................................................................     1
ICCMIC....................................................................     6
ICCMIC Management Agreement...............................................   128
ICW....................................................................... Cover
IFG.......................................................................   109
IMH.......................................................................    49
IMH Services Agreement....................................................   123
IMH Tax Agreement.........................................................   123
Indebtedness..............................................................   181
Indenture.................................................................     i
Indenture Default.........................................................   182
Indenture Event of Default................................................   166
Indenture Trustee.........................................................   161
Initial Distribution Rate.................................................     8
Initial Interest Rate.....................................................   161
Initial Optional Redemption Price.........................................   162
Initial Purchaser.........................................................    12
Interest Payment Date.....................................................    10
Investment Company Act....................................................   149
Investment Company Event..................................................   149
Investments...............................................................   182
IPLD......................................................................     4
IRS.......................................................................   193
ISOs......................................................................   115
Issue Date................................................................   182
LCPI......................................................................   122
Letter of Transmittal..................................................... Cover
LIBOR.....................................................................    67
Lien......................................................................   182
Liquidation Distribution..................................................   156
LPIG......................................................................     3
Management Agreement......................................................   124
Maturity Advancement......................................................   148
Maximum Adjusted Distribution Rate........................................    17

 
                                      200

 


                                                                           PAGE
                                                                           -----
                                                                        
MBS.......................................................................   129
Moody's...................................................................   179
MOU.......................................................................    31
Net Income................................................................   183
Net Proceeds..............................................................   183
New Debentures............................................................ Cover
New Par Securities........................................................ Cover
New Securities............................................................ Cover
New Subsidiary Guarantees................................................. Cover
New Trust Guarantee....................................................... Cover
Non-Compete Agreement.....................................................   131
Non-Recourse Debt.........................................................   183
Non-United States Holder..................................................   195
Notice of Election........................................................    18
NPAs......................................................................    91
NQSO......................................................................   115
NYSE......................................................................   139
Obligations...............................................................   183
OCC.......................................................................   103
Offering..................................................................     9
OID.......................................................................    19
Old Debentures............................................................ Cover
Old Par Securities........................................................ Cover
Old Securities............................................................ Cover
Old Subsidiary Guarantees................................................. Cover
Old Trust Guarantee....................................................... Cover
OREO......................................................................  F-15
Par Securities............................................................ Cover
Participating Broker-Dealers..............................................     7
Paying Agent..............................................................   159
Payment Blockage Notice...................................................   165
Payment Default...........................................................   166
Permitted Investments.....................................................   183
Permitted Liens...........................................................   183
Permitted Refinancing Indebtedness........................................   185
Permitted SPB Preferred Stock.............................................   185
Permitted Warehouse Indebtedness..........................................   185
Person....................................................................   174
Plans.....................................................................   196
PMSRs.....................................................................   125
Primary Treasury Dealer...................................................   164
PrinCap...................................................................    77
Pro Forma Transactions....................................................    23
Property Account..........................................................   144
Property Trustee..........................................................     2
Purchase Facility.........................................................   186
Qualified Securitization Transaction......................................   186
Quotation Agent...........................................................   164
Receivables...............................................................   186
Redemption Price..........................................................   150
Reference Treasury Dealer Quotations......................................   164

 
                                      201

 


                                                                           PAGE
                                                                           -----
                                                                        
Registrants...............................................................     7
Registration Default......................................................   135
Registration Rights Agreement.............................................    12
Registration Statement....................................................     i
Regular Trustee...........................................................     2
REIT......................................................................   129
Related Business..........................................................   186
Remaining Life............................................................    11
Remarketing...............................................................     9
Remarketing Agent.........................................................    11
Remarketing Agreement.....................................................   156
Remarketing Settlement Date............................................... 9,146
Reorganization............................................................     3
Residual Certificates.....................................................   186
RESPA.....................................................................   100
Restricted Investment.....................................................   186
Restricted Payment........................................................   160
Restricted Subsidiary.....................................................   186
Retained Interest.........................................................   186
Rule 144A.................................................................     7
SAIF......................................................................   106
Scheduled Remarketing Date................................................   146
Scheduled Remarketing Settlement Date.....................................   146
Securities Act............................................................ Cover
Securitization Related Assets.............................................   186
Senior Debt...............................................................   186
Senior Indebtedness.......................................................   186
Servicing Contracts.......................................................  F-68
SFAS 122..................................................................  F-60
SFAS 123..................................................................  F-17
SFAS 125..................................................................  F-13
SFAS 128..................................................................  F-17
SFAS 130..................................................................  F-17
SFAS 131..................................................................  F-18
Significant Subsidiary....................................................   187
S&P.......................................................................   179
Special Event.............................................................   148
Special Mandatory Redemption..............................................    11
Special Purpose Subsidiary................................................   187
SPFC......................................................................   187
SPFC Tax Agreement........................................................   121
SPSAC.....................................................................    96
SPB.......................................................................   187
Stated Maturity...........................................................   187
Strategic Investor Repurchase Transaction.................................   187
Subsidiary................................................................   187
Subsidiary Guarantors.....................................................   187
Successor Securities......................................................   159
Tax Counsel...............................................................   193
Tax Event.................................................................     8
Tax Opinion...............................................................   149

 
                                      202

 


                                                                           PAGE
                                                                           -----
                                                                        
Tender Offer..............................................................     6
Ten-Year U.S. Treasury Rate...............................................   130
TILA......................................................................    98
Treasury Rate.............................................................   163
Trust..................................................................... Cover
Trust Act.................................................................     1
Trust Guarantee........................................................... Cover
Trust Indenture Act.......................................................     2
Trustee...................................................................     2
Trust Enforcement Event...................................................   156
Trust Securities..........................................................     i
United States Person......................................................   193
Unrestricted Subsidiary...................................................   188
Warehouse Facility........................................................   188
Warehouse Indebtedness....................................................   188
Weighted Average Life to Maturity.........................................   188
Wholly Owned Restricted Subsidiary........................................   188
1940 Act..................................................................   149
9 7/8% Senior Notes.......................................................    10
9 3/4% Senior Notes.......................................................     6
1992 Stock Option Plan....................................................   115
1996 Stock Option Plan....................................................   115
30-year Treasury Rate.....................................................   147

 
                                      203

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 


                                                                            PAGE
                                                                            ----
                                                                         
Audited Consolidated Financial Statements:
  Independent Auditors' Report............................................. F-2
  Consolidated Balance Sheets.............................................. F-3
  Consolidated Statements of Income........................................ F-4
  Consolidated Statements of Changes in Shareholders' Equity............... F-5
  Consolidated Statements of Cash Flows.................................... F-6
  Notes to Consolidated Financial Statements............................... F-8

 
 
  All supplemental schedules are omitted as inapplicable or because the
required information is included in the consolidated financial statements or
notes thereto.
 
                                      F-1

 
                         INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Imperial Credit Industries, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
 
                                          KPMG Peat Marwick LLP
 
Los Angeles, California
January 27, 1998
 
                                      F-2

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 


                                                               DECEMBER 31,
                                                           ---------------------
                                                              1997       1996
                                                           ---------- ----------
                         ASSETS
                         ------
                                                                
Cash.....................................................  $   50,597 $   74,247
Interest bearing deposits................................     103,738      3,369
Investment in Federal Home Loan Bank stock...............       5,646     17,152
Securities held for trading, at market...................     120,904     25,180
Securities available for sale, at market.................     107,727     59,116
Loans held for sale......................................     162,571    940,096
Loans held for investment, net...........................   1,266,718  1,068,599
Purchased and originated servicing rights................       4,731     14,887
Capitalized excess servicing fees receivable.............         --      23,142
Retained interest in loan and lease securitizations......      43,105     49,548
Interest-only and residual certificates..................         --      87,017
Accrued interest receivable..............................       9,132     13,847
Premises and equipment, net..............................       9,513     12,442
Other real estate owned, net.............................      10,905     12,214
Goodwill.................................................      35,607     38,490
Investment in Southern Pacific Funding Corporation ......      65,303        --
Investment in Franchise Mortgage Acceptance Company......      53,099        --
Other assets.............................................      52,798     31,293
                                                           ---------- ----------
  Total assets...........................................  $2,102,094 $2,470,639
                                                           ========== ==========

          LIABILITIES AND SHAREHOLDERS' EQUITY
          ------------------------------------
                                                                
Deposits.................................................  $1,156,022 $1,069,184
Borrowings from Federal Home Loan Bank...................      45,000    140,500
Other borrowings.........................................     144,841    694,352
Remarketed Par Securities................................      70,000        --
Senior Notes.............................................     219,813     88,209
Convertible subordinated debentures......................         --      75,000
Accrued interest payable.................................      21,484     14,034
Accrued income taxes payable.............................      60,528     55,327
Minority interest in consolidated subsidiaries...........       3,174     54,936
Other liabilities........................................      57,299     39,589
                                                           ---------- ----------
  Total liabilities......................................   1,778,161  2,231,131
                                                           ---------- ----------
Commitments and contingencies (note 25)
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none issued
 or outstanding..........................................         --         --
Common stock, no par value. Authorized 80,000,000 shares;
 38,791,439 and 38,291,112 shares issued and outstanding
 at December 31, 1997 and 1996, respectively ............     147,109    145,521
Retained earnings........................................     174,898     88,977
Unrealized gain on securities available for sale, net....       1,926      5,010
                                                           ---------- ----------
  Total shareholders' equity.............................     323,933    239,508
                                                           ---------- ----------
  Total liabilities and shareholders' equity.............  $2,102,094 $2,470,639
                                                           ========== ==========

 
          See accompanying notes to consolidated financial statements
 
                                      F-3

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
                       CONSOLIDATED STATEMENTS OF INCOME
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


                                                    YEARS ENDED DECEMBER 31,
                                                   ---------------------------
                                                     1997      1996     1995
                                                   --------  -------- --------
                                                             
REVENUE:
 Gain on sale of loans and leases................. $ 67,723  $ 88,156 $ 39,557
                                                   --------  -------- --------
 Interest on loans and leases.....................  201,728   188,242  120,244
 Interest on investments..........................   23,531    10,807    6,630
 Interest on other finance activities.............    2,678     8,422    2,608
                                                   --------  -------- --------
   Total interest income..........................  227,937   207,471  129,482
 Interest on deposits.............................   71,014    60,999   51,565
 Interest on other borrowings ....................   29,604    64,407   35,783
 Interest on long term debt.......................   25,976     9,630    8,380
                                                   --------  -------- --------
   Total interest expense.........................  126,594   135,036   95,728
                                                   --------  -------- --------
   Net interest income............................  101,343    72,435   33,754
 Provision for loan and lease losses..............   38,951     9,773    5,450
                                                   --------  -------- --------
 Net interest income after provision for loan and
  lease losses....................................   62,392    62,662   28,304
                                                   --------  -------- --------
 Loan servicing income............................   10,743     1,680   12,718
 Loss on sale of securities.......................     (936)      --       --
 Equity in net income of Southern Pacific Funding
  Corporation.....................................   25,869       --       --
 Equity in net loss of Franchise Mortgage
  Acceptance Company..............................   (3,050)      --       --
 Investment banking fees..........................    7,702       --       --
 Management fees..................................    5,810     3,347       38
 Gain on sale of servicing rights.................      --      7,591    3,578
 Gain on sale of Franchise Mortgage Acceptance
  Company stock...................................   48,924       --       --
 Gain on sale of Southern Pacific Funding
  Corporation stock...............................    9,488    51,243      --
 Gain on sale of stock by subsidiary..............   43,213    31,447      --
 Gain on sale of Impac Mortgage Holdings stock....   11,496       --       --
 Gain on termination of REIT advisory agreement...   19,046       --       --
 Other income.....................................    1,140    10,807    1,114
                                                   --------  -------- --------
   Total other income.............................  179,445   106,115   17,448
                                                   --------  -------- --------
 Total revenue....................................  309,560   256,933   85,309
                                                   --------  -------- --------
EXPENSES:
 Personnel expense................................   60,830    48,355   34,053
 Amortization of PMSR's and OMSR's................    3,089     1,121    3,986
 Occupancy expense................................    4,319     4,653    3,904
 Data processing expense..........................    1,503     2,163    1,461
 Net expenses of other real estate owned..........    6,527     7,014    1,913
 Professional services............................   10,303     9,559    2,769
 FDIC insurance premiums..........................      250       327    1,137
 Telephone and other communications...............    2,926     2,917    2,509
 Restructuring provision--exit from mortgage
  banking operations..............................      --      3,800      --
 Loss on restructuring of loan to
  Dabney/Resnick/Imperial, LLC....................    3,709       --       --
 Provision for loss on repurchase of former
  mortgage banking loans..........................    5,400       --       --
 Amortization of Goodwill.........................   23,260     1,875      321
 General and administrative expense...............   28,268    17,265    9,127
                                                   --------  -------- --------
   Total expenses.................................  150,384    99,049   61,180
                                                   --------  -------- --------
 Income before income taxes, minority interest
  and extraordinary item..........................  159,176   157,884   24,129
 Income taxes.....................................   58,747    69,874   10,144
 Minority interest in income (loss) of
  consolidated subsidiaries.......................   10,513    12,026     (208)
                                                   --------  -------- --------
 Income before extraordinary item.................   89,916    75,984   14,193
 Extraordinary item--Loss on early extinguishment
  of debt, net of income taxes....................   (3,995)      --       --
                                                   --------  -------- --------
   Net income..................................... $ 85,921  $ 75,984 $ 14,193
                                                   ========  ======== ========
BASIC INCOME PER SHARE:
 Income before extraordinary item................. $   2.33  $   2.11 $   0.45
 Extraordinary item--Loss on early extinguishment
  of debt, net of income taxes....................    (0.10)      --       --
                                                   --------  -------- --------
 Net Income per common share, basic............... $   2.23  $   2.11 $   0.45
                                                   ========  ======== ========
DILUTED INCOME PER SHARE:
 Income before extraordinary item................. $   2.20  $   1.95 $   0.40
 Extraordinary item--Loss on early extinguishment
  of debt, net of income taxes....................    (0.10)      --       --
                                                   --------  -------- --------
 Net Income per common share, diluted............. $   2.10  $   1.95 $   0.40
                                                   ========  ======== ========

 
          See accompanying notes to consolidated financial statements.
 
                                      F-4

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 


                                                           UNREALIZED
                                                             GAIN ON
                            COMMON                         SECURITIES       TOTAL
                            SHARES     COMMON   RETAINED    AVAILABLE   SHAREHOLDERS'
                          OUTSTANDING  STOCK    EARNINGS  FOR SALE, NET    EQUITY
                          ----------- --------  --------  ------------- -------------
                                               (IN THOUSANDS)
                                                         
Balance, December 31,
 1994...................     9,621    $ 51,156  $ 24,717     $  --        $ 75,873
Exercise of stock
 options................       147         825       --         --             825
3-for-2 stock split.....     4,810         --        --         --             --
Increase in unrealized
 gain on securities
 available for sale,
 net....................       --          --        --       3,211          3,211
Net income, 1995........       --          --     14,193        --          14,193
                            ------    --------  --------     ------       --------
Balance, December 31,
 1995...................    14,578      51,981    38,910      3,211         94,102
Exercise of stock
 options................       868       1,671       --         --           1,671
1-for-10 stock dividend.     1,460      25,917   (25,917)       --             --
2-for-1 stock split.....    18,952         --        --         --             --
Issuance of common
 stock..................     2,440      59,228       --         --          59,228
Increase in unrealized
 gain on securities
 available for sale,
 net....................       --          --        --       1,799          1,799
Tax benefit from
 exercise of stock
 options................       --        6,851       --         --           6,851
Retirement of stock.....        (7)       (127)      --         --            (127)
Net income, 1996........       --          --     75,984        --          75,984
                            ------    --------  --------     ------       --------
Balance, December 31,
 1996...................    38,291     145,521    88,977      5,010        239,508
Exercise of stock
 options................       530       1,332       --         --           1,332
Decrease in unrealized
 gain on securities
 available for sale,
 net....................       --          --        --      (3,084)        (3,084)
Tax benefit from
 exercise of stock
 options................       --          807       --         --             807
Retirement of stock.....       (30)       (551)      --         --            (551)
Net income, 1997........       --          --     85,921        --          85,921
                            ------    --------  --------     ------       --------
Balance, December 31,
 1997...................    38,791    $147,109  $174,898     $1,926       $323,933
                            ======    ========  ========     ======       ========

 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 


                                              YEARS ENDED DECEMBER 31,
                                         -------------------------------------
                                            1997         1996         1995
                                         -----------  -----------  -----------
                                                   (IN THOUSANDS)
                                                          
Cash flows from operating activities:
  Net income............................ $    85,921  $    75,984  $    14,193
  Adjustments to reconcile net income to
   net cash provided by (used in)
   operating activities:
    Provision for loan and lease losses.      38,951        9,773        5,450
    Recovery for operational losses.....         --           --        (1,819)
    Restructuring Provision.............         --         3,800          --
    Loss on restructuring of
     Dabney/Resnick/Imperial, LLC.......       3,709          --           --
    Provision for loss on repurchase of
     former mortgage banking loans......       5,400          --           --
    Depreciation........................       4,523        3,483        2,657
    Amortization of goodwill............      23,260        1,875          321
    Amortization of PMSR's and OMSR's...       3,089        1,121        3,986
    Accretion of discount...............      (2,678)      (8,350)      (2,608)
    Gain on sale of servicing rights....         --        (7,591)      (3,578)
    Gain on sale of loans and leases....     (67,723)     (88,156)     (39,557)
    Gains on sale of SPFC stock.........      (9,488)     (82,690)         --
    Gain on sale of FMC stock...........     (92,137)         --           --
    Gain on sale of IMH stock...........     (11,496)         --           --
    Gain on termination of REIT advisory
     agreement..........................     (19,046)         --           --
    Equity in net earnings of SPFC......     (25,869)         --           --
    Equity in net loss of FMC...........       3,050          --           --
    Loss on sale of OREO................       4,453        2,843          --
    Loss on sale of securities..........         936          --           --
    Writedowns of capitalized excess
     servicing..........................         --         4,675          --
    Writedowns of fixed assets..........         --           886          --
    Stock option compensation expense...         --           --           653
    Writedowns on other real estate
     owned..............................         892        3,252        2,085
    Provision for deferred income taxes.       6,191       22,104        2,120
    Originations of loans held for sale.  (1,232,100)  (1,939,200)  (2,813,378)
    Purchases of loans held for sale....         --           --      (159,122)
    Purchase of trading securities......    (126,083)     (25,180)         --
    Sales of trading securities.........      48,369          --           --
    Sales and collections on loans held
     for sale...........................   1,309,323    2,159,055    1,923,733
    Net change in accrued interest
     receivable.........................        (311)      (3,683)      (4,247)
    Net change in retained interest in
     loan and lease securitizations.....         --       (21,481)     (14,012)
    Net change in capitalized excess
     servicing..........................         --        33,234      (37,500)
    Net change in other assets..........      78,528     (210,969)     (51,644)
    Net change in other liabilities.....      28,063       33,953       (1,436)
                                         -----------  -----------  -----------
  Net cash provided by (used in)
   operating activities.................      57,727      (31,262)  (1,173,703)
                                         -----------  -----------  -----------

 
                                      F-6

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 


                                                 YEARS ENDED DECEMBER 31,
                                              --------------------------------
                                                1997       1996        1995
                                              ---------  ---------  ----------
                                                      (IN THOUSANDS)
                                                           
Cash flows from investing activities:
  Net (increase) decrease in interest bearing
   deposits..................................  (100,369)   264,407    (257,176)
  Purchase of servicing rights...............       --         --       (8,128)
  Proceeds from sale of servicing rights.....     2,213     10,011      12,815
  Proceeds from sale of other real estate
   owned.....................................    21,171      1,202       7,072
  Purchase of securities available for sale..   (42,938)   (48,553)        --
  Sales of securities available for sale.....     5,404        --          --
  Net change in loans held for investment....  (206,172)   (27,651)    566,693
  Purchases of premises and equipment........    (6,839)    (5,442)     (1,367)
  Proceeds from sale of SPFC stock...........    13,707     64,625         --
  Proceeds from sale of FMC stock............    59,731        --          --
  Proceeds from sale of IMH stock............    11,950        --          --
  Purchases of Federal Home Loan Bank stock..    (3,634)    (7,652)     (3,933)
  Redemption of stock in Federal Home Loan
   Bank .....................................    15,140     13,250         --
  Cash utilized for acquisitions.............  (124,488)   (20,020)   (175,015)
                                              ---------  ---------  ----------
Net cash (used in) provided by investing
 activities..................................  (355,124)   244,177     140,961
                                              ---------  ---------  ----------
Cash flows from financing activities:
  Net increase (decrease) in deposits........ $  86,838  $ (23,805) $  158,369
  Net increase (decrease) in borrowings from
   Imperial Bank.............................       --      (5,000)      5,000
  Advances from Federal Home Loan Bank.......    50,000    434,000     347,000
  Repayments of advances from Federal Home
   Loan Bank.................................  (145,500)  (483,500)   (452,000)
  Proceeds from issuance of convertible
   subordinated debentures...................       --      72,162         --
  Net change in other borrowings.............   143,505   (181,463)    875,815
  Issuance of bonds..........................       --         --      111,995
  Repayment of bonds.........................       --    (111,995)        --
  Proceeds from issuance of Senior Notes due
   2007......................................   194,500        --          --
  Proceeds from issuance of Remarketed Par
   Securities................................    68,075        --          --
  Repayments of Senior Notes due 2004........   (73,241)       --          --
  Proceeds from resale of Senior Notes due
   2004......................................       --       7,384         --
  Proceeds from issuance of common stock.....       --      59,228         --
  Net change in minority interest............   (51,762)    53,484         --
  Proceeds from exercise of stock options....     1,332      1,671         825
                                              ---------  ---------  ----------
Net cash provided by (used in) financing
 activities..................................   273,747   (177,834)  1,047,004
Net change in cash...........................   (23,650)    35,081      14,262
Cash at beginning of year....................    74,247     39,166      24,904
                                              ---------  ---------  ----------
Cash at end of year.......................... $  50,597  $  74,247  $   39,166
                                              =========  =========  ==========

 
          See accompanying notes to consolidated financial statements.
 
                                      F-7

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
 
1. ORGANIZATION
 
  Imperial Credit Industries, Inc., incorporated in 1986 in the State of
California, is 23.0% owned by Imperial Bank. In 1991 Imperial Bank
recapitalized the Company to conduct a full service mortgage banking
operation. The consolidated financial statements include Imperial Credit
Industries, Inc. ("ICII"), its significant wholly-owned operating
subsidiaries, significant majority-owned operating subsidiaries and
significant equity investments in two publicly traded companies (collectively
the "Company"). The significant wholly-owned subsidiaries include Southern
Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit
Advisors, Inc. ("ICAI"), Auto Marketing Network ("AMN"), Imperial Credit
Commercial Asset Management Corporation, ("ICCAMC") and Imperial Credit
Worldwide ("ICW"). The significant operating majority owned consolidated
subsidiary is Imperial Capital Group ("ICG") which is 60% owned by the Company
and 40% owned by outside private investors. The significant equity investments
in publicly traded companies are Southern Pacific Funding Corporation ("SPFC")
NYSE Symbol: SFC, and Franchise Mortgage Acceptance Company ("FMC") NASDAQ
Symbol: FMAX. Both SPFC and FMC were former consolidated subsidiaries of the
Company. All material intercompany balances and transactions with consolidated
subsidiaries have been eliminated.
 
2. STRATEGIC FOCUS AND ACQUISITIONS
 
 Strategic Divestitures
 
  In 1995, the Company began to diversify away from the conforming residential
mortgage lending business, the Company's traditional focus, and into other
select lending businesses. The Company expanded several existing businesses
and commenced several new businesses, including non-conforming residential
mortgage banking, commercial mortgage banking, business lending and consumer
lending. The Company's loans and leases by sector consist primarily of the
following: sub-prime residential mortgage banking; commercial mortgage banking
and income producing property loans; business lending--equipment leasing,
asset-based lending, and participation in syndicated commercial lending;
consumer loans--sub-prime auto loans and Title I home improvement loans. The
Company solicits loans and leases from brokers on a wholesale and portfolio
basis and originates loans directly from borrowers. The majority of the
Company's loans and leases, other than those held by SPB for investment, are
sold in secondary markets through securitizations and whole loan sales.
 
 Impac Mortgage Holdings, Inc. and Impac Funding Corporation
 
  During 1995, the Company sold its mortgage conduit operations and SPB's
warehouse lending operations to Impac Mortgage Holdings, Inc. ("IMH"),
formerly Imperial Credit Mortgage Holdings, Inc. In exchange for these assets,
the Company received approximately 11.8% of the common stock of IMH.
Additionally, ICAI entered into a management agreement with IMH pursuant to
which ICAI advised upon the day-to-day operations of IMH and for which it was
paid a management fee. During 1997, the Company sold its common stock interest
in IMH for a gain of approximately $11.5 million. In December 1997, IMH and
the Company negotiated a termination of the management agreement (the
"Termination Agreement"). The consideration received by the Company pursuant
to the Termination Agreement was $44 million, comprised of 2,009,310 shares of
IMH common stock and certain securitization-related assets. Additionally, the
Company agreed to cancel its note receivable from ICI Funding Corporation
("ICIFC"), a former subsidiary of ICII which is now known as Impac Funding
Corporation and is the origination unit of IMH, in the amount of $29.1
million. The IMH common stock and the securitization-related assets were
recorded by the Company at their estimated fair values of approximately $35.0
million and $13.1 million, respectively, for a total of $48.1 million. This
amount, when netted with the $29.1 million cancellation of the ICIFC note
receivable resulted in the gain on termination of the management agreement of
approximately $19.0 million.
 
                                      F-8

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  During the first quarter of 1997, the Company disposed of its common stock
interest in ICIFC, at a loss of $100,000. At December 31, 1996, the Company
owned 100% of the common stock of ICIFC which represented only a 1% economic
interest as IMH owned all of the non-voting preferred stock of ICIFC which
gave IMH a 99% economic interest in ICIFC. The Company's disposal of its
remaining economic interest in ICIFC concluded its exit from the original
mortgage banking business.
 
 Franchise Mortgage Acceptance Company
 
  On June 30, 1995, the Company completed the acquisition of certain net
assets from Greenwich Capital Financial Products, Inc. and formed Franchise
Mortgage Acceptance Company LLC ("FMAC"), a limited liability company, in
which the Company had a 66.7% ownership interest. The acquisition was
accounted for as a purchase and the purchase price of $7.6 million, which
included $3.8 million in contingent consideration for loans in the pipeline,
was allocated to the net assets acquired based on their fair value resulting
in goodwill of approximately $4.0 million. The Company's franchise lending
business was conducted through FMAC until November 1997, at which time FMAC
merged into FMC, a Delaware corporation formed for the purpose of succeeding
to the business of FMAC, and FMC completed an initial public offering of its
common stock. The Company sold into FMC's initial public offering 3,568,175
shares at $18.00 per share generating net proceeds of $59.7 million and a gain
of $48.9 million. Additionally, the Company recognized a gain of $43.2 million
resulting from the adjustment in the basis of its investment in FMC due to the
offering and its reduced ownership percentage. Upon the completion of FMC's
initial public offering and at December 31, 1997, the Company's percentage
ownership of FMC common stock was 38.4%. Accordingly, FMC's operating results
are no longer consolidated with those of the Company and the Company's
investment in FMC is accounted for under the equity method.
 
 Southern Pacific Funding Corporation
 
  For the year ended December 31, 1996, a substantial portion of the Company's
operations were conducted through its sub-prime residential lending
subsidiary, Southern Pacific Funding Corporation ("SPFC"). In June 1996, SPFC
completed an initial public offering of its common stock pursuant to which
ICII was a selling shareholder. SPFC and the Company sold 5.2 million shares
and 3.5 million shares, respectively, at $11.33 per share. In a secondary
offering, the Company sold 1.5 million SPFC shares at $19.83 per share. The
Company recognized a gain on sale of the SPFC shares it owned of $51.2
million, which is net of offering expenses and the Company's cost basis in the
shares. The Company also recognized a gain of $31.4 million related to the
stock sold by SPFC. The gain related to the stock sold by SPFC is based on the
difference between the Company's equity ownership in SPFC after the sale and
such equity ownership prior to the sale, using the Company's respective SPFC
ownership percentages. During the first quarter of 1997, the Company sold
370,000 shares of SPFC common stock at $16.63 per share generating net
proceeds of $6.2 million and a gain of $4.3 million. Such transaction reduced
the Company's ownership percentage in SPFC from 51.2% at December 31, 1996, to
49.4% at March 31, 1997. Accordingly, SPFC's operating results are no longer
consolidated with those of the Company and the Company's investment in SPFC is
accounted for under the equity method. During the third quarter of 1997, the
Company sold an additional 500,000 shares of SPFC common stock generating net
proceeds of $7.6 million and a gain of $5.2 million. At December 31, 1997, the
Company's ownership interest in SPFC was 47.0%.
 
 Imperial Business Credit
 
  The Company expanded its commercial equipment leasing business conducted by
IBC through the acquisitions of substantially all of the assets of First
Concord Acceptance Corporation ("FCAC") for a purchase price of $21.4 million
in May 1995 and all of the assets of Avco Leasing Services, Inc and Avco
Financial Services of Southern California, Inc. (together "Avco") for
approximately $94.8 million in October 1996.
 
                                      F-9

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  These acquisitions were accounted for as purchases and the purchase prices
were allocated to the net assets acquired based on their fair value resulting
in goodwill of $1.2 million and $12.5 million for the FCAC and Avco
transactions, respectively.
 
  IBC's lease originations were $151.3 million and $87.2 million, and it
securitized and sold $213.6 million and $87.0 million during the years ended
December 31, 1997, and 1996, respectively.
 
 Coast Business Credit
 
  In September 1995, the Company began making asset-based loans to middle
market companies located mainly in California by acquiring CoastFed Business
Credit. This entity, now a division of SPB, was renamed Coast Business Credit
("CBC"). The acquisition was accounted for as a purchase and the purchase
price of $150 million was allocated to the net assets acquired based on their
fair value resulting in goodwill of approximately $16 million. At December 31,
1997 and 1996, CBC had total commitments of $803.3 million and $547.7 million,
of which $484.8 million and $288.5 million of loans were outstanding,
respectively.
 
 Imperial Capital Group
 
  During the fourth quarter of 1996, the Company continued to diversify and
strategically deploy its capital by announcing the closing of its investment
in Dabney/Resnick/Imperial LLC ("DRI") (formerly Dabney/Resnick, Inc.), an
investment banking firm. DRI was headquartered in Beverly Hills, California
with offices in Chicago, Illinois, Dallas, Texas, and Sun Valley, Idaho, and
offered full service investment banking, brokerage, and asset management
services. DRI managed and underwrote public offerings of securities, arranged
private placements and provided advisory and other services in connection with
mergers, acquisitions, restructurings, and other financial transactions. The
Company acquired a 1% interest in DRI and purchased a warrant to acquire an
additional 48% interest. During the fourth quarter of 1997, the Company formed
a new subsidiary, ICG, which includes a registered broker/dealer and an asset
management company offering individual and corporate investors a wide range of
financial products and services. In connection with the formation of ICG, the
Company recognized a pre-tax charge of $3.7 million relating to the
restructuring of its loan to DRI. As part of the DRI restructuring,
substantially all of the assets and personnel of DRI were acquired or hired by
ICG. During the fourth quarter of 1997, ICG raised $323 million for corporate
clients through private placement debt and equity offerings generating
investment banking fees of $7.7 million. At December 31, 1997, the Company's
ownership interest in ICG was 60%.
 
 Auto Marketing Network
 
  In March 1997, the Company acquired all the outstanding common stock of AMN,
a sub-prime auto lender engaged in the financing of new and used motor
vehicles on a national basis, for $750,000. As part of the acquisition, the
Company advanced $11.6 million to repay amounts owed pursuant to operating
lines of credit and for working capital purposes. The acquisition was recorded
using the purchase method of accounting. The purchase price was allocated to
the net assets acquired based on their fair value and goodwill of
approximately $20.8 million was recorded. Since the March 1997 acquisition
date, AMN posted operating losses and experienced significant increases in
non-performing assets, loan charge-offs and loan loss provisions. In December
1997, the Company developed revised operating projections which indicated that
the goodwill resulting from the AMN acquisition was not recoverable.
Accordingly, the remaining goodwill balance of $20.1 million was written off
during the fourth quarter of 1997.
 
 PrinCap Mortgage Warehouse
 
  In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and
PrinCap Mortgage Backed, L.P. (collectively, "PrinCap") and
 
                                     F-10

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
contributed such assets to a subsidiary. The acquisition was accounted for as
a purchase, and the purchase price of $123.7 million was allocated to the net
assets acquired based on their fair value resulting in goodwill of $6.8
million.
 
  PrinCap's primary business is residential mortgage warehouse lending to
medium-sized brokers and mortgage bankers on a national basis. At December 31,
1997, PrinCap had commitments outstanding and loans of $124.6 million and
$122.5 million, respectively.
 
 Imperial Credit Commercial Asset Management Corporation
 
  The Company formed ICCAMC, a wholly-owned subsidiary, to oversee the day to
day operations of Imperial Credit Commercial Mortgage Investment Corporation
("ICCMIC"), a real estate investment trust intending to invest primarily in
performing multi-family and commercial real estate loans and mortgage-backed
securities. In October 1997, ICCMIC completed its initial public offering and
sold approximately 34.5 million shares of common stock at $15.00 per share
resulting in net proceeds of approximately $481.2 million. The Company
purchased 2,970,000 shares of ICCMIC common stock in the offering and an
additional 100,000 shares in December 1997. As of December 31, 1997, the
Company owned 8.9% of the common stock of ICCMIC.
 
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of Presentation
 
  The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosure of
contingent liabilities as of the dates of the balance sheets and revenues and
expenses for the periods presented. Significant balance sheet items which
could be materially affected by such estimates include: loans held for
investment, which is presented net of the allowance for loan and lease losses,
and the valuation of the Company's securitization related assets. Actual
results could differ significantly from management's estimates. Prior years'
consolidated financial statements have been reclassified to conform to the
1997 presentation.
 
 Investment Securities
 
  The Company classifies investments as held to maturity, trading securities,
or available for sale securities. Held to maturity investments are reported at
amortized cost, trading securities are reported at fair value with unrealized
gains and losses included in operations, and available for sale securities are
reported at fair value with unrealized gains and losses, net of related income
taxes, included as a separate component of shareholders' equity.
 
  Investment securities held to maturity are those securities that management
has the positive intent and the ability to hold to maturity.
 
  Trading securities include mortgage-backed securities resulting from certain
mortgage banking related activities and United States Treasury securities.
 
                                     F-11

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Investment securities available-for-sale are those securities which are not
held in the trading portfolio and are not held in the held to maturity
portfolio.
 
  Realized gains and losses on securities available for sale are included in
income and are derived using the specific identification method for
determining the cost of securities sold.
 
  Premiums and discounts are amortized over the life of the securities by use
of the interest method. When a decline in value of a security is judged to be
other than temporary, it is written down to fair value by a charge to
earnings.
 
 Loans Held for Sale
 
  Loans held for sale are carried at the lower of aggregate cost or market,
which is based on sale commitments or prices for similar products.
 
  Loans which are ineligible for sale, generally those 90 days past due, are
transferred to loans held for investment at the lower of cost or market on the
day of transfer.
 
 Loans Held for Investment
 
  Loans held for investment are stated at the principal amount outstanding.
Interest income is recorded on the accrual basis in accordance with the terms
of the loans, except that accruals are discontinued when the payment of
principal or interest is 90 or more days past due. Future collections of
interest are included in interest income or applied to the loan balance based
on an assessment of the likelihood that the loan will be repaid. Additionally,
unearned income on installment contracts and leases is recognized in interest
income over the life of the related loans using the interest method.
 
  On an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for loan and lease losses. In determining the
adequacy of the allowance for loan and lease losses, management considers such
factors as historical loan loss experience, underlying collateral values,
known problem loans, evaluations made by bank regulatory authorities,
assessment of economic conditions and other appropriate data to identify the
risks in the loan portfolio. Loans deemed by management to be uncollectible
are charged to the allowance for loan and lease losses. Recoveries on loans
previously charged off are credited to the allowance. Provisions for loan
losses are charged to expense and credited to the allowance in amounts deemed
appropriate by management based upon its evaluation of the known and inherent
risks in the loan portfolio.
 
  The Company considers a loan to be impaired when, based upon current
information and events, it believes it will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Individually
significant loans are evaluated for impairment separately; other loans are
evaluated for impairment collectively. The value of impaired loans is
established by discounting the expected future cash flows at the loan's
effective interest rate, or by the current observable market price or by the
fair value of its collateral. Many factors are considered in the determination
of impairment. The measurement of collateral dependent impaired loans is based
on the fair value of the loan's collateral. Non-collateral dependent loans are
valued based on a present value calculation of expected future cash flows,
discounted at the loan's effective rate.
 
  Cash receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan, unless the
Company believes it will fully recover the remaining principal balance of the
loan, in which case such cash receipts are recognized as interest income.
 
  Impairment losses are included in the allowance for loan losses through a
charge to the provision for loan losses. Adjustments to impairment losses due
to changes in the fair value of collateral of impaired loans are
 
                                     F-12

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
included in the provision for loan losses. Upon disposition of an impaired
loan, loss of principal, if any, is recorded through a charge-off to the
allowance for loan losses.
 
 Purchased and Originated Servicing Rights
 
  Purchased servicing represents the cost of acquiring the right to service
mortgage loans. The cost relating to purchased and originated servicing is
capitalized and amortized in proportion to, and over the period of, estimated
future net servicing income.
 
  The Company assesses the purchased servicing rights portfolio for impairment
based on the fair value of those rights on a stratum-by-stratum basis with any
impairment recognized through a valuation allowance for each impaired stratum.
For the purpose of measuring impairment, the Company has stratified the
capitalized mortgage servicing rights using the following risk
characteristics: loan program type and interest rate tranche in 100 basis
point increments.
 
  In order to determine the fair value of the servicing rights, the Company
uses market prices under comparable servicing sales contracts, when available,
or alternatively, it uses a valuation model that calculates the present value
of future cash flows. Assumptions used in the valuation model include market
discount rates and anticipated prepayment speeds. The prepayment speeds are
determined from market sources for fixed rate mortgages with similar coupons
and prepayment rates for comparable variable rate loans. In addition, the
Company uses market comparables for estimates of the cost of servicing per
loan, an inflation rate, ancillary income per loan and default rates.
 
 Capitalized Excess Servicing Fees Receivable
 
  The Company has created capitalized excess servicing fees receivable as a
result of the sale of loans, and to a lesser extent leases, into various trust
vehicles. These various trust vehicles are majority owned by an independent
third party who has made a substantial capital investment and has substantial
risks and rewards of ownership of the assets of the trust; therefore, these
trust vehicles are not consolidated with the Company.
 
 Retained Interest in Loan and Lease Securitizations
 
  The Company adopted on January 1, 1997, Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which establishes accounting for transfers
and servicing of financial assets and extinguishment of liabilities. This
statement specifies when financial assets and liabilities are to be removed
from an entity's financial statements, the accounting for servicing assets and
liabilities and the accounting for assets that can be contractually prepaid in
such a way that the holder would not recover substantially all of its recorded
investment. Under SFAS 125, an entity recognizes only assets it controls and
liabilities it has incurred, discontinues recognition of assets only when
control has been surrendered, and discontinues recognition of liabilities only
when they have been extinguished. SFAS 125 requires that the selling entity
continue to carry retained interests, including servicing assets, relating to
assets it no longer recognizes. Such retained interests are based on the
relative fair values of the retained interests of the subject assets at the
date of transfer. Transfers not meeting the criteria for sale recognition are
accounted for as a secured borrowing with a pledge of collateral. SFAS 125
requires an entity to recognize its obligation to service financial assets
that are retained in a transfer of assets in the form of a servicing asset or
liability. The servicing asset or liability is amortized in proportion to, and
over the period of, net servicing income or loss. Servicing assets and
liabilities are assessed for impairment based on their fair value.
 
                                     F-13

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The implementation of SFAS 125 did not have a material impact on the
Company's financial condition or results of operation. Under the provisions of
SFAS 125, securitization interests retained by the Company as a result of
securitization transactions are held as either available for sale or trading.
 
  The Company may create retained interest in loan and lease securitizations
as a result of the sale of loans into securitization trusts. Loan and lease
securitizations have specific credit enhancement requirements in the form of
overcollateralization which must be met before the Company receives cash flows
due. As the securitized assets generate excess cash flows, they are initially
used to pay down the balance of the pass-through certificates until such time
as the ratio of securitized assets to pass-through certificates reaches the
overcollateralization requirement specified in each securitization.
 
  This overcollateralization amount is carried on the balance sheet as
retained interest in loan and lease securitizations. After the
overcollateralization requirement and the other requirements specified in the
pooling and servicing agreement have been met, the Company begins to receive
the cash flows from any subordinated bonds or residual interests retained on a
monthly basis. Retained interest in loan and lease securitizations is
classified as available for sale, and income is amortized using the interest
method. To the extent that the future performance results are less than the
Company's initial performance estimates, the Company's retained interest in
loan and lease securitizations will be written down through a charge to
operations.
 
 Interest-only and Residual Certificates
 
  Assets reflected in the accompanying balance sheet as interest-only and
residual certificates in real estate mortgage investment conduits are recorded
as a result of SPB's and SPFC's securitization of loans through various trust
vehicles.
 
 Loan Sales and Related Gain or Loss
 
  Loans are sold through either securitizations or whole loan sales with
servicing retained by the Company. Securitizations typically require credit
enhancements in the form of cash reserves or overcollateralization that are
reflected as retained interest in loan and lease securitizations on the
balance sheet. Sales are recognized when the transaction settles and the risks
and rewards of ownership are determined to have been passed to the purchaser.
 
  Gain is recognized to the extent that the selling prices exceed the carrying
value of the loans sold based on the estimated relative fair values of the
assets transferred, assets obtained and liabilities incurred. The assets
obtained in a sale include, generally, retained interest in loan and lease
securitizations, loan servicing assets, and call options. Liabilities incurred
in a sale include, generally, recourse obligations, put options, and servicing
liabilities. In the securitizations completed to date, the Company retained
call options giving it the right to repurchase loans sold when the outstanding
amount of such loans is 1% to 10% or less of the original amount sold,
depending on the terms of the related securitization. As these call options
are equivalent to a cleanup call, the Company has ascribed no value to them.
The securitizations completed to date had no put option features.
 
  In determining the estimated fair values of the retained interest in loan
and lease securitizations, the Company estimates the cash flows therefrom and
discounts such cash flows at interest rates determined by management to be
rates market participants would use in similar circumstances. Discount rates
ranged from 11% to 28%, as of and for the year ended December 31, 1997. Quoted
market prices are not available as no active market exists for retained
interest in loan and lease securitizations. In estimating the cash flows, the
Company considers default and prepayment rates. The default rates used by the
Company as of and for the year ended December 31, 1997 have ranged from 2.0%
to 18.5%, and the prepayment rates used by the Company have ranged from 0.25%
to 48.0%.
 
                                     F-14

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Loan Origination Fees
 
  Origination fees received on loans held for sale, net of direct costs
related to the origination of the loans, are deferred until the time of sale
and are included in the computation of the gain or loss on the sale of the
related loans. Commitment fee income is deferred until each loan is funded and
sold, and recorded as a part of the gain on sale of the loan in the same
percentage as such loan is to the total commitment. Any remaining deferred
commitment fee income is recognized at expiration of the commitment. When
exercise of such commitment is deemed remote, the fee is recognized over the
remaining commitment period.
 
  Origination fees on loans held for investment, net of direct costs related
to the origination of the loans, are deferred and amortized over the
contractual lives of the related loans using the interest method. When a loan
is classified as a nonaccrual loan, the related net deferred origination fees
are no longer amortized.
 
 Premises and Equipment
 
  Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets (3
to 7 years). Leasehold improvements are amortized over the terms of their
related leases or the estimated useful lives of improvements, whichever is
shorter.
 
 Interest Bearing Deposits
 
  Interest bearing deposits consist of time certificates, investment in
federal funds and money market accounts. Amounts are carried at cost which
approximates market value.
 
 Other Real Estate Owned
 
  Foreclosed real estate is transferred from the loan portfolio at the lower
of the cost of the former mortgage loan or net fair value of the property less
estimated selling costs and is classified as other real estate owned ("OREO").
The excess carrying value, if any, of the loan over the estimated fair value
of the collateral based on appraisal or broker opinion of value less estimated
selling costs is charged to the allowance for loan losses. Any subsequent
impairments in value are recognized through a valuation allowance. Subsequent
increases in fair value are credited to income and reduce the valuation
allowance.
 
  Subsequent increases in the fair value of an asset are only recognized to
the extent that decreases in fair value were recorded through the valuation
allowance. Gains and losses from sales of OREO, provisions for losses on OREO,
and net operating expenses of OREO are recorded in operations and included in
the caption "net expenses of other real estate owned" in the accompanying
consolidated statements of income.
 
 Income Taxes
 
  The Company files a combined California franchise tax return and a
consolidated Federal income tax return with all of its subsidiaries except
ICG. The Company accounts for income taxes using the asset and liability
method of accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
 
  Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
 
                                     F-15

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Goodwill
 
  Goodwill is amortized on a straight-line basis over its estimated useful
life of 15 years. Goodwill is reviewed for possible impairment when events or
changed circumstances may affect the underlying basis of the asset. Impairment
is measured by discounting operating income of the related entity at an
appropriate discount rate. At December 31, 1997 and 1996, Goodwill is
presented net of accumulated amortization of $25.5 million and $2.2 million,
respectively.
 
 Debt Issue Costs
 
  Capitalized debt issue costs are included in Other Assets and are amortized
to interest expense over the life of the related debt using the interest
method.
 
 Hedging Loans Held for Sale
 
  The Company regularly securitizes and sells fixed and variable rate mortgage
loans. To offset the effects of interest rate fluctuations on the value of its
fixed-rate loans held for sale, the Company in certain cases will hedge its
interest rate risk related to loans held for sale by selling United States
Treasury futures contracts. Unrealized and realized gains and losses on such
positions are deferred as an adjustment to the carrying value of loans and
leases held for sale and included in income as gain or loss on sale of loans
when the related loans are sold.
 
  Management has determined that hedge accounting is appropriate for the
Company's hedging program because the hedged loans expose the Company to price
risk. The futures contracts reduce that risk and are designated as hedges, and
at the inception of the hedge and throughout the hedge period, there is a high
correlation between the price of the futures contracts and the fair value of
the loans being hedged. In the event correlation does not remain high, the
futures contracts will cease to be accounted for as hedges and a gain or loss
will be recognized to the extent the futures results have not been offset by
the price changes of the hedged loans.
 
 Total Rate of Return Swaps
 
  The Company has entered into total rate of return swap contracts with
various investment bank counterparties, the provisions of which entitle the
Company to receive the total return on various commercial loans in exchange
for a floating payment of one month LIBOR plus a spread. These contracts are
off-balance sheet financial instruments. The Company's cash collateral held by
the counterparties is included in trading securities. Net income or expense on
these contracts is included in interest income, and the contracts are carried
at their estimated fair values.
 
 Equity Investments
 
  Equity investments are carried under the equity method of accounting.
Accordingly, the Company records as a part of its earnings, the ownership
percentage of its equity investments net income. Dividends received from such
subsidiaries, if any, are credited to the investment balance and not recorded
as earnings.
 
  The Company records gains from the sale of stock in subsidiaries carried
under the equity method based on the difference between the Company's equity
ownership after the sale and such equity ownership prior to the sale, using
the Company's respective ownership percentages. Deferred income tax
liabilities on such gains are accrued at the time such gains are recognized.
 
                                     F-16

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Stock Based Compensation
 
  As permitted by SFAS No. 123, "Accounting for Stock Based Compensation", the
Company accounts for stock based employee compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. The Company provides the pro forma
net earnings, pro forma income per share, and plan disclosures as set forth in
SFAS 123.
 
 Income Per Share
 
  Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." This statement replaces the previously reported primary and fully-
diluted income per share with basic and diluted income per share. Unlike
primary income per share, basic income per share excludes any dilutive effects
of stock options. Diluted income per share is similar to fully-diluted income
per share. Income per share amounts for all periods ending prior to December
31, 1997, have been restated to conform to the SFAS 128 requirements. The
following table reconciles the number of shares used in the computations of
basic and diluted income per share for the years ended December 31:
 


                                                   1997       1996       1995
                                                ---------- ---------- ----------
                                                             
   Weighted-average common shares outstanding
    during the year used to compute basic
    income per share..........................  38,610,952 36,062,776 31,825,495
   Assumed common shares issued on exercise of
    stock options.............................   2,244,321  2,912,058  3,296,167
                                                ---------- ---------- ----------
   Number of common shares used to compute
    diluted income per share..................  40,855,273 38,974,834 35,121,662
                                                ========== ========== ==========

 
 Recent Accounting Pronouncements
 
  In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
 
  This statement stipulates that comprehensive income reflect the change in
equity of an enterprise during a period from transactions and other events and
circumstances from nonowner sources. Comprehensive income will thus represent
the sum of net income and comprehensive income, although SFAS 130 does not
require the use of the terms comprehensive income or other comprehensive
income. The accumulated balance of other comprehensive income is required to
be displayed separately from retained earnings and additional paid in capital
in the statement of financial condition. This statement is effective for the
fiscal years and interim periods beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management believes that the adoption of
SFAS 130 will have no significant impact on its financial position or results
of operations.
 
                                     F-17

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS 131 establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS 131 requires that all public enterprises report financial
and descriptive information about reportable operating segments. Operating
segments are defined as components regularly evaluated by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This statement is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. Management is in the process of
determining the impact, if any, this statement will have on the financial
position, results of operations and disclosures of the Company.
 
  In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures about
Pensions and Other Postretirement Benefits". The statement revises the
required disclosures for pensions and other post retirement plans but does not
change the measurement or recognition of such plans. SFAS 132 is effective for
fiscal years beginning after December 15, 1997. The Company, as required, will
adopt this statement during 1998. As the Company does not offer defined
benefit pension plans, Management believes that the adoption of SFAS 132 will
not have a material effect on the Company's existing disclosures regarding
postretirement benefits
 
                                     F-18

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
  The following information supplements the statement of cash flows:
 


                                                     YEAR ENDED DECEMBER 31,
                                                    ---------------------------
                                                      1997      1996     1995
                                                    --------  -------- --------
                                                          (IN THOUSANDS)
                                                              
Cash paid during the period for:
  Interest......................................... $119,144  $134,251 $ 93,223
  Income taxes.....................................   24,611    24,134    8,283
Significant non-cash activities:
  Loans transferred from held for investment to
   held for sale...................................      --        --   505,037
  Loans transferred to OREO or repossessed assets..   29,359    14,203   12,302
  Loans transferred from held for sale to held for
   investment......................................   37,007   197,141   83,398
  Loans to facilitate the sale of OREO.............    2,347     1,871    1,315
  Retained interest in loan and lease
   securitizations capitalized.....................   23,592     6,908   14,002
  Transfer of securities from available for sale to
   trading.........................................   15,178       --       --
  Securities received in consideration of IMH
   Termination Agreement...........................   48,167       --       --
  Cancellation of note receivable from ICIFC in
   consideration of IMH Termination Agreement......   29,121       --       --
  Change in unrealized gain on securities available
   for sale........................................   (3,084)    1,799    3,211
Deconsolidation of SPFC, ICIFC and FMAC:
  Decrease in loans held for sale..................  768,025       --       --
  Decrease in interest only and residual
   certificates....................................   87,017       --       --
  Decrease in retained interest in loan
   securitizations.................................   30,035       --       --
  Decrease in capitalized excess servicing.........   23,142       --       --
  Decrease in accrued interest receivable..........    5,026       --       --
  Decrease in other borrowings.....................  693,016       --       --
  Decrease in convertible subordinated debt........   75,000       --       --
Purchase of Auto Marketing Network:
  Assets acquired, including goodwill of $20,770... $ 82,484  $    --  $    --
  Liabilities assumed..............................   81,734       --       --
                                                    --------  -------- --------
  Cash paid........................................ $    750  $    --  $    --
                                                    ========  ======== ========
Purchase of PrinCap Mortgage Warehouse, Inc.
 assets:
  Assets acquired, including goodwill of $6,800.... $123,767  $    --  $    --
  Liabilities assumed..............................       29       --       --
                                                    --------  -------- --------
  Cash paid........................................ $123,738  $    --  $    --
                                                    ========  ======== ========

 
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.
 
                                     F-19

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
6. SECURITIES AVAILABLE FOR SALE
 
  The following table provides a summary of securities available for sale with
a comparison of amortized cost and fair values as of December 31, 1997 and
1996.
 


                                                   GROSS      GROSS
                                       AMORTIZED UNREALIZED UNREALIZED   FAIR
 DECEMBER 31, 1997                       COST      GAINS      LOSSES    VALUE
 -----------------                     --------- ---------- ---------- --------
                                                    (IN THOUSANDS)
                                                           
Investment in IMH stock............... $ 35,037    $  879      $--     $ 35,916
Investment in ICCMIC stock............   42,938     1,961       --       44,899
Avalon total return fund..............    5,000       492       --        5,492
AMN Auto Trust 1997-A Class A-2
 principal-only security..............    6,809       --        --        6,809
IBC 1997-1 Class B-1 subordinated
 bond.................................    4,585       --        --        4,585
IBC 1997-1 Class C-1 interest-only
 security.............................    9,638       --        --        9,638
Other.................................      388       --        --          388
                                       --------    ------      ----    --------
                                       $104,395    $3,332      $ --    $107,727
                                       ========    ======      ====    ========

 


                                                     GROSS      GROSS
                                         AMORTIZED UNREALIZED UNREALIZED  FAIR
 DECEMBER 31, 1996                         COST      GAINS      LOSSES    VALUE
 -----------------                       --------- ---------- ---------- -------
                                                     (IN THOUSANDS)
                                                             
Investment in IMH stock................   $   454    $8,668      $--     $ 9,122
SPTL 1996 C-1 interest only securities.     9,829       --        --       9,829
FLRT 1991-A residual interest..........    36,571       --        --      36,571
FLRT 1994-A interest-only security.....     1,814       --        --       1,814
FLRT 1995-A interest-only security.....       964       --        --         964
Other..................................       816       --        --         816
                                          -------    ------      ----    -------
                                          $50,448    $8,668      $ --    $59,116
                                          =======    ======      ====    =======

 
  Gross realized gains and losses on the sale of available for sale securities
were $11.5 million and $936,000, respectively for the year ended December 31,
1997. There were no sales of available for sale securities for the years ended
December 31, 1996 and 1995.
 
7. TRADING SECURITIES
 
  The following table provides a summary of trading securities as of December
31, 1997 and 1996.
 


                                                                 1997    1996
                                                               -------- -------
                                                                (IN THOUSANDS)
                                                                  
     U.S. Treasury Securities................................. $ 79,751 $   --
     FLRT 1996-A interest-only securities.....................    8,541     --
     SPTL 1997 C-1 interest-only security.....................    6,637     --
     SPTL 1996 C-1 interest-only securities...................   12,179  25,180
     Other....................................................   13,796     --
                                                               -------- -------
                                                               $120,904 $25,180
                                                               ======== =======

 
                                      F-20

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Gross unrealized gains and losses on trading securities included in income
were $709,000 and $835,000 for the year ended December 31, 1997. There were no
gross unrealized gains or losses on trading securities included in income for
the years ended December 31, 1996 and 1995.
 
  During the year ended December 31, 1997, the Company entered into total rate
of return swap contracts for investment purposes with various investment bank
counterparties, the provisions of which entitle the Company to receive the
total return on various commercial loans in exchange for a floating payment of
one month LIBOR plus a spread. These contracts are off balance sheet
instruments. As of December 31, 1997, the Company was party to total rate of
return swap contracts with a total notional amount of $150.6 million, under
which the Company was obligated to pay one month LIBOR plus a weighted average
spread of 0.78%. The weighted average remaining life of these contracts was
37.1 months as of December 31, 1997. For the year ended December 31, 1997, the
Company recognized $448,000 in interest income on total return swaps.
 
  The Company's cash collateral held by the counterparties is included in
trading securities. Net income or expense on these contracts is included in
interest income, and the contracts are carried at their estimated fair values.
 
8. LOANS HELD FOR SALE
 
  Loans held for sale, at the lower of cost or market, consisted of the
following at December 31, 1997 and 1996:
 


                                                                1997     1996
                                                              -------- --------
                                                               (IN THOUSANDS)
                                                                 
     Loans secured by real estate:
       Single family 1-4..................................... $ 13,169 $562,002
       Multi-family..........................................   68,294  186,391
                                                              -------- --------
                                                                81,463  748,393
     Automobile loans........................................    9,102      --
     Leases..................................................   13,561    8,547
     Commercial loans........................................   58,445  183,156
                                                              -------- --------
                                                              $162,571 $940,096
                                                              ======== ========

 
9. LOANS HELD FOR INVESTMENT, NET
 
  Loans held for investment consisted of the following at December 31, 1997
and 1996:
 


                                                            1997        1996
                                                         ----------  ----------
                                                            (IN THOUSANDS)
                                                               
     Loans secured by real estate:
       Single family 1-4................................ $  244,588  $  375,476
       Multi-family.....................................     17,261       2,527
       Commercial.......................................      1,085      11,011
                                                         ----------  ----------
                                                            262,934     389,014
     Leases.............................................      7,745      99,717
     Installment loans..................................    154,919      34,248
     Franchise loans....................................     62,219     115,910
     Asset based loans..................................    484,832     288,528
     Commercial loans...................................    344,882     173,932
                                                         ----------  ----------
                                                          1,317,531   1,101,349
     Unearned income....................................     (7,850)     (6,336)
     Deferred loan fees.................................     (4,916)     (6,415)
                                                         ----------  ----------
                                                          1,304,765   1,088,598
       Allowance for loan and lease losses..............    (38,047)    (19,999)
                                                         ----------  ----------
                                                         $1,266,718  $1,068,599
                                                         ==========  ==========

 
                                     F-21

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company's loans held for investment are primarily comprised of first and
second lien mortgages secured by residential and income producing real
property in California, leases secured by equipment, asset based loans to
middle market companies mainly in California, loans to experienced franchisees
of nationally recognized restaurant concepts, and participations in syndicated
commercial loans. As a result, the loan portfolio has a high concentration in
the same geographic region. Although the Company has a diversified portfolio,
a substantial portion of its debtors' ability to honor their contracts is
dependent upon the economy of California.
 
  Activity in the allowance for loan and lease losses was as follows:
 


                                                     YEAR ENDED DECEMBER 31,
                                                     --------------------------
                                                       1997     1996     1995
                                                     --------  -------  -------
                                                          (IN THOUSANDS)
                                                               
   Balance, beginning of year....................... $ 19,999  $13,729  $ 7,054
   Provision for loan and lease losses..............   38,951    9,773    5,450
   Business acquisitions and bulk loan purchases....   11,161    4,500    4,320
   Sale of Leases...................................     (900)     --       --
   Deconsolidation of ICIFC.........................     (687)     --       --
   Loans charged off................................  (31,053)  (8,326)  (3,106)
   Recoveries on loans previously charged off.......      576      323       11
                                                     --------  -------  -------
   Net charge-offs..................................  (30,477)  (8,003)  (3,095)
                                                     --------  -------  -------
   Balance, end of period........................... $ 38,047  $19,999  $13,729
                                                     ========  =======  =======

 
  As of December 31, 1997 and 1996 and 1995, non-accrual loans totaled $70.6
million, $50.1 million, and $31.0 million, respectively. Interest income
foregone on nonaccrual loans was $4.9 million, $1.1 million, and $492,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
 
  At December 31, 1997 and 1996, impaired loans and the related allowance for
loan and lease losses were as follows:
 


                                     1997                          1996
                         ----------------------------- -----------------------------
                                    SPECIFIC                      SPECIFIC
                                    ALLOWANCE                     ALLOWANCE
                          RECORDED     FOR    CARRYING  RECORDED     FOR    CARRYING
                         INVESTMENT  LOSSES    VALUE   INVESTMENT  LOSSES    VALUE
                         ---------- --------- -------- ---------- --------- --------
                                               (IN THOUSANDS)
                                                          
Nonaccrual loans........  $70,631    $(5,351) $65,280   $38,297    $(3,671) $34,626
Restructured loans......      --         --       --        800         (4)     796
                          -------    -------  -------   -------    -------  -------
Total impaired loans....  $70,631    $(5,351) $65,280   $39,097    $(3,675) $35,422
                          =======    =======  =======   =======    =======  =======

 
  Impaired loans averaged $61.8 million, $33.3 million and $21.1 million
during 1997, 1996 and 1995 respectively. During 1997 total interest income
recognized on impaired loans was not material. During 1996 total interest
income recognized on impaired loans was $2.0 million and was immaterial during
1995. At December 31, 1997, total impaired loans were comprised of $40.1
million which had $5.4 million of specific allowances for losses and $30.5
million with no related specific allowance. There were no impaired loans
without a related allowance for losses at December 31, 1996 and 1995.
 
10. RESTRUCTURING
 
  Restructuring charges of $3.8 million were recognized during the year ended
December 31, 1996. The charge represents those costs incurred in connection
with the Company's exit from the conforming mortgage banking business. During
the first quarter of 1996, the Company committed itself to, and began the
execution of, an exit plan that specifically identified the necessary actions
to be taken to complete the exit from the origination,
 
                                     F-22

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
sale and servicing of conforming residential mortgage loans. During 1996, the
Company sold the majority of its wholesale mortgage origination offices and
disposed of fixed assets related to its former conforming residential mortgage
lending business. The Company believes that significant changes to the exit
plan are not likely, and that the exit plan should be completed in the second
quarter of 1998.
 
  Activity in the allowance for restructuring charges during 1997 and 1996 was
as follows:
 


                                               1996      1997
                                             --------  --------
                                   ALLOWANCE CHARGES   CHARGES     BALANCE AT
                                   PROVIDED  INCURRED  INCURRED DECEMBER 31, 1997
                                   --------- --------  -------- -----------------
                                                  (IN THOUSANDS)
                                                    
Disposition of wholesale mortgage
 origination offices.............   $2,500   $(2,354)   $(146)        $--
Disposal of fixed assets.........    1,000      (886)    (114)         --
Other............................      300       --      (229)          71
                                    ------   -------    -----         ----
  Total..........................   $3,800   $(3,240)   $(489)        $ 71
                                    ======   =======    =====         ====

 
11. CAPITALIZED EXCESS SERVICING FEES RECEIVABLE
 
  Changes in capitalized excess servicing fees receivable were as follows:
 


                                                   YEAR ENDED DECEMBER 31,
                                                  ----------------------------
                                                    1997      1996      1995
                                                  --------  --------  --------
                                                        (IN THOUSANDS)
                                                             
   Beginning Balance............................. $ 23,142  $ 33,181  $  4,319
   Present value of excess servicing fees on
    loans sold...................................      --     19,448    40,353
   Amortization..................................      --    (24,812)  (11,491)
   Writedowns....................................      --     (4,675)      --
   Deconsolidation of ICIFC......................  (23,142)      --        --
                                                  --------  --------  --------
   Ending balance................................ $    --   $ 23,142  $ 33,181
                                                  ========  ========  ========

 
  Capitalized excess servicing fees receivable are net of a valuation
allowance of $4.5 million at December 31, 1996.
 
12. PURCHASED AND ORIGINATED SERVICING RIGHTS
 
  Changes in purchased and originated servicing rights were as follows:
 


                                                    YEAR ENDED DECEMBER 31,
                                                    --------------------------
                                                     1997      1996     1995
                                                    -------  --------  -------
                                                         (IN THOUSANDS)
                                                              
   Beginning Balance............................... $14,887  $ 18,428  $16,746
   Additions.......................................   2,982    10,970    7,340
   Increase as a result of the FMAC acquisition....     --        --     3,805
   Decrease as a result of the ICIFC
    deconsolidation................................  (8,785)      --       --
   Bulk purchase of servicing......................     --        --       757
   Sales of servicing rights.......................  (1,264)  (13,390)  (6,234)
   Amortization--accelerated.......................  (2,217)      --    (1,176)
   Amortization--scheduled.........................    (872)   (1,121)  (2,810)
                                                    -------  --------  -------
   Ending balance.................................. $ 4,731  $ 14,887  $18,428
                                                    =======  ========  =======

 
  The servicing portfolio associated with purchased and originated servicing
rights at December 31, 1997 and 1996 was $665.3 million and $1.0 billion,
respectively.
 
                                     F-23

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
13. PREMISES AND EQUIPMENT, NET
 
  Premises and equipment consisted of the following at December 31, 1997 and
1996:
 


                                                                1997     1996
                                                               -------  -------
                                                               (IN THOUSANDS)
                                                                  
     Premises and equipment................................... $14,504  $19,606
     Leasehold improvements...................................   1,371    1,394
                                                               -------  -------
                                                                15,875   21,000
     Less accumulated depreciation and amortization...........  (6,362)  (8,558)
                                                               -------  -------
                                                               $ 9,513  $12,442
                                                               =======  =======

 
14. DEPOSITS
 
  Deposits of $100,000 and over totaled approximately $236.4 million and
$220.8 million at December 31, 1997 and 1996, respectively. Interest expense
associated with certificates of deposit of $100,000 and over was approximately
$15.6 million, $13.6 million, and $15.4 million for the years ended December
31, 1997, 1996, and 1995, respectively.
 
15. BORROWINGS FROM FEDERAL HOME LOAN BANK
 
  SPB is approved as a member of the Federal Home Loan Bank ("FHLB") to borrow
up to a maximum of 35% of the assets of SPB. These borrowings must be fully
collateralized by qualifying mortgage loans and may be in the form of
overnight funds or term borrowings at SPB's option. At December 31, 1997 and
1996, all of the outstanding borrowings from the FHLB were scheduled to mature
within one year. The FHLB advances are secured by the investment in stock of
the FHLB and certain real estate mortgage loans with a carrying value of
$104.7 million and $228.5 million at December 31, 1997 and 1996, respectively.
At December 31, 1997, 1996 and 1995, FHLB borrowings are summarized as
follows:
 


                                                     1997      1996      1995
                                                   --------  --------  --------
                                                      (DOLLARS IN
                                                      THOUSANDS)
                                                              
     Balance at year end.......................... $ 45,000  $140,500  $190,000
     Maximum outstanding at any month end.........  109,500   338,000   435,000
     Average balance during the year..............   56,761   188,765   292,000
     Weighted average rate during the year........     5.82%     6.10%     6.26%
     Weighted average rate at year end............     6.71%     6.30%     6.10%

 
  Interest expense on borrowings from the FHLB was $3.3 million, $12.1 million
and $19.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
 
16. OTHER BORROWINGS
 
  Other borrowings primarily consist of revolving warehouse lines of credit to
fund the Company's and its subsidiaries' lending activities. At December 31,
1997 and 1996, approximately $159 million and $700 million of loans and
securities were pledged as collateral for other borrowings.
 
  These lines of credit are short term and management believes these lines
will be renewed in the normal course of business. Certain covenants exist in
regards to these lines of credit with which the Company was in
 
                                     F-24

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
compliance at December 31, 1997 and 1996. ICII and its subsidiaries have
various revolving warehouse lines of credit and repurchase facilities
available at December 31, 1997, as follows:
 


                         INTEREST                            INDEX
                           RATE   COMMITMENT OUTSTANDING (BASIS POINTS) EXPIRATION DATE
                         -------- ---------- ----------- -------------- ---------------
                                             (DOLLARS IN THOUSANDS)
                                                         
Greenwich Capital
 Financial (AMN)........   7.25%   $125,000   $ 20,058   Libor plus 125  March 10, 1998
Donaldson, Lufkin and
 Jenrette (Corona Film
 Finance Fund)..........   5.85      79,591     79,591   Fixed rate     January 7, 1998
Core States (IBC).......   8.17      30,000     10,192   Libor plus 220 October 6, 1998
Morgan Stanley (SPB)....   6.51     200,000     35,000   Libor plus 50  October 1, 1998
                                   --------   --------
                           6.37    $434,591   $144,841
                                   ========   ========

 
  ICII and its subsidiaries had various revolving warehouse lines of credit
available at December 31, 1996, as follows:
 


                                              INTEREST
                                                RATE    COMMITMENT  OUTSTANDING
                                              -------- ------------ -----------
                                                   (DOLLARS IN THOUSANDS)
                                                           
PaineWebber (ICII)...........................   6.81%  $    200,000  $  5,686
Banco Santander (FMAC).......................   7.63         50,000    16,229
First Boston (FMAC)..........................   7.31        200,000    48,773
Greenwich Capital Markets (FMAC)                7.36    unspecified    35,158
Lehman Brothers (SPFC).......................    --         200,000        --
Imperial Warehouse Lending Group (ICIFC).....   8.25        600,000   337,380
Core States (IBC)............................   7.61         10,000     1,111
Conti (IBC)..................................   7.50        100,000    87,657
Morgan Stanley Mortgage Capital (SPFC).......   6.16        150,000   152,681
Imperial Warehouse Lending Group (ICII)......   8.00         20,000     5,077
Warehouse Lending Corporation of America
 (ICII)......................................   7.94         20,000     4,600
                                                       ------------  --------
                                                7.55   $  1,550,000  $694,352
                                                       ============  ========

 
  Interest expense on other borrowings was $29.6 million, $64.4 million and
$35.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
 
                                     F-25

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
17. SENIOR NOTES
 


                                                       DECEMBER 31, 1997
                                               ---------------------------------
                                                          UNAMORTIZED
                                               FACE VALUE  DISCOUNT   BOOK VALUE
                                               ---------- ----------- ----------
                                                             
     9.75% Senior Notes due 2004..............  $ 20,174     $(361)    $ 19,813
     9.875% Senior Notes due 2007.............   200,000       --       200,000
                                                --------     -----     --------
                                                $220,174     $(361)    $219,813
                                                ========     =====     ========

 


                                                       DECEMBER 31, 1996
                                               ---------------------------------
                                                          UNAMORTIZED
                                               FACE VALUE  DISCOUNT   BOOK VALUE
                                               ---------- ----------- ----------
                                                             
     9.75% Senior notes due 2004..............  $90,000     $(1,791)   $88,209
                                                -------     -------    -------
                                                $90,000     $(1,791)   $88,209
                                                =======     =======    =======

 
  During the first quarter of 1997, the Company successfully completed a
$200.0 million offering of 9.875% Senior Notes due 2007 (the "9.875% Senior
Notes"). A portion of the proceeds from the offering was used to repurchase
$69.8 million of the outstanding 9.75% Senior Notes due 2004 (the "9.75%
Senior Notes") on which the Company recorded an extraordinary after-tax loss
of $4.0 million. The remaining proceeds were used to make capital
contributions to subsidiaries, strategic acquisitions, investments, and for
general corporate purposes. The effective interest rate on the tendered notes
was approximately 10.8% after the amortization of original issue discount and
deferred bond issue costs. The effective interest rate on the new notes is
approximately 10.4% after the amortization of deferred bond issue costs. The
Company engaged in the tender offer and new issuance in order to obtain a more
favorable debt covenant package and to raise new capital to support its
growing businesses.
 
  The 9.875% Senior Notes may be redeemed after January 15, 2002 at the option
of the Company until maturity at a declining premium, plus accrued interest.
The 9.875% Senior Notes are general unsecured obligations of the Company
ranking pari passu with all senior indebtedness of the Company, but are
effectively subordinated to the liabilities of SPB. The Indenture for the
9.875% Senior Notes includes provisions which limit the ability of the Company
to incur additional indebtedness or issue certain stock of the Company, to
make certain investments, engage in certain transactions with affiliates,
create restrictions on the ability of subsidiaries to pay dividends or certain
other distributions, create liens and encumbrances, or allow its subsidiaries
to issue certain classes of stock. As of December 31, 1997, the Company was in
compliance with the debt covenants related to the 9.875% Senior Notes.
 
  In January 1994, the Company issued $90.0 million of 9.75% Senior Notes. At
December 31, 1997 and 1996, $20.2 million and $90.0 million of the 9.75%
Senior Notes were outstanding, respectively. The 9.75% Senior Notes may be
redeemed after January 15, 1999 at the option of the Company until maturity at
a declining premium, plus accrued interest. The 9.75% Senior Notes are
unsecured and rank pari passu with all other senior unsecured indebtedness of
the Company, but are effectively subordinated to the liabilities of SPB.
 
  The Indenture for the 9.75% Senior Notes includes provisions which limit the
ability of the Company to incur additional indebtedness or issue certain stock
of the Company, to make certain investments, engage in certain transactions
with affiliates, create restrictions on the ability of subsidiaries to pay
dividends or certain other distributions, create liens and encumbrances, or
allow its subsidiaries to issue certain classes of stock. As of December 31,
1997 and 1996, the Company was in compliance with the debt covenants related
to the 9.75% Senior Notes.
 
                                     F-26

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Total interest expense on the Senior Notes for the years ended December 31,
1997, 1996 and 1995 was $21.7 million, $9.0 million and $8.4 million,
respectively.
 
18. CONVERTIBLE SUBORDINATED DEBENTURES
 
  At December 31, 1996, the SPFC convertible subordinated debentures were
convertible into 3,151,125 shares of common stock of the Company's former
consolidated subsidiary, SPFC, at a conversion price of $23.80 per share, at
any time prior to maturity. Interest on the convertible subordinated
debentures is payable semi-annually. Debt issuance costs of $2.8 million
associated with the convertible subordinated debentures were being amortized
over ten years using the effective interest method. Total interest expense on
the convertible subordinated debentures for the year ended December 31, 1996
was $887,093. The convertible subordinated debentures were deconsolidated
during the first quarter of 1997 when the Company reduced its ownership
percentage in SPFC to below 50%.
 
19. REMARKETED PAR SECURITIES
 
  During the second quarter of 1997, Imperial Credit Capital Trust I
("ICCTI"), a subsidiary of the Company organized for the sole purpose of
issuing trust securities, issued $70.0 million of 10.25% Remarketed Par
Securities ("ROPES") due June 14, 2002 at par. The ROPES are secured by
resettable rate debentures which are general unsecured obligations of the
Company and can be redeemed at par upon their maturity or remarketed as 30
year capital instruments at the Company's option. Under current tax law, the
interest payments on these securities are tax-deductible. The proceeds from
the offering were used for capital contributions to subsidiaries, strategic
acquisitions, investments and general corporate purposes. Interest expense on
the ROPES was $4.3 million for the year ended December 31, 1997.
 
  The Trust Indenture for the ROPES includes provisions which limit the
ability of the Company to incur additional indebtedness or issue certain stock
of the Company, to make certain investments, engage in certain transactions
with affiliates, create restrictions on the ability of subsidiaries to pay
dividends or certain other distributions, create liens and encumbrances, or
allow its subsidiaries to issue certain classes of stock. As of December 31,
1997, the Company was in compliance with the debt covenants related to the
ROPES.
 
20. PREFERRED AND COMMON STOCK
 
  The Company has authorized 8,000,000 shares of Preferred Stock. The Board
has the authority to issue the preferred stock in one or more series, and to
fix the designations, rights, preferences, privileges, qualifications and
restrictions, including dividend rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preferences and sinking fund
terms, any or all of which may be greater than the rights of the Common Stock.
 
  In the fourth quarter of 1997, the Company's board of directors announced
the authorization to repurchase approximately 5% of the company's common
stock, or as much as 1.9 million shares. During 1997, the Company repurchased
and retired 25,000 shares of common stock under this program.
 
  During 1996, the Company issued an additional 2.4 million shares to the
public, generating net proceeds of $59.2 million, which is net of expenses of
$891,000.
 
  On October 22, 1996, the Company effected a 2-for-1 stock split to
shareholders of record as of October 15, 1996.
 
  On February 26, 1996, the Company paid a stock dividend to shareholders of
record as of February 12, 1996. One new share of Common Stock was issued for
each, 10 shares currently held by shareholders.
 
                                     F-27

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  On October 24, 1995, the Company effected a 3-for-2 stock split to
shareholders of record as of October 10, 1995.
 
21. INCOME TAXES
 
  The Company's income taxes for the years ended December 31, 1997, 1996 and
1995 were as follows:
 


                                                      YEAR ENDED DECEMBER 31,
                                                      ------------------------
                                                       1997     1996    1995
                                                      -------  ------- -------
                                                          (IN THOUSANDS)
                                                              
     Current:
       Federal....................................... $41,988  $31,138 $ 7,803
       State.........................................  13,551   12,210   2,452
                                                      -------  ------- -------
         Total current...............................  55,539   43,348  10,255
                                                      -------  ------- -------
     Deferred:
       Federal.......................................   4,399   16,009   1,846
       State.........................................   1,792    6,095     274
                                                      -------  ------- -------
         Total deferred..............................   6,191   22,104   2,120
                                                      -------  ------- -------
     Taxes credited (charged) to shareholders'
      equity.........................................   2,916    4,422  (2,231)
     Reduction of deferred tax liability due to FMC
      public offering ...............................  (5,899)     --      --
                                                      -------  ------- -------
     Taxes on income before extraordinary item.......  58,747   69,874  10,144
     Current taxes--extraordinary item...............  (2,919)     --      --
                                                      -------  ------- -------
     Income taxes.................................... $55,828  $69,874 $10,144
                                                      =======  ======= =======

 
  The Company's current income taxes payable totaled approximately $24.8
million and $25.7 million at December 31, 1997 and 1996, respectively.
 
                                     F-28

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Deferred income taxes arise from differences in the timing of recognition of
income and expense for tax and financial reporting purposes. The following
table shows the primary components of the Company's net deferred tax liability
at December 31, 1997 and 1996.
 


                                                              1997      1996
                                                            --------  --------
                                                             (IN THOUSANDS)
                                                                
Deferred tax assets:
  Allowances for loan losses............................... $ 13,156  $  4,365
  Unrealized gain on loans and securities..................      --      1,671
  State taxes..............................................    7,099     5,677
  Executive stock options..................................      543       548
  Other....................................................      213     1,309
                                                            --------  --------
    Total..................................................   21,011    13,570
                                                            --------  --------
  Valuation allowance......................................      --        --
                                                            --------  --------
  Deferred tax assets, net of valuation allowance..........   21,011    13,570
                                                            --------  --------
Deferred tax liabilities:
  Sales/Investments in FMAC/SPFC/ICIFC.....................  (41,984)  (12,934)
  Purchased and originated servicing rights................      --     (5,222)
  Gain on sale of servicing................................     (926)   (8,934)
  Excess servicing gains...................................   (1,143)   (6,162)
  Leases...................................................   (7,915)   (3,930)
  Deferred loan fees.......................................     (505)     (510)
  Depreciation.............................................   (1,160)     (468)
  Unrealized gain on securities available for sale.........   (1,363)   (3,473)
  FHLB stock dividends.....................................   (1,791)   (1,522)
                                                            --------  --------
    Total..................................................  (56,787)  (43,155)
                                                            --------  --------
Net deferred tax liability................................. $(35,776) $(29,585)
                                                            ========  ========

 
  In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Management considers the scheduled reversal
of deferred tax liabilities and available tax carrybacks and future taxable
income, in making this assessment. Based upon the schedule of reversals,
future taxable income and available tax carrybacks, management believes it is
more likely than not the Company will realize the benefits of the deferred tax
assets.
 
  A reconciliation of the statutory Federal corporate income tax rate of 35%
to the effective income tax rate is as follows:
 


                                                                YEAR ENDED
                                                               DECEMBER 31,
                                                              ----------------
                                                              1997  1996  1995
                                                              ----  ----  ----
                                                                 
     Statutory U.S. federal income tax rate.................. 35.0% 35.0% 35.0%
     Increase (reduction) in rate resulting from:
       State income taxes, net of Federal benefit............  6.3   7.5   7.3
       Reduction of deferred tax liability due to FMC public
        offering............................................. (3.7)  --    --
       Other, net............................................ (0.7)  1.8  (0.3)
                                                              ----  ----  ----
     Effective income tax rate............................... 36.9% 44.3% 42.0%
                                                              ====  ====  ====

 
 
                                     F-29

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
22. EMPLOYEE BENEFIT PLANS
 
 PROFIT SHARING AND 401(K) PLAN
 
  Under the Company's 401(k) plan, employees may elect to enroll on the first
of any month, provided that they have been employed for at least six months.
Employees may contribute up to 14% of their salaries. The Company will match
50% of the first 4% of employee contributions. The Company recorded 401(k)
matching expense of $296,000, $305,000, and $209,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
 
  An additional Company contribution may be made at the discretion of the
Company. Should a discretionary contribution be made, the contribution would
first be allocated to those employees deferring salaries in excess of 4%. The
matching contribution would be 50% of any deferral in excess of 4% up to a
maximum deferral of 8%.
 
  Should discretionary contribution funds remain following the allocation
outlined above, any remaining Company matching funds would be allocated as a
50% match of employee contributions on the first 4% of the employee's
deferrals. Discretionary contributions of $0, $350,000, and $200,000 were
charged to operations in each of the years ending December 31, 1997, 1996, and
1995.
 
  Company matching contributions are made as of December 31st each year.
 
 1992 STOCK OPTION PLAN
 
  A total of 2,292,632 shares of the Company's Common Stock has been reserved
for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory
Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own
terms in 2002. A total of 1,082,493 options were outstanding at December 31,
1997.
 
  The 1992 Stock Option Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonqualified stock options
("NQSOs") to employees, officers, directors and consultants of the Company.
Incentive stock options may be granted only to employees. The 1992 Stock
Option Plan is administered by the Board of Directors or a committee appointed
by the Board, which determines the terms of options granted, including the
exercise price, the number of shares subject to the option, and the option's
exercisability.
 
  The exercise price of all options granted under the 1992 Stock Option Plan
must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the 1992 Stock Option Plan is
10 years. With respect to any participant who owns stock representing more
than 10% of the voting rights of the Company's outstanding capital stock, the
exercise price of any option must be at least equal to 110% of the fair market
value on the date of grant.
 
 1996 STOCK OPTION PLAN
 
  The Company adopted the 1996 Stock Option, Deferred Stock and Restricted
Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of
ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards
consisting of deferred stock, restricted stock, stock appreciation rights and
limited stock appreciation rights ("Awards"). The 1996 Stock Option Plan is
administered by a committee of directors appointed by the Board of Directors
(the "Committee"). ISOs may be granted to the officers and key employees of
the Company or any of its subsidiaries.
 
                                     F-30

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The exercise price for any option granted under the 1996 Stock Option Plan
may not be less than 100% (110% in the case of ISOs granted to an employee who
is deemed to own in excess of 10% of the outstanding Common Stock) of the fair
market value of the shares of Common Stock at the time the option is granted.
The purpose of the 1996 Stock Option Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
the Company. The effective date of the 1996 Stock Option Plan was June 21,
1996.
 
  A total of 3,000,000 shares of the Company's Common Stock has been reserved
for issuance under the 1996 Stock Option Plan and a total of 1,453,200 options
were outstanding at December 31, 1997.
 
  If an option granted under the 1996 Stock Option Plan expires or terminates,
or an Award is forfeited, the shares subject to any unexercised portion of
such option or Award will again become available for the issuance of further
options or Awards under the 1996 Stock Option Plan.
 
  Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the 1996 Stock Option Plan after June 21, 2006.
 
  Options granted under the 1996 Stock Option Plan will become exercisable
upon the terms of the grant made by the Committee. Awards will be subject to
the terms and restrictions of the Award made by the Committee. The Committee
has discretionary authority to select participants from among eligible persons
and to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO.
 
  Under current law, ISOs may not be granted to any individual who is not also
an officer or employee of the Company or any subsidiary.
 
  Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of the Company's outstanding
Common Stock). Options may be granted on terms providing for exercise in whole
or in part at any time or times during their respective terms, or only in
specified percentages at stated time periods or intervals during the term of
the option, as determined by the Committee.
 
  The exercise price of any option granted under the 1996 Stock Option Plan is
payable in full (i) in cash, (ii) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
1996 Stock Option Plan, (iii) by cancellation of indebtedness owed by the
Company to the optionholder, or (iv) by any combination of the foregoing.
 
  The Board of Directors may from time to time revise or amend the 1996 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding options or Award without such participant's consent or may,
without shareholder approval, increase the number of shares subject to the
1996 Stock Option Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant (with the exception
of adjustments resulting from changes in capitalization), materially modify
the class of participants eligible to receive options or Awards under the 1996
Stock Option Plan, materially increase the benefits accruing to participants
under the 1996 Stock Option Plan or extend the maximum option term under the
1996 Stock Option Plan.
 
                                     F-31

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  A summary of changes in outstanding stock options follows:
 


                                                  DECEMBER 31,
                                 --------------------------------------------------
                                      1997             1996             1995
                                 ---------------- ---------------- ----------------
                                         WEIGHTED         WEIGHTED         WEIGHTED
                                 NUMBER  AVERAGE  NUMBER  AVERAGE  NUMBER  AVERAGE
                                   OF     OPTION    OF     OPTION    OF     OPTION
      SHARES IN THOUSANDS        SHARES   PRICE   SHARES   PRICE   SHARES   PRICE
      -------------------        ------  -------- ------  -------- ------  --------
                                                         
Options outstanding, January 1.  2,589    $8.58   1,637    $2.94   1,758    $2.46
Options granted................    470    18.72   1,609    13.62     394     5.01
Options exercised..............   (430)    2.61    (295)    2.61    (323)    2.55
Options canceled...............    (93)   10.56    (362)    8.32    (192)    2.80
                                 -----    -----   -----    -----   -----    -----
Options outstanding, December
 31............................  2,536    11.41   2,589     8.58   1,637     2.94
                                 =====            =====            =====
Options Exercisable............    678     6.95     551     2.47     467     2.24

 
  There were 1,636,431 options available for future grants at December 31,
1997.
 
  The stock option information presented in the above tables reflects the 2-
for-1 stock split and 1-for-10 stock dividend in 1996, 3-for-2 stock split
paid in 1995, the 1-for-10 stock dividend paid in 1993, and the 1-for-19 stock
dividend paid in 1992.
 
  Effective January 1, 1996, The Company adopted the disclosure requirements
of SFAS 123, and continued to measure its employee stock-based compensation
arrangements under the provisions of APB 25. Accordingly, no compensation
expense has been recognized for the stock option plan. Had compensation
expense for the Company's stock option plan been determined based on the fair
value at the grant date for awards in 1997, 1996 and 1995 consistent with the
provisions of SFAS 123, the Company's net income and income per share would
have been reduced to the pro forma amounts indicated below:
 


                                                         YEAR ENDED DECEMBER 31,
                                                         -----------------------
                                                          1997    1996    1995
                                                         ------- ------- -------
                                                          (IN THOUSANDS, EXCEPT
                                                             PER SHARE DATA)
                                                                
     Net income:
       As reported...................................... $85,921 $75,984 $14,193
       Pro forma........................................  81,707  74,733  14,089
     Basic income per share:
       As reported...................................... $  2.23 $  2.11 $  0.45
       Pro forma........................................    2.12    2.07    0.44
     Diluted income per share:
       As reported...................................... $  2.10 $  1.95 $  0.40
       Pro forma........................................    2.00    1.92    0.40

 
  The effects of applying SFAS 123 for disclosing compensation cost may not be
representative of the effects on reported net income for future years.
 
                                     F-32

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The weighted average fair value at date of grant of options granted during
1997, 1996 and 1995 was $11.27, $6.22 and $3.09 per option, respectively. The
fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
 


                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                            -------------------
                                                            1997   1996   1995
                                                            -----  -----  -----
                                                                 
     Expected life (years).................................  5.53   3.40   3.43
     Interest rate.........................................  5.76%  5.48%  5.14%
     Volatility............................................ 64.33  57.51  60.80
     Dividend yield........................................  0.00%  0.00%  0.00%

 
23. EXECUTIVE COMPENSATION
 
 Employment Agreements
 
  On January 1, 1997, the Company entered into five-year employment contracts
with H. Wayne Snavely, Chairman of the Board, President and Chief Executive
Officer, Kevin E. Villani, Executive Vice President, Chief Financial Officer
and a Director and Stephen J. Shugerman, President of SPB and a Director,
which provide for minimum annual aggregate compensation of $1 million, subject
to adjustment for inflation, plus an annual bonus approved by the Company's
Board of the Directors based on the attainment of performance objectives,
including the Company's return on equity, earnings per share and increase in
the price of the Company's common stock. The total cash compensation of the
three senior officers is limited in the aggregate to $2.95 million, annually.
 
 Stock Options
 
  On January 1, 1992, options were granted to three senior officers of the
Company to purchase a total of 2,292,628 shares, adjusted for stock dividends
and splits, of the Company's Common Stock. The exercise price of these options
is $0.89 per share of common stock for one-half of the options, with the other
half exercisable at $1.40 per share. These options became exercisable in
September 1995 (vesting was accelerated from January 1, 1997). These options
expire on December 1, 2001 and are not covered by the Company's stock option
plan.
 
  Compensation expense relating to these options was recorded in the Company's
consolidated financial statements over a four year period which ended December
31, 1995 for an amount representing the difference between the exercise price
of the options and the market price of the Company's stock at the grant date.
The aggregate amount of compensation expense recognized on these stock options
since their grant date is $2,178,000.
 
  The amount of compensation expense recorded for the year ended December 31,
1995 related to the stock options was $871,200.
 
24. INTEREST RATE SWAPS
 
  The Company may enter into interest rate cap, floor, and swap transactions
to manage its exposure to fluctuations in interest rates and market movements
in securities values. These instruments involve, to varying degrees, elements
of credit and interest rate risk.
 
  The contract or notional amounts do not represent exposure to credit loss.
Risk originates from the inability of counterparties to meet the terms of the
contracts and from market movements in securities values and interest rates.
The Company controls the credit risk of its interest rate cap, floor and swap
agreements through credit approvals, limits and monitoring procedures.
 
                                     F-33

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  As a part of the SPB securitization in the third quarter of 1996 of $277.0
million of multi-family and commercial mortgage loans, the Company delivered
subordinate bonds of approximately $22 million into a total rate of return
swap with JP Morgan. The provisions of the swap entitle the Company to receive
the total return on the subordinate bonds delivered in exchange for a floating
payment of LIBOR plus a spread of 1.95%. The swap was an off balance sheet
instrument, and it expired on September 30, 1997.
 
25. COMMITMENTS AND CONTINGENCIES
 
 Loan Servicing
 
  As of December 31, 1997 and 1996 the Company was servicing loans for others,
directly and through sub-servicing arrangements, totaling approximately $1.3
billion and $2.1 billion, respectively.
 
  Related fiduciary funds held in trust for investors in non-interest bearing
accounts totaled $8.3 million and $1.3 million at December 31, 1997 and 1996,
respectively. These funds are segregated in special bank accounts and are held
as deposits at SPB. The Company is a guarantor of certain performances and
lease servicing by IBC. The Company is a guarantor for AMN's performance with
regards to the Auto Trust 1997-A securitization.
 
 Sales of Loans and Servicing Rights
 
  In the ordinary course of business, the Company is exposed to liability
under representations and warranties made to purchasers and insurers of
mortgage loans and the purchasers of servicing rights. Under certain
circumstances, the Company is required to repurchase mortgage loans if there
has been a breach of representations or warranties. The Company provided $5.4
million in 1997 as an allowance for losses on repurchases of former mortgage
banking loans.
 
  During the years ended December 31, 1997 and 1996, the Company retained
servicing rights on $197.8 million and $35.1 million of mortgage loans sold
through traditional secondary market channels and $919.1 million and $1.3
billion on loans and leases sold through securitizations. Additionally, during
the year ended December 31, 1996, the Company released servicing rights to the
purchasers on $627.0 million of mortgage loans sold. During the year ended
December 31, 1995, the Company retained servicing rights on $794.9 million of
mortgage loans sold, and released servicing rights to the purchasers on $1.1
billion of mortgage loans sold.
 
 Loan Commitments
 
  As of December 31, 1997 and 1996, the Company had unfunded open loan
commitments amounting to $655.3 million and $642.8 million, respectively, to
fund loans. There is no exposure to credit loss in this type of commitment
until the loans are funded. Interest rate risk is mitigated by the use of
forward contracts to sell loans to investors.
 
                                     F-34

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Forward Contracts
 
  The Company sold mortgage-backed securities through forward delivery
contracts with major dealers in such securities, primarily through its former
mortgage banking operations. At December 31, 1997 and 1996, the Company had $0
and $143.0 million, respectively, in outstanding commitments to sell mortgage
loans through mortgage-backed securities.
 
  The credit risk of forward contracts relates to the counterparties' ability
to perform under the contract. The Company evaluates counterparties based on
their ability to perform prior to entering into any agreements.
 
  The Company regularly securitizes and sells fixed and variable-rate mortgage
loans. To offset the effects of interest rate fluctuations on the value of its
fixed-rate loans held for sale, the Company in certain cases will hedge its
interest rate risk related to loans held for sale by selling U.S. Treasury
securities short or in the forward market.
 
  As of December 31, 1997 and 1996, the Company had open positions of $16.4
million and $183.7 million related to the sales of United States Treasury
futures contracts hedging the interest rate risk on fixed rate loans held for
sale. At December 31, 1997, the Company had unrealized gains of $277,000 on
open positions. At December 31, 1996, the Company had unrealized losses of
$1.7 million on open positions.
 
 Options
 
  The Company may purchase put options or write covered call options to hedge
against adverse movements in the value of the loans held for sale portfolio.
 
  The Company will realize a gain or loss upon the expiration or closing of
the option transaction. When an option is exercised, the proceeds on sales for
a written call option, the purchase cost for a written put option, or the cost
of the security for a purchased put or call option is adjusted by the amount
of premium received or paid.
 
  The risk in writing a call option is that the Company gives up the
opportunity for profit if the market price of the security increases and the
option is exercised. The risk in buying an option is that the Company pays a
premium whether or not the option is exercised.
 
  The Company had $0 and $70.0 million notional amount of written call option
contracts outstanding at December 31, 1997 and 1996, respectively. The Company
received $0 and $366,000 in premiums related to the options outstanding at
December 31, 1997 and 1996, respectively. There were no option contracts
exercised during the year.
 
 Lease Commitments
 
  Minimum rental commitments under all noncancelable operating leases at
December 31, 1997 were as follows:
 


                                                    (IN THOUSANDS)
                                                    --------------
                                                 
         1998......................................    $ 4,629
         1999......................................      3,664
         2000......................................      3,421
         2001......................................      2,828
         2002......................................      2,572
         Thereafter................................      1,493
                                                       -------
           Total...................................    $18,607
                                                       =======

 
                                     F-35

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Rent expense for the years ended December 31, 1997, 1996 and 1995 was $4.0
million, $4.2 million, and $3.6 million, respectively.
 
 Legal Proceedings
 
  The Company is a defendant in Fortune Mortgage Corporation et al. vs. ICII
et al., originally filed in Orange County Superior Court on March 5, 1997 and
recently ordered removed to arbitration under the auspices of the American
Arbitration Association. The complaint alleges breach of contract, breach of
implied covenant of good faith and fair dealing, negligent misrepresentation,
fraud, conspiracy to commit fraud, aiding and abetting fraud, contractual
indemnity and reimbursement, money had and received, and unjust enrichment
arising from the Company's sale of a group of loan production offices to
plaintiffs. The plaintiffs seek rescission, restitution and general, special
and/or consequential damages, and also exemplary and punitive damages as
relate to the claims regarding fraud. The plantiffs are seeking approximately
$3.5 million in general damages and approximately $10.0 million in punitive
damages.
 
  In Steadfast Insurance Co., Inc. vs. AMN and ICII, filed on August 12, 1997
in the U.S. District Court, Northern District of Illinois, the plaintiff seeks
a declaratory judgment, compensatory damages in the amount of $9 million and
punitive damages arising from an alleged breach of contract and allegedly
fraudulent conduct by AMN. The claim relates to an insurance policy issued to
AMN in 1993 covering certain losses resulting from auto loan defaults.
 
  The Company and a Director, among others, are defendants in Judy L. Resnick
v. Imperial Credit Industries, Inc., et al originally filed on January 14,
1998, in Los Angeles Superior Court. The complaint alleges conspiracies by the
defendants to defraud, interfere with advantageous business relationships,
defame, and breach of fiduciary duty as well as actual fraud, defamation, and
breach of implied covenant of good faith and fair dealing arising out of ICG's
acquisition of substantially all of the assets of Dabney/Resnick/Imperial. The
plaintif is seeking actual, consequential, incidental, general and punitive
damages in a sum of not less than $25 million.
 
  The Company is involved in additional litigation arising in the normal
course of business.
 
  All of the above referenced actions are being actively defended and although
the ultimate outcome can not be estimated, management believes, based in part
upon the advice of legal counsel, that none of these proceedings will have a
material effect on the Company's financial condition or results of operations.
 
26. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  Financial instruments include securities, loans receivable, time deposits
and various off-balance sheet items. Because no market exists for a portion of
the Company's loans held for investment and securitization related assets,
fair value estimates are based on judgments regarding credit risk, investor
expectation of future economic conditions, normal cost of administration and
other risk characteristics, including interest rate and prepayment risk. These
estimates are subjective in nature and involve uncertainties and matters of
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. In addition, the fair
value estimates presented do not include the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.
 
                                     F-36

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
 
FINANCIAL ASSETS
 
  The carrying values of cash, interest bearing deposits, FHLB stock, and
accrued interest receivable are considered to approximate fair value. The
carrying values of securities held for trading and available for sale
approximate fair value. Such market value is determined by reference to quoted
market prices. When quoted market prices are not available, fair value is
estimated by reference to market values for similar securities or by
discounting cash flows at an appropriate risk rate. The fair value of loans
held for sale is based on forward sales contracts or quoted market prices. The
fair value of loans held for investment is estimated using a combination of
techniques, including discounting estimated future cash flows and quoted
market prices for similar instruments, taking into consideration the varying
degrees of credit risk.
 
  The fair value of servicing rights, excess servicing fees and securitization
related assets is estimated by discounting future cash flows using appropriate
risk, default and prepayment rates. The fair value of investments in
unconsolidated publicly traded affiliates is based on quoted market prices.
 
FINANCIAL LIABILITIES
 
  The carrying amounts of deposits due on demand and accrued interest payable
is considered to approximate fair value. For fixed maturity deposits, fair
value is estimated by discounting estimated future cash flows using currently
offered rates for deposits of similar maturities. The fair value of debt is
based on rates currently available to the Company for debt with similar terms
and remaining maturities.
 
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
 
  The fair value of lending commitments is estimated using the fees currently
charged to enter into similar agreements; such estimated fair value is not
material. The fair value of interest rate swaps, forward treasury contracts,
interest rate futures and interest rate swaps is based on quoted market
prices. The fair value of option contracts is based on the unamortized
premium.
 
                                     F-37

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The estimated fair values of the Company's financial instruments at December
31, 1997 and 1996 are as follows:
 


                                           1997                  1996
                                   --------------------- ----------------------
                                    CARRYING  ESTIMATED   CARRYING   ESTIMATED
                                     AMOUNT   FAIR VALUE   AMOUNT    FAIR VALUE
                                   ---------- ---------- ----------  ----------
                                                 (IN THOUSANDS)
                                                         
ASSETS:
Cash.............................  $   50,597 $   50,597 $   74,247  $   74,247
Interest bearing deposits........     103,738    103,738      3,369       3,369
Investment in Federal Home Loan
 Bank stock......................       5,646      5,646     17,152      17,152
Securities held for trading......     115,905    115,905     25,180      25,180
Securities available for sale....     112,726    112,726     59,116      59,116
Loans held for sale..............     162,571    168,262    940,096     954,299
Loans held for investment, net...   1,266,718  1,286,820  1,068,599   1,081,053
Purchased and originated
 servicing rights................       4,731      4,731     14,887      14,887
Capitalized excess servicing fees
 receivable......................         --         --      23,142      23,142
Retained interest in loan and
 lease securitizations...........      43,105     43,105     49,548      49,548
Interest only and residual
 certificates....................         --         --      87,017      87,017
Accrued interest receivable......       9,132      9,132     13,847      13,847
Investments in unconsolidated
 subsidiaries....................     118,402    330,427        --          --
LIABILITIES:
Deposits.........................  $1,156,022 $1,160,294 $1,069,184  $1,069,624
Borrowings from Federal Home Loan
 Bank............................      45,000     45,000    140,500     140,500
Other borrowings.................     144,841    144,841    694,352     694,352
Remarketed par securities........      70,000     70,000        --          --
Senior notes.....................     219,813    219,474     88,209      93,150
Convertible debentures...........         --         --      75,000      75,000
Accrued interest payable.........      21,484     21,484     14,034      14,034
OFF BALANCE SHEET ITEMS:
Options..........................         --         --         366         366
Interest rate swap...............         --         --         --        1,166
Forward treasury contracts.......         277        277     (1,700)     (1,700)

 
                                      F-38

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
27. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 


                                                THREE MONTHS ENDED
                                     ------------------------------------------
                                     MARCH 31 JUNE 30  SEPTEMBER 30 DECEMBER 31
                                     -------- -------  ------------ -----------
                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                        
Year ended December 31, 1997
  Gain on sale of loans............. $ 8,666  $28,558    $20,512      $ 9,987
  Net interest income...............  20,808   23,723     29,181       27,631
  Other revenues....................  13,691   10,960     25,405      128,517
  Provision for loan and lease
   losses...........................   2,870    5,736      9,559       20,786
  Other expenses....................  21,134   29,064     35,090       64,224
  Net income........................   7,037   14,073     14,589       50,222
  Income per share:
    Basic........................... $  0.18  $  0.37    $  0.38      $  1.29
    Diluted......................... $  0.17  $  0.35    $  0.36      $  1.22
Year ended December 31, 1996
  Gain on sale of loans............. $21,711  $19,166    $28,640      $18,639
  Net interest income...............  12,737   13,405     22,163       24,130
  Gain (loss) on sale of servicing..   8,065     (257)       --          (217)
  Other revenues....................   3,212   65,843      2,987       26,483
  Provision for loan and lease
   losses...........................   1,500    2,025      2,617        3,631
  Other expenses....................  27,168   20,652     24,924       26,305
  Net income........................   8,616   43,041      9,433       14,894
  Income per share:
    Basic........................... $  0.27  $  1.19    $  0.25      $  0.39
    Diluted......................... $  0.24  $  1.11    $  0.23      $  0.37

 
                                      F-39

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
28. SELECTED FINANCIAL INFORMATION OF SUBSIDIARIES
 
The following represents summarized financial information with respect to the
operations of SPB, a significant wholly-owned subsidiary of ICII.
 


                                                  AS OF AND FOR THE YEAR ENDED
                                                          DECEMBER 31,
                                                --------------------------------
              SOUTHERN PACIFIC BANK                1997       1996       1995
              ---------------------             ---------- ---------- ----------
                                                         (IN THOUSANDS)
                                                             
   Total assets................................ $1,503,807 $1,384,008 $1,432,554
   Deposits....................................  1,189,841  1,072,266  1,093,250
   Borrowings from Federal Home Loan Bank......     45,000    140,500    190,000
   Other borrowings............................     80,000        --         --
   Stockholder's equity........................    157,081    144,798    126,599
   Interest income.............................    153,824    131,184    103,112
   Interest expense............................     80,453     73,141     70,819
   Noninterest income..........................     34,636     15,149     17,790
   Noninterest expense.........................     39,768     21,846     13,942
   Provision for loan losses...................     14,900      8,938      5,450
   Income before taxes.........................     53,339     42,408     30,691
   Net income..................................     30,824     24,399     17,753

 
The following represents summarized financial information with respect to the
operations of SPFC, in which the Company has a significant equity investment.
SPFC is a publicly traded sub-prime mortgage banking company, that is subject
to the reporting requirements of the United States Securities and Exchange
Commission.
 


                                                       AS OF AND FOR THE YEAR
                                                         ENDED DECEMBER 31,
                                                     --------------------------
         SOUTHERN PACIFIC FUNDING CORPORATION          1997     1996     1995
         ------------------------------------        -------- -------- --------
                                                           (IN THOUSANDS)
                                                              
   Total assets..................................... $589,345 $340,377 $120,405
   Interest-only and residual certificates..........  277,156   87,017   25,659
   Long term debt...................................  175,000   75,000       --
   Shareholders' equity.............................  139,155   85,086   12,889
   Gain on sale of loans............................  148,404   55,361   16,329
   Interest income..................................   39,307   13,849    4,305
   Interest expense.................................   27,613    7,800    3,414
   Noninterest income...............................    1,634    4,265    1,667
   Noninterest expense..............................   69,714   17,596    6,344
   Income before taxes..............................   92,018   48,079   12,543
   Net income.......................................   53,775   27,632    7,337

 
                                     F-40

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following represents summarized consolidating financial information as
of December 31, 1997 and December 31, 1996, and for the years ended December
31, 1997, 1996 and 1995, with respect to the financial position, results of
operations and cash flows of the Company and its wholly-owned and majority-
owned subsidiaries. On January 17, 1997, the Company sold $200 million of
9.875% Senior Notes due 2007. As of December 31, 1997, the 9.875% Senior Notes
are guaranteed by five of the Company's wholly-owned subsidiaries, IBC, ICAI,
ICCAMC, ICW, ICCTI and AMN (the "Guarantor Subsidiaries"). As of December 31,
1997, the non-guarantor subsidiaries are SPB and ICG. FMC was a guarantor
subsidiary through September 30, 1997. Each of the guarantees is full and
unconditional and joint and several. The summarized consolidated financial
information is presented in lieu of separate financial statements and other
related disclosures of the wholly-owned subsidiary guarantors as management
has determined that such information is not material to investors. None of the
subsidiary guarantors is restricted from making distributions to the Company.
 
                     CONSOLIDATING CONDENSED BALANCE SHEET
 
                            AS OF DECEMBER 31, 1997
 


                                                    NON-
                                    GUARANTOR    GUARANTOR
                            ICII   SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                          -------- ------------ ------------ ------------ ------------
                                                 (IN THOUSANDS)
                                                           
         ASSETS
Cash....................  $ 13,229   $  6,668    $   43,318   $ (12,618)   $   50,597
Interest bearing
 deposits...............    31,390      1,149        71,199         --        103,738
Investments in Federal
 Home Loan Bank stock...       --         --          5,646         --          5,646
Securities available for
 sale and trading.......   107,671     21,031        99,929         --        228,631
Loans held for sale.....    12,138     23,694       126,739         --        162,571
Loans held for
 investment, net........    78,922     44,941     1,197,430     (54,575)    1,266,718
Investment in SPFC......    65,303        --            --          --         65,303
Purchased and originated
 servicing rights.......       --         --          4,731         --          4,731
Investment in FMC.......    53,099        --            --          --         53,099
Retained interest in
 loan and lease
 securitizations........       --      43,105           --          --         43,105
Investment in
 subsidiaries...........   281,454        --            --     (281,454)          --
Goodwill................       --      13,229        22,378         --         35,607
Other assets............    59,911     (1,104)       26,473      (2,932)       82,348
                          --------   --------    ----------   ---------    ----------
  Total assets..........  $703,117   $152,713    $1,597,843   $(351,579)   $2,102,094
                          ========   ========    ==========   =========    ==========
    LIABILITIES AND
  SHAREHOLDERS' EQUITY
Deposits................  $    --    $    --     $1,189,840   $ (33,818)   $1,156,022
Other borrowings........       --      30,250       196,528     (36,937)      189,841
Remarketed Par
 Securities.............    72,165        --         (2,165)        --         70,000
Senior notes............   219,813        --            --          --        219,813
Minority interest in
 consolidated
 subsidiaries...........       946         20           111       2,097         3,174
Other liabilities.......    86,260      7,327        45,095         629       139,311
                          --------   --------    ----------   ---------    ----------
  Total liabilities.....   379,184     37,597     1,429,409     (68,029)    1,778,161
                          --------   --------    ----------   ---------    ----------
Shareholders' equity:
Preferred stock.........       --      12,000           --      (12,000)          --
Common stock............   147,109    125,139        89,342    (214,481)      147,109
Retained earnings.......   174,898    (22,023)       79,092     (57,069)      174,898
Unrealized gain on
 securities available
 for sale...............     1,926        --            --          --          1,926
                          --------   --------    ----------   ---------    ----------
  Total shareholders'
   equity...............   323,933    115,116       168,434    (283,550)      323,933
                          --------   --------    ----------   ---------    ----------
  Total liabilities and
   shareholders' equity.  $703,117   $152,713    $1,597,843   $(351,579)   $2,102,094
                          ========   ========    ==========   =========    ==========

 
 
                                     F-41

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                    CONSOLIDATING CONDENSED INCOME STATEMENT
 
                          YEAR ENDED DECEMBER 31, 1997
 


                                                     NON-
                                     GUARANTOR    GUARANTOR
                            ICII    SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                          --------  ------------ ------------ ------------ ------------
                                                 (IN THOUSANDS)
                                                            
REVENUE:
(Loss) gain on sale of
 loans and leases.......  $ (4,427)   $  5,894     $ 65,853     $    403     $ 67,723
                          --------    --------     --------     --------     --------
Interest income.........    28,916      32,736      172,894       (6,609)     227,937
Interest expense........    25,703      11,283       96,116       (6,508)     126,594
                          --------    --------     --------     --------     --------
Net interest income.....     3,213      21,453       76,778         (101)     101,343
Provision for loan and
 lease losses...........     5,000      19,051       14,900          --        38,951
                          --------    --------     --------     --------     --------
 Net interest income
  after Provision for
  loan and lease
  losses................    (1,787)      2,402       61,878         (101)      62,392
                          --------    --------     --------     --------     --------
Loan servicing (expense)
 income.................    (2,283)      5,212        7,814          --        10,743
Investment Banking fees.       --          --         7,702          --         7,702
Gains on sale of FMC
 stock..................    92,137         --           --           --        92,137
Gain on sale of SPFC
 stock..................     9,488         --           --           --         9,488
Gain on sale of IMH
 stock..................     9,225         411        1,294          566       11,496
Gain on termination of
 REIT contract..........       --       19,046          --           --        19,046
Equity in net income
 SPFC...................    25,869         --           --           --        25,869
Equity in net loss FMC..    (3,050)        --           --           --        (3,050)
Dividends received from
 subsidiaries...........    27,514         --           --       (27,514)         --
Other (expense) income..    (3,447)      5,050        5,113         (702)       6,014
                          --------    --------     --------     --------     --------
 Total other income.....   155,453      29,719       21,923      (27,650)     179,445
                          --------    --------     --------     --------     --------
   Total revenues.......   149,239      38,015      149,654      (27,348)     309,560
                          --------    --------     --------     --------     --------
EXPENSES:
Personnel expense.......     4,682      17,769       38,379          --        60,830
Amortization of PMSR's
 and OMSR's.............     1,580         637          872          --         3,089
Occupancy expense.......     1,310         598        2,411          --         4,319
Data processing expense.       260         288          955          --         1,503
Net expenses of other
 real estate owned......     4,513        (254)       2,268          --         6,527
Professional services...     3,611       1,684        5,008          --        10,303
Amortization of
 goodwill...............       --       21,724        1,536          --        23,260
Provision for loss on
 loan repurchase........     5,400         --           --           --         5,400
Loss on restructuring...     3,709         --           --           --         3,709
General, administrative
 and other expense......     4,662      13,486       13,695         (399)      31,444
                          --------    --------     --------     --------     --------
 Total expenses.........    29,727      55,932       65,124         (399)     150,384
                          --------    --------     --------     --------     --------
Income before income
 taxes, minority
 interest, deferred
 inter-company expense
 and extraordinary item.   119,512     (17,917)      84,530      (26,949)     159,176
Income taxes (benefit)..    41,611      (5,670)      22,568          238       58,747
                          --------    --------     --------     --------     --------
Income (loss) before
 minority interest and
 extraordinary item.....    77,901     (12,247)      61,962      (27,187)     100,429
Minority interest in
 income of consolidated
 subsidiaries...........    10,513         --           --           --        10,513
                          --------    --------     --------     --------     --------
Income (loss) before
 deferred inter-company
 expense and
 extraordinary item.....    67,388     (12,247)      61,962      (27,187)      89,916
Deferred inter-company
 expense, net of income
 taxes..................      (327)        --           --           327          --
                          --------    --------     --------     --------     --------
Income (loss) before
 equity in undistributed
 income of subsidiaries
 and extraordinary item.    67,715     (12,247)      61,962      (27,514)      89,916
Equity in undistributed
 income of subsidiaries.    22,201         --           --       (22,201)         --
                          --------    --------     --------     --------     --------
Extraordinary item--Loss
 on early extinguishment
 of debt, net of income
 taxes..................    (3,995)        --           --           --        (3,995)
                          --------    --------     --------     --------     --------
Net income (loss).......  $ 85,921    $(12,247)    $ 61,962     $(49,715)    $ 85,921
                          ========    ========     ========     ========     ========

 
                                      F-42

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
 
                          YEAR ENDED DECEMBER 31, 1997
 


                                                     NON-
                                     GUARANTOR    GUARANTOR
                           ICII     SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                         ---------  ------------ ------------ ------------ ------------
                                                (IN THOUSANDS)
                                                            
Net cash provided by
 (used in) operating
 activities............. $  (2,067)   $ 31,657    $ 815,765    $(787,628)   $  57,727
                         ---------    --------    ---------    ---------    ---------
Cash flows from
 investing activities:
  Net change in interest
   bearing deposits.....   (31,390)       (986)     (70,797)       2,804     (100,369)
  Purchase of securities
   available for sale...   (42,938)        --           --           --       (42,938)
  Sale of securities
   available for sale...       --          --        29,354      (23,950)       5,404
  Net change loans held
   for investment.......   (56,088)     15,544     (272,429)     106,801     (206,172)
  Proceeds of sale of
   SPFC stock...........    13,707         --           --           --        13,707
  Proceeds of sales of
   IMH stock............     9,679         411        1,295          565       11,950
  Proceeds of sales of
   FMC stock............    59,731         --           --           --        59,731
  Investment in Imperial
   Credit Asset
   Resolution Inc.......   (74,810)        --           --        74,810          --
  Cash utilized for
   acquisitions.........      (750)        --      (123,738)         --      (124,488)
  Net change in
   investment in
   Subsidiaries.........   (11,803)        --           --        11,803          --
  Other, net............     3,645     (23,283)     (40,377)      88,066       28,051
                         ---------    --------    ---------    ---------    ---------
Net cash (used in)
 provided by investing
 activities.............  (131,017)     (8,314)    (476,692)     260,899     (355,124)
                         ---------    --------    ---------    ---------    ---------
Cash flows from
 financing activities:
  Net change in
   deposits.............       --          --       117,575      (30,737)      86,838
  Advances from Federal
   Home Loan Bank.......       --          --        50,000          --        50,000
  Repayments of advances
   from Federal Home
   Loan Bank............       --          --      (145,500)         --      (145,500)
  Net change in other
   borrowings...........   (15,363)    (58,518)    (290,113)     507,499      143,505
  Proceeds from offering
   of Senior Notes......   194,500         --           --           --       194,500
  Borrowings from
   Imperial Credit
   Investment Corp......    10,000         --           --       (10,000)         --
  Proceeds from offering
   of Remarketed
   Securities...........    68,075         --           --           --        68,075
  Repurchase of Senior
   Notes................   (73,241)        --           --           --       (73,241)
  Net change in minority
   interest.............   (44,203)        --           111       (7,670)     (51,762)
  Other, net............     1,332      33,870      (92,754)      58,884        1,332
                         ---------    --------    ---------    ---------    ---------
Net cash provided by
 (used in) financing
 activities.............   141,100     (24,648)    (360,681)     517,976      273,747
                         ---------    --------    ---------    ---------    ---------
  Net change in cash....     8,016      (1,305)     (21,608)      (8,753)     (23,650)
  Cash at beginning of
   period...............     5,213       7,973       64,926       (3,865)      74,247
                         ---------    --------    ---------    ---------    ---------
  Cash at end of period. $  13,229    $  6,668    $  43,318    $ (12,618)   $  50,597
                         =========    ========    =========    =========    =========

 
                                      F-43

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                          CONSOLIDATING BALANCE SHEET
 
                            AS OF DECEMBER 31, 1996
 


                                                    NON-
                                    GUARANTOR    GUARANTOR
                            ICII   SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                          -------- ------------ ------------ ------------ ------------
                                                 (IN THOUSANDS)
                                                           
         ASSETS
Cash....................  $  5,213   $  7,973    $   64,926   $  (3,865)   $   74,247
Interest bearing
 deposits...............       --         163         2,594         612         3,369
Investments in Federal
 Home Loan Bank stock...       --         --         17,152         --         17,152
Investment and trading
 securities.............     8,802        887        75,173        (566)       84,296
Loans held for sale.....     4,839      8,547       926,710         --        940,096
Loans held for
 investment, net........    34,505     86,214       948,567        (687)    1,068,599
Purchased and originated
 servicing rights.......       --         637        14,250         --         14,887
Capitalized excess
 servicing fees
 receivable.............       --         --         23,142         --         23,142
Retained interest in
 loan and lease
 securitizations........       --      19,646        29,902         --         49,548
Interest-only and
 residual certificates..       --         --         87,017         --         87,017
Accrued interest on
 loans..................     1,425        --         12,422         --         13,847
Premises and equipment,
 net....................     4,922        404         7,116         --         12,442
Other real estate owned,
 net....................     3,508        --          8,706         --         12,214
Investment in
 subsidiaries...........   269,651        --            --     (269,651)          --
Goodwill................       --      14,115        24,375         --         38,490
Other assets............    96,746    (15,385)      (22,998)    (27,070)       31,293
                          --------   --------    ----------   ---------    ----------
  Total assets..........  $429,611   $123,201    $2,219,054   $(301,227)   $2,470,639
                          ========   ========    ==========   =========    ==========
    LIABILITIES AND
  SHAREHOLDERS' EQUITY
Deposits................  $    --    $    --     $1,072,266   $  (3,082)   $1,069,184
Borrowings from Federal
 Home Loan Bank.........       --         --        140,500         --        140,500
Other borrowings........    15,363     88,768       605,343     (15,122)      694,352
Senior notes............    88,209        --            --          --         88,209
Convertible subordinated
 debentures.............       --         --         75,000         --         75,000
Minority interest in
 consolidated
 subsidiaries...........    45,149        --            --        9,787        54,936
Other liabilities.......    41,382      9,222        71,605     (13,259)      108,950
                          --------   --------    ----------   ---------    ----------
Total liabilities.......   190,103     97,990     1,964,714     (21,676)    2,231,131
                          --------   --------    ----------   ---------    ----------
Shareholders' equity:
Preferred stock.........       --         --          9,143      (9,143)          --
Common stock............   145,521     21,501       140,382    (161,883)      145,521
Retained earnings.......    88,977      3,525       104,815    (108,340)       88,977
Unrealized gain on
 securities available
 for sale...............     5,010        185           --         (185)        5,010
                          --------   --------    ----------   ---------    ----------
  Total shareholders'
   equity...............   239,508     25,211       254,340    (279,551)      239,508
                          --------   --------    ----------   ---------    ----------
  Total liabilities and
   shareholders'
   equity...............  $429,611   $123,201    $2,219,054   $(301,227)   $2,470,639
                          ========   ========    ==========   =========    ==========

 
 
                                      F-44

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                         CONSOLIDATING INCOME STATEMENT
 
                          YEAR ENDED DECEMBER 31, 1996
 


                                                    NON-
                                    GUARANTOR    GUARANTOR
                           ICII    SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                          -------  ------------ ------------ ------------ ------------
                                                (IN THOUSANDS)
                                                           
REVENUE:
Gain on sale of loans...  $  (937)   $ 2,617      $ 86,090     $    386     $ 88,156
                          -------    -------      --------     --------     --------
Interest income.........   14,877      3,811       193,963       (5,180)     207,471
Interest expense........   16,696      1,901       127,181      (10,742)     135,036
                          -------    -------      --------     --------     --------
Net interest income.....   (1,819)     1,910        66,782        5,562       72,435
Provision for loan and
 lease losses...........      --         --          9,625          148        9,773
                          -------    -------      --------     --------     --------
 Net interest income
  after provision for
  loan and lease losses.   (1,819)     1,910        57,157        5,414       62,662
                          -------    -------      --------     --------     --------
Loan servicing income...   (3,706)     3,095        11,444       (9,153)       1,680
Gain on sale of
 servicing rights.......    6,249        --            --         1,342        7,591
Gains on sale of SPFC
 stock..................   82,690        --            --           --        82,690
Dividends received from
 subsidiaries...........    6,200        --            --        (6,200)         --
Other income............      741      3,214         6,162        4,037       14,154
                          -------    -------      --------     --------     --------
 Total other income.....   92,174      6,309        17,606       (9,974)     106,115
                          -------    -------      --------     --------     --------
 Total revenues.........   89,418     10,836       160,853       (4,174)     256,933
                          -------    -------      --------     --------     --------
EXPENSES:
Personnel expense.......    8,757      2,997        36,837         (236)      48,355
Amortization of PMSRs
 and OMSRs..............      402        106           613          --         1,121
Occupancy expense.......    1,994        229         2,352           78        4,653
Data processing expense.    1,094         62         1,007          --         2,163
Net expenses of other
 real estate owned......    4,969        --            765        1,280        7,014
General, administrative
 and other expense......   13,652      3,583        17,877          631       35,743
                          -------    -------      --------     --------     --------
 Total expenses.........   30,868      6,977        59,451        1,753       99,049
                          -------    -------      --------     --------     --------
Income before income
 taxes, minority
 interest, deferred
 inter-company expense
 and extraordinary item.   58,550      3,859       101,402       (5,927)     157,884
Income taxes............   28,830      1,606        39,135          303       69,874
                          -------    -------      --------     --------     --------
Income before minority
 interest, deferred
 inter-company expense
 and extraordinary item.   29,720      2,253        62,267       (6,230)      88,010
Minority interest in of
 consolidated
 subsidiaries...........   12,026        --            --           --        12,026
                          -------    -------      --------     --------     --------
Income before deferred
 inter-company expense..   17,694      2,253        62,267       (6,230)      75,984
Deferred inter-company
 expense, net of income
 taxes..................   (1,383)       --            --         1,383          --
                          -------    -------      --------     --------     --------
Income before equity in
 undistributed income of
 subsidiaries...........   19,077      2,253        62,267       (7,613)      75,984
Equity in undistributed
 income of subsidiaries.   56,907        --            --       (56,907)         --
                          -------    -------      --------     --------     --------
Net income (loss).......  $75,984    $ 2,253      $ 62,267     $(64,520)    $ 75,984
                          =======    =======      ========     ========     ========

 
 
                                      F-45

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
 
                          YEAR ENDED DECEMBER 31, 1996
 


                                       OTHER         NON-
                                     GUARANTOR    GUARANTOR
                           ICII     SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                         ---------  ------------ ------------ ------------ ------------
                                                (IN THOUSANDS)
                                                            
Net cash provided by
 (used in) operating
 activities............. $ 141,655   $  28,949    $(222,480)   $  20,614    $ (31,262)
                         ---------   ---------    ---------    ---------    ---------
Cash flows from
 investing activities:
  Net change in interest
   bearing deposits.....       --         (163)     265,206         (636)     264,407
  Proceeds of sales of
   servicing rights.....    31,799         --           --       (21,788)      10,011
  Purchase of securities
   available for sale...       --         (887)     (41,704)      (5,962)     (48,553)
  Net change in loans
   held for investment..    (5,310)    (86,213)     (37,354)     101,226      (27,651)
  Cash utilized for
   acquisitions.........       --      (20,020)         --           --       (20,020)
  Proceeds from sale of
   SPFC stock...........    64,625         --           --           --        64,625
  Net change in
   investment in
   Subsidiaries.........  (155,759)        --           --       155,759          --
  Other, net............     3,762        (524)      (6,425)       4,545        1,358
                         ---------   ---------    ---------    ---------    ---------
Net cash (used in)
 provided by investing
 activities.............   (60,883)   (107,807)     179,723      233,144      244,177
                         ---------   ---------    ---------    ---------    ---------
Cash flows from
 financing activities:
  Net change in
   deposits.............       --          --       (20,984)      (2,821)     (23,805)
  Advances from Federal
   Home Loan Bank.......       --          --       434,000          --       434,000
  Repayments of advances
   from Federal Home
   Loan Bank............       --          --      (483,500)         --      (483,500)
  Proceeds from
   convertible
   subordinated
   debentures...........       --          --        72,162          --        72,162
  Net change in other
   borrowings...........  (196,363)     88,768      105,266     (184,134)    (186,463)
  Proceeds from issuance
   of common stock......    59,228         --        53,798      (53,798)      59,228
  Repayment of Bonds....       --          --      (111,995)         --      (111,995)
  Net change in minority
   interest.............    43,697         --           --         9,787       53,484
  Other, net............     9,286         --        26,400      (26,631)       9,055
                         ---------   ---------    ---------    ---------    ---------
Net cash (used in)
 provided by financing
 activities.............   (84,152)     88,768       75,147     (257,597)    (177,834)
                         ---------   ---------    ---------    ---------    ---------
  Net change in cash....    (3,380)      9,910       32,390       (3,839)      35,081
  Cash at beginning of
   period...............     8,593      (1,937)      32,536          (26)      39,166
                         ---------   ---------    ---------    ---------    ---------
  Cash at end of period. $   5,213   $   7,973    $  64,926    $  (3,865)   $  74,247
                         =========   =========    =========    =========    =========

 
                                      F-46

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                         CONSOLIDATING INCOME STATEMENT
 
                          YEAR ENDED DECEMBER 31, 1995
 


                                                     NON-
                                     GUARANTOR    GUARANTOR
                            ICII    SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                          --------  ------------ ------------ ------------ ------------
                                                            
REVENUE
Gain on sale of loans...  $ 12,999     $1,803      $ 36,051     $(11,296)    $ 39,557
                          --------     ------      --------     --------     --------
Interest income.........    15,677         76       110,595        3,134      129,482
Interest expense........    20,900         17        77,708       (2,897)      95,728
                          --------     ------      --------     --------     --------
Net interest income.....    (5,223)        59        32,887        6,031       33,754
Provision for loan
 losses.................       --         --          5,450          --         5,450
                          --------     ------      --------     --------     --------
 Net interest income
  after provision for
  loan loss.............    (5,223)        59        27,437        6,031       28,304
                          --------     ------      --------     --------     --------
Loan servicing income...    14,007         27         6,670       (7,986)      12,718
Gain on sale of
 servicing rights.......     4,889        --            401       (1,712)       3,578
Other income............      (885)     2,465         2,676       (3,104)       1,152
                          --------     ------      --------     --------     --------
 Total other income.....    18,011      2,492         9,747      (12,802)      17,448
                          --------     ------      --------     --------     --------
 Total revenues.........    25,787      4,354        73,235      (18,067)      85,309
                          --------     ------      --------     --------     --------
EXPENSES:
Personnel expense.......    20,281      1,606        12,789         (623)      34,053
Amortization of PMSRs
 and OMSRs..............     3,986        --          2,892       (2,892)       3,986
Occupancy expense.......     2,874         54         1,065          (89)       3,904
Data processing expense.     1,191          1           358          (89)       1,461
Net expense of other
 real estate owned......       191        --          1,706           16        1,913
General, administrative
 and other expense......     9,938        493         9,277       (3,845)      15,863
                          --------     ------      --------     --------     --------
 Total expenses.........    38,461      2,154        28,087       (7,522)      61,180
                          --------     ------      --------     --------     --------
Income before income
 taxes, minority
 interest, deferred
 inter-company gains and
 extraordinary item.....   (12,674)     2,200        45,148      (10,545)      24,129
Income taxes............    (5,443)       929        19,212       (4,554)      10,144
                          --------     ------      --------     --------     --------
(Loss) income before
 minority interest,
 deferred inter-company
 gains and extraordinary
 item...................    (7,231)     1,271        25,936       (5,991)      13,985
Minority interest in
 loss of consolidated
 subsidiaries...........      (208)       --            --           --          (208)
                          --------     ------      --------     --------     --------
(Loss) income before
 deferred inter-company
 gains..................    (7,023)     1,271        25,936       (5,991)      14,193
Deferred inter-company
 gains, net of income
 taxes..................     1,710        --            --        (1,710)         --
(Loss) income before
 equity in undistributed
 income of subsidiaries.    (8,733)     1,271        25,936       (4,281)      14,193
Equity in undistributed
 income of subsidiaries.    22,926        --            --       (22,926)         --
                          --------     ------      --------     --------     --------
Net income (loss).......  $ 14,193     $1,271      $ 25,936     $(27,207)    $ 14,193
                          ========     ======      ========     ========     ========

 
                                      F-47

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
 
                          YEAR ENDED DECEMBER 31, 1995
 


                                                     NON-
                                     GUARANTOR    GUARANTOR
                           ICII     SUBSIDIARIES SUBSIDIARIES  ELIMINATIONS CONSOLIDATED
                         ---------  ------------ ------------  ------------ ------------
                                                (IN THOUSANDS)
                                                             
Net cash (used in)
 provided by operating
 activities............. $(258,380)   $ 22,093   $(1,076,751)   $ 139,335   $(1,173,703)
                         ---------    --------   -----------    ---------   -----------
Cash flows from
 investing activities:
  Net change in interest
   bearing
   deposits.............       --          --       (126,700)    (130,476)     (257,176)
  Proceeds of sales of
   servicing rights.....    12,815         --          5,055       (5,055)       12,815
  Net change in loans
   held for investment..    51,784         --        493,749       21,160       566,693
  Cash utilized for
   acquisitions.........       --      (25,015)     (150,000)         --       (175,015)
  Net change in
   investment in
   Subsidiaries.........   (15,581)        --            --        15,581           --
  Other, net............    (8,310)        (15)        1,194          775        (6,356)
                         ---------    --------   -----------    ---------   -----------
Net cash provided by
 (used in) investing
 activities.............    40,708     (25,030)      223,298      (98,015)      140,961
                         ---------    --------   -----------    ---------   -----------
Cash flows from
 financing activities:
  Net change in
   deposits.............       --          --        146,390       11,979       158,369
  Advances from Federal
   Home Loan Bank.......       --          --        347,000          --        347,000
  Repayments of advances
   from Federal Home
   Loan Bank............       --          --       (452,000)         --       (452,000)
  Net change in other
   borrowings...........   211,725         --        708,823      (39,733)      880,815
  Issuance of Bonds.....       --          --        111,995          --        111,995
  Net change in minority
   interest.............     1,453         --            --        (1,453)          --
  Other, net............       825       1,000        (1,100)         100           825
                         ---------    --------   -----------    ---------   -----------
Net cash provided by
 financing activities...   214,003       1,000       861,108      (29,107)    1,047,004
                         ---------    --------   -----------    ---------   -----------
  Net change in cash....    (3,669)     (1,937)        7,655       12,213        14,262
  Cash at beginning of
   period...............    12,262         --         24,881      (12,239)       24,904
                         ---------    --------   -----------    ---------   -----------
  Cash at end of period. $   8,593    $ (1,937)  $    32,536    $     (26)  $    39,166
                         =========    ========   ===========    =========   ===========

 
                                      F-48

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
29. SPB REGULATORY MATTERS
 
 General
 
  In August 1989, the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989, ("FIRREA") was enacted. This legislation was adopted in order to
reform the regulation and supervision of financial institutions. Additionally
legislation was adopted in 1991 with the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FDICIA provided for increased funding for
Federal Deposit Insurance Commission ("FDIC") deposit insurance and for
expanded regulation of financial institutions. Specifically, FDICIA requires
the federal regulators to take prompt corrective action with respect to
depository institutions which do not meet the minimum capital requirements.
FDICIA established five capital ratio categories: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." A depository institution
may be deemed to be in a capitalization category that is lower than is
indicated by its actual capital position if it receives an unsatisfactory
examination rating and may be reclassified to a lower category by action based
on other supervisory criteria. For an institution to be well capitalized it
must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-
based capital ratio of at least 6%, and a leverage ratio of at least 5% and
not be subject to any specific capital order or directive. At December 31,
1997 and 1996, SPB was categorized as well capitalized.
 
 Restrictions on Availability of Funds from SPB
 
  Under the California industrial loan law, a thrift and loan may declare
dividends on its capital stock only if it has at least $750,000 of unimpaired
capital stock plus additional capital stock of $50,000 for each branch office
maintained. In addition, no distribution of dividends is permitted unless: (i)
such distribution would not exceed a thrift and loan's retained earnings, (ii)
any payment would not result in a violation of the approved minimum capital to
thrift and loan certificate of deposit ratio and (iii) after giving effect to
the distribution, either (y) the sum of a thrift and loan's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes,
deferred income and other deferred credits), or (z) current assets would be
not less than current liabilities (except that if a thrift and loan's average
earnings before taxes for the last two fiscal years had been less than average
interest expense, current assets must be not less than 125% of current
liabilities). Subject to the above limitations, and according to SPB's by-
laws, at December 31, 1997, all of SPB's capital and surplus in excess of
$125.0 million is available for the payment of dividends.
 
  Additionally, SPB generally may not make any loan to, or hold an obligation
of, any of its directors or officers or any director or officer of its holding
company or affiliates, except in specified cases and subject to regulation by
the California Commissioner of Corporations. In addition, SPB may not make any
loan to, or hold an obligation of, any of its shareholders or any shareholder
of its holding company or affiliates, except that this prohibition does not
apply to persons who own less than 10% of the stock of a holding company or an
affiliate that is listed on a national securities exchange.
 
Recent Development
 
  On October 30, 1997, SPB announced that the Memorandum of Understanding
("MOU") entered into in September 1996 had been terminated as a result of the
recent concurrent examinations by the FDIC and CDFI and their joint
conclusions that the terms of the agreement have been satisfactorily met and
the improvement in SPB's operations no longer warranted the MOU.
 
  On September 30, 1996 SPB entered into a MOU with the FDIC and the
California Department of Financial Institutions ("CDFI"). This agreement
required SPB to (i) have and retain qualified management, (ii) adopt and
 
                                     F-49

 
                       IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
implement comprehensive risk management policies, programs and systems, (iii)
take all reasonable and good faith steps to ensure future compliance with all
applicable laws and regulations, (iv) develop a credit review program, (v)
update the lending, investments and audit policies, and (vi) provide quarterly
progress reports to the FDIC and the Department of Corporations.
 
 Regulatory Capital
 
  SPB is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary-- actions by
regulators that, if undertaken, could have a direct material effect on SPB's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, SPB must meet specific capital
guidelines that involve quantitative measures of its assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. SPB's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
 
  Quantitative measures established by regulation to ensure capital adequacy
require SPB to maintain minimum amounts and ratios, set forth in the table
below, of total and Tier I capital to risk-weighted assets and Tier I capital
to average assets. Management believes, as of December 31, 1997, that SPB
meets all capital adequacy requirements to which it is subject.
 
  As of December 31, 1997, the most recent notification from the FDIC
categorized SPB as well capitalized under the regulatory framework for prompt
and corrective action. To be categorized as well capitalized SPB must maintain
minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the institution's category.
 
  The following table presents SPB's actual capital ratios and the
corresponding minimum and well capitalized capital ratio requirements under
the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier
1 Capital regulations, and (iii) the FDIC Leverage ratio regulation as of
December 31, 1997.
 


                                                  MINIMUM      WELL CAPITALIZED
                                   ACTUAL       REQUIREMENT      REQUIREMENT
                               --------------  --------------  -----------------
                                AMOUNT  RATIO   AMOUNT  RATIO   AMOUNT   RATIO
                               -------- -----  -------- -----  --------- -------
                                           (DOLLARS IN THOUSANDS)
                                                       
California Leverage
 Limitation................... $157,082 13.20% $ 59,476 5.00%  $     --     --
Risk-based Capital............  190,673 12.25%  124,583 8.00%    155,729  10.00%
Risk-based Tier 1 Capital.....  136,206  8.75%   62,292 4.00%     93,437   6.00%
FDIC Leverage Ratio...........  136,206  8.30%   65,644 4.00%     82,055   5.00%

 
                                     F-50

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
30. IMPERIAL CREDIT INDUSTRIES, INC. (PARENT COMPANY ONLY)
 
                            CONDENSED BALANCE SHEETS
 


                                                                DECEMBER 31,
                                                              -----------------
                                                                1997     1996
                                                              -------- --------
                                                               (IN THOUSANDS)
                                                                 
                           ASSETS
Cash......................................................... $ 13,229 $  5,213
Interest bearing deposits....................................   31,390      --
Securities available for sale................................   86,695    8,802
Trading securities...........................................   20,976      --
Loans held for sale..........................................   12,138    4,839
Loans held for investment, net...............................   78,922   34,505
Premises and equipment, net..................................    2,272    4,922
Other real estate owned, net.................................    1,158    3,508
Investment in SPFC...........................................   65,303      --
Investment in FMC............................................   53,099      --
Investment in subsidiaries...................................  281,454  269,651
Accrued interest on loans....................................    3,320    1,425
Other assets.................................................   53,161   96,746
                                                              -------- --------
  Total assets............................................... $703,117 $429,611
                                                              ======== ========
            LIABILITIES AND SHAREHOLDERS' EQUITY
Remarketed Par Securities.................................... $ 72,165 $    --
Other borrowings.............................................      --    15,363
Senior Notes.................................................  219,813   88,209
Minority interest in consolidated subsidiaries...............      946   45,149
Other liabilities............................................   86,260   41,382
                                                              -------- --------
  Total liabilities..........................................  379,184  190,103
                                                              -------- --------
Shareholders' equity:
  Common stock, no par value, authorized 80,000,000 shares;
   38,791,439 and 38,291,112 shares issued and outstanding at
   December 31, 1997 and 1996, respectively..................  147,109  145,521
  Retained earnings..........................................  174,898   88,977
  Unrealized gain on securities available for sale, net......    1,926    5,010
                                                              -------- --------
    Total shareholders' equity...............................  323,933  239,508
                                                              -------- --------
    Total liabilities and shareholders' equity............... $703,117 $429,611
                                                              ======== ========

 
                                      F-51

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                         CONDENSED STATEMENTS OF INCOME
 


                                                          DECEMBER 31,
                                                    --------------------------
                                                      1997     1996     1995
                                                    --------  -------  -------
                                                         (IN THOUSANDS)
                                                              
Revenues:
  (Loss) gain on sale of loans..................... $ (4,427) $  (937) $12,999
                                                    --------  -------  -------
  Interest income..................................   28,916   14,877   15,677
  Interest expense.................................   25,703   16,696   20,900
                                                    --------  -------  -------
    Net interest income (expense)..................    3,213   (1,819)  (5,223)
                                                    --------  -------  -------
  Provision for loan and lease losses..............    5,000      --       --
                                                    --------  -------  -------
  Net interest expense after provision for loan and
   lease losses....................................   (1,787)  (1,819)  (5,223)
  Loan servicing (expense) income..................   (2,283)  (3,706)  14,007
  Gain on sale of servicing rights.................      --     6,249    4,889
  Gains on sale of FMC stock.......................   92,137      --       --
  Gain on sale of IMH stock........................    9,225      --       --
  Gains on sale of SPFC stock......................    9,488   82,690      --
  Equity in net income of SPFC.....................   25,869      --       --
  Equity in net loss of FMC........................   (3,050)     --       --
  Dividends received from subsidiaries.............   27,514    6,200      --
  Other (loss) income..............................   (3,447)     741     (885)
                                                    --------  -------  -------
    Total other income.............................  155,453   92,174   18,011
                                                    --------  -------  -------
  Total revenue....................................  149,239   89,418   25,787
                                                    --------  -------  -------
Expenses:
  Personnel expense................................    4,682    8,757   20,281
  Occupancy expense................................    1,310    1,994    2,874
  Other expense....................................   23,735   20,117   15,306
                                                    --------  -------  -------
    Total expenses.................................   29,727   30,868   38,461
                                                    --------  -------  -------
  Income (loss) before income taxes, minority
   interest, deferred inter-Company gains and
   extraordinary item..............................  119,512   58,550  (12,674)
  Income taxes.....................................   41,611   28,830   (5,443)
                                                    --------  -------  -------
  Income (loss) before minority interest, deferred
   inter-company items and extraordinary item......   77,901   29,720   (7,231)
  Minority interest in income (loss) of
   consolidated subsidiaries.......................   10,513   12,026     (208)
  Deferred inter-company (expense) income, net of
   income taxes....................................     (327)  (1,383)   1,710
                                                    --------  -------  -------
  Income (loss) before extraordinary item..........   67,715   19,077   (8,733)
  Extraordinary item--Loss on extinguishment of
   debt, net of income taxes.......................   (3,995)     --       --
                                                    --------  -------  -------
  Income (loss) before equity in undistributed
   income of subsidiaries..........................   63,720   19,077   (8,733)
  Equity in undistributed income of subsidiaries...   22,201   56,907   22,926
                                                    --------  -------  -------
    Net income..................................... $ 85,921  $75,984  $14,193
                                                    ========  =======  =======

 
                                      F-52

 
                        IMPERIAL CREDIT INDUSTRIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                       CONDENSED STATEMENTS OF CASH FLOWS
 


                                                       DECEMBER 31,
                                               -------------------------------
                                                 1997       1996       1995
                                               ---------  ---------  ---------
                                                      (IN THOUSANDS)
                                                            
Net cash provided by (used in) operating
 activities................................... $  (2,067) $ 141,655  $(258,380)
                                               ---------  ---------  ---------
Cash flows from investing activities:
  Net change in interest bearing deposits.....   (31,390)       --         --
  Proceeds from bulk sale of servicing rights.       --      31,799     12,815
  Purchase of servicing rights................       --         --      (8,128)
  Proceeds from sale of other real estate
   owned......................................     4,637      2,953        --
  Net change in securities available for sale.   (42,938)       --         --
  Investment in Imperial Credit Asset
   Resolution Inc.............................   (74,810)       --         --
  Proceeds from sale of SPFC stock............    13,707     64,625        --
  Proceeds from sale of FMC stock.............    59,731        --         --
  Proceeds from sale of IMH stock.............     9,679        --         --
  Net change in loans held for investment.....   (56,088)    (5,310)    51,784
  Net change in investment in subsidiaries....   (11,803)  (155,759)   (15,581)
  Cash utilized for acquisitions..............      (750)       --         --
  (Purchase) disposal of premises and
   equipment..................................      (992)       809       (182)
                                               ---------  ---------  ---------
Net cash (used in) provided by investing
 activities...................................  (131,017)   (60,883)    40,708
                                               ---------  ---------  ---------
Cash flows from financing activities:
  Net change in borrowings from Imperial Bank.       --      (5,000)     5,000
  Proceeds from offering of Senior Notes due
   2007.......................................   194,500        --         --
  Proceed from offering of Remarketed Par
   Securities.................................    68,075        --         --
  Repayments of Senior Notes due 2004.........   (73,241)       --         --
  Borrowings from Imperial Credit Investment
   Corporation................................    10,000        --         --
  Proceeds from resale of Senior Notes due
   2004.......................................       --       7,615        --
  Proceeds from issuance of common stock......       --      59,228        --
  Proceeds from exercise of stock options.....     1,332      1,671        825
  Net change in other borrowings..............   (15,363)  (191,363)   206,725
  Net change in minority interest.............   (44,203)    43,697      1,453
                                               ---------  ---------  ---------
Net cash provided by (used in) financing
 activities...................................   141,100    (84,152)   214,003
                                               ---------  ---------  ---------
Net change in cash............................     8,016     (3,380)    (3,669)
Cash at beginning of year.....................     5,213      8,593     12,262
                                               ---------  ---------  ---------
Cash at end of year........................... $  13,229  $   5,213  $   8,593
                                               =========  =========  =========

 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
  The following information supplements the condensed statements of cash flows:
 


                                                            DECEMBER 31,
                                                      -------------------------
                                                       1997      1996    1995
                                                      -------  -------- -------
                                                           (IN THOUSANDS)
                                                               
Cash paid during the period for:
  Interest........................................... $19,349  $ 16,315 $20,898
Significant non-cash activities:
  Loans transferred to OREO.......................... $ 6,751  $  8,479 $ 2,419
  Loans transferred from held for sale to held for
   investment........................................     --    197,141  83,398
  Servicing rights transferred from subsidiary.......     --        --    3,774
  Change in unrealized gain on securities available
   for sale, net.....................................  (3,084)    1,799   3,211
  Contribution of fixed assets to ICIFC..............     --        --      525

 
                                      F-53

 
                      SOUTHERN PACIFIC FUNDING CORPORATION
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 


                                                                            PAGE
                                                                            ----
                                                                         
Independent Auditors' Report............................................... F-54
Consolidated Balance Sheets................................................ F-55
Consolidated Statements of Earnings........................................ F-56
Consolidated Statements of Changes in Shareholders' Equity................. F-57
Consolidated Statements of Cash Flows...................................... F-58
Notes to Consolidated Financial Statements................................. F-59

 
  All supplemental schedules are omitted as inapplicable or because the
required information is included in the consolidated financial statements or
notes thereto.
 
                                      F-54

 
                         INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Southern Pacific Funding Corporation:
 
  We have audited the accompanying consolidated balance sheets of Southern
Pacific Funding Corporation and subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Southern Pacific Funding Corporation and subsidiaries as of December 31,
1996 and 1997, and the consolidated results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997
in conformity with generally accepted accounting principles.
 
                                          KPMG Peat Marwick LLP
 
Portland, Oregon
January 29, 1998
 
                                     F-55

 
                      SOUTHERN PACIFIC FUNDING CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
 


                                                           DECEMBER 31,
                                                     -------------------------
                                                         1996         1997
                                                     ------------ ------------
                       ASSETS
                       ------
                                                            
Cash................................................ $ 14,175,566 $  7,886,412
Loans held for sale.................................  223,059,102  264,384,993
Interest-only and residual certificates.............   87,016,900  277,156,343
Accrued interest receivable.........................    3,181,449    4,568,977
Premises and equipment, net.........................    3,036,388    7,660,691
Goodwill, net of accumulated amortization of $0 and
 $448,375 at December 31, 1996 and 1997,
 respectively.......................................    4,742,571    6,615,080
Other assets........................................    5,165,048   21,072,897
                                                     ------------ ------------
    Total assets.................................... $340,377,024 $589,345,393
                                                     ============ ============

        LIABILITIES AND SHAREHOLDERS' EQUITY
        ------------------------------------
                                                            
Liabilities:
  Borrowings under warehouse lines of credit........ $152,680,395 $205,031,055
  Notes Payable.....................................          --     3,431,972
  Deferred tax liability............................   18,445,495   48,074,988
  Long term debt....................................   75,000,000  175,000,000
  Other liabilities.................................    9,164,901   18,652,471
                                                     ------------ ------------
    Total liabilities...............................  255,290,791  450,190,486
Shareholders' equity:
  Preferred stock, $.01 par value, 5,000,000 shares
   authorized; none issued or outstanding at
   December 31, 1996 and 1997.......................          --           --
  Common stock, no par value, 75,000,000 shares
   authorized; 20,737,500 and 20,760,450 shares
   issued and outstanding at December 31, 1996 and
   1997, respectively...............................   53,798,099   54,100,622
  Contributed capital...............................      247,500      247,500
  Translation adjustment............................          --        (8,745)
  Retained earnings.................................   31,040,634   84,815,530
                                                     ------------ ------------
    Total shareholders' equity......................   85,086,233  139,154,907
                                                     ------------ ------------
    Total liabilities and shareholders' equity...... $340,377,024 $589,345,393
                                                     ============ ============

 
          See accompanying notes to consolidated financial statements.
 
                                      F-56

 
                      SOUTHERN PACIFIC FUNDING CORPORATION
 
                      CONSOLIDATED STATEMENTS OF EARNINGS
 


                                                YEARS ENDED DECEMBER 31,
                                          ------------------------------------
                                             1995        1996         1997
                                          ----------- ----------- ------------
                                                         
Revenues:
  Gains on sales of loans................ $16,328,621 $55,360,515 $148,403,866
  Interest income........................   4,304,760  13,848,976   39,306,759
  Securities valuation and other income..   1,666,682   4,265,285    1,634,175
                                          ----------- ----------- ------------
    Total revenues.......................  22,300,063  73,474,776  189,344,800
                                          =========== =========== ============
Expenses:
  Interest...............................   3,413,652   7,799,986   27,613,103
  Personnel and commission expense.......   4,190,566  10,996,713   45,027,704
  General and administrative expense.....   2,153,220   6,599,474   24,685,987
                                          ----------- ----------- ------------
    Total expenses.......................   9,757,438  25,396,173   97,326,794
                                          =========== =========== ============
Earnings before taxes....................  12,542,625  48,078,603   92,018,006
Income taxes.............................   5,205,190  20,446,614   38,243,110
                                          ----------- ----------- ------------
    Net earnings......................... $ 7,337,435 $27,631,989 $ 53,774,896
                                          =========== =========== ============
Net earnings per share:
  Basic.................................. $       .47 $      1.49 $       2.59
  Diluted................................ $       .47 $      1.37 $       2.23
Weighted average number of shares
 outstanding:
  Basic..................................  15,562,500  18,552,500   20,747,665
  Diluted................................  15,562,500  20,511,936   25,358,202

 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-57

 
                      SOUTHERN PACIFIC FUNDING CORPORATION
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 


                              COMMON STOCK
                         ----------------------- CONTRIBUTED TRANSLATION  RETAINED    SHAREHOLDERS'
                           SHARES      AMOUNT      CAPITAL   ADJUSTMENT   EARNINGS       EQUITY
                         ----------  ----------- ----------- ----------- -----------  -------------
                                                                    
Balance, December 31,
 1994................... 15,562,500  $       --   $789,591     $   --    $ 4,761,693  $  5,551,284
Net earnings, 1995......        --           --        --          --      7,337,435     7,337,435
                         ----------  -----------  --------     -------   -----------  ------------
Balance, December 31,
 1995................... 15,562,500          --    789,591         --     12,099,128    12,888,719
Effect of contribution
 transaction............        --           --   (542,091)        --     (8,690,483)   (9,232,574)
Proceeds from initial
 public offering of
 5,175,000 shares of
 common stock, net of
 offering expenses of
 $4,810,911               5,175,000   53,798,099       --          --            --     53,798,099
Net earnings, 1996......        --           --        --          --     27,631,989    27,631,989
                         ----------  -----------  --------     -------   -----------  ------------
Balance, December 31,
 1996................... 20,737,500   53,798,099   247,500         --     31,040,634    85,086,233
Exercise of stock
 options for 22,950
 shares of common stock      22,950      302,523       --          --            --        302,523
Translation adjustment..        --           --        --       (8,745)          --         (8,745)
Net earnings, 1997......        --           --        --          --     53,774,896    53,774,896
                         ----------  -----------  --------     -------   -----------  ------------
Balance, December 31,
 1997................... 20,760,450  $54,100,622  $247,500     $(8,745)  $84,815,530  $139,154,907
                         ==========  ===========  ========     =======   ===========  ============

 
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-58

 
                      SOUTHERN PACIFIC FUNDING CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 


                                        1995          1996           1997
                                    ------------  -------------  -------------
                                                        
Cash flows from operating
 activities:
  Net earnings..................... $  7,337,435  $  27,631,989  $  53,774,896
  Adjustments to reconcile net
   income to net cash used in
   operating activities:
    Depreciation and amortization..       51,488        615,258      2,714,870
    Amortization of discount on
     note payable..................          --             --         163,972
    Translation adjustment.........          --             --          (8,745)
    Securities valuation ..........          --      (4,265,285)       427,799
    Deferred tax expense...........          --      20,446,614     29,629,493
  Changes in certain assets and
   liabilities, net of effect of
   acquisitions and contribution
   transaction:
    Mortgage loans held for sale...  (63,536,648)  (143,632,836)   (41,325,891)
    Net change in interest only and
     residual certificates.........  (18,235,099)   (71,493,840)  (186,767,242)
    Loans held under repurchase
     agreement.....................  (12,800,565)    12,800,565            --
    Accrued interest receivable....     (928,119)    (2,204,075)    (1,387,528)
    Other assets...................     (282,831)    (1,387,556)   (12,465,420)
    Other liabilities..............    3,186,942      3,787,856      9,487,570
                                    ------------  -------------  -------------
      Net cash used in operating
       activities..................  (85,207,397)  (157,701,310)  (145,756,226)
                                    ------------  -------------  -------------
Cash flows used in investing
 activities:
  Purchases of premises and
   equipment.......................     (436,853)    (3,028,897)    (5,649,989)
  Purchase of interest-only and
   residual certificates...........          --             --      (3,800,000)
  Payment for acquisitions.........          --      (5,000,000)           --
  Payment for long-term investment
   and loan commitment.............          --        (525,000)           --
                                    ------------  -------------  -------------
      Net cash used in investment
       activities:.................     (436,853)    (8,553,897)    (9,449,989)
                                    ------------  -------------  -------------
Cash flows from financing
 activities:
  Net change in:
    Borrowings under warehouse
     lines of credit...............   96,130,120     56,550,275     52,350,660
    Borrowings from SPTL...........  (12,940,537)       322,053            --
    Due to affiliates..............    1,585,150     (1,504,984)           --
    Bank overdraft.................      619,517       (619,517)           --
    Proceeds from long term debt...          --      72,162,436     96,263,878
    Proceeds from issuance of
     common stock..................          --      53,798,099        302,523
    Contribution transaction.......          --        (277,589)           --
                                    ------------  -------------  -------------
      Net cash provided by (used
       in) financing activities....   85,394,250    180,430,773    148,917,061
                                    ------------  -------------  -------------
Net change in cash.................     (250,000)    14,175,566     (6,289,154)
Cash at beginning of year..........      250,000            --      14,175,566
                                    ------------  -------------  -------------
Cash at end of year................ $        --   $  14,175,566  $   7,886,412
                                    ============  =============  =============
Supplementary information:
  Interest paid.................... $  2,129,369  $   6,330,097  $  25,540,511
  Taxes paid....................... $        --   $   1,213,252  $   9,105,917

 
          See accompanying notes to consolidated financial statements.
 
                                      F-59

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
               FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
 
1. ORGANIZATION
 
  Southern Pacific Funding Corporation ("SPFC" or the "Company") is the
successor to the Residential Lending Division of Southern Pacific Thrift and
Loan ("SPTL"). The Company originates and acquires non-conforming single-
family residential loans, including loans secured by second mortgages. In
October 1994, Imperial Credit Industries, Inc. ("ICII") incorporated the
Company as part of a strategic decision to form a separate subsidiary through
which to operate SPTL's Residential Lending Division. In April 1995, ICII
caused SPTL to contribute (the "Contribution Transaction") to SPFC certain
customer lists of SPTL's Residential Lending Division to the ongoing
operations of such division. In addition, in April 1995 all employees of
SPTL's Residential Lending Division became employees of SPFC. The Company
completed an initial public offering of its Common Stock in June 1996. At
December 31, 1997, upon completion of three secondary offerings, ICII owned
approximately 46.9% of the Company's outstanding Common Stock.
 
2. BASIS OF PRESENTATION
 
  The consolidated financial statements include the accounts of SPFC and its
majority and wholly owned subsidiaries. These subsidiaries include National
Capital Funding, Inc., Oceanmark Financial Corporation, Home America Financial
Services, Inc. and Hallmark America Corp. which are located throughout the
United States and Southern Pacific Mortgage Limited which is the Company's
United Kingdom operation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
 
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Mortgage Loans Held for Sale
 
  Mortgage loans held for sale are carried at the lower of aggregate cost or
market. These loans are pledged against the Company's lines of credit. The
cost of mortgage loans held for sale is the cost of the mortgage loans reduced
or increased by the net deferred fees or costs associated with originating or
acquiring the loan and increased by costs that are recognized upon sale. On an
ongoing basis, management of the Company monitors the loan portfolio and
considers such factors as historical loan loss experience, underlying
collateral values, known problem loans, assessment of economic conditions,
including changes in interest rates, and other appropriate data to identify
risks in the loan portfolio.
 
 Interest-only and Residual Certificates
 
  Assets reflected in the accompanying consolidated balance sheets as
interest-only and residual certificates in real estate mortgage investment
conduits (REMICs) are recorded as a result of the Company's securitization of
loans through various trust vehicles. The Company considers its obligations
under recourse provisions in connection with its securitizations in valuing
its interest-only and residual certificates. The Company estimates future cash
flows from these interest-only and residual certificates and values them
utilizing assumptions that it believes are consistent with those that would be
utilized by an unaffiliated third party purchaser and records them as trading
securities at fair value. Unrealized gains and losses are included in gains on
sales of loans in the accompanying financial statements. The initial and
subsequent changes in the unrealized gains and losses are included in
securities valuation and other income. To the Company's knowledge, there is no
active market for the sale of these interest-only and residual certificates.
 
  The fair value of interest-only and residual certificates is determined by
computing the present value of the excess of the weighted average coupon on
the loans sold over the sum of: (1) the coupon on the senior interests, (2) a
base servicing fee paid to the loan servicer, (3) expected losses to be
incurred on the portfolio of loans sold
 
                                     F-60

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
over the lives of the loans, and (4) fees payable to the trustee and monoline
insurer. Prepayment assumptions used in the present value computation are
based on recent evaluations of the actual prepayments of the Company's
servicing portfolio or on market prepayment rates on new portfolios, taking
into consideration the current interest rate environment and its expected
impact on prepayment rates. The cash flows expected to be received by the
Company are discounted at an interest rate that the Company believes an
unaffiliated third-party purchaser would require as a rate of return on such a
financial instrument. To the extent that actual future excess cash flows are
different from estimated excess cash flows, the fair value of the Company's
interest-only and residual certificates will be adjusted monthly with
corresponding adjustments made to earnings in that period.
 
  In certain of its securitizations, the Company provided an initial
overcollateralization on the securities sold and in all its securitizations
the Company builds overcollateralization as cash flows projected as described
above are used by the trustee to reduce the outstanding balance of the
securities sold by the Company.
 
  The Company currently uses a 12% discount rate to calculate present value of
anticipated "out of the trust" cash flows that it anticipates receiving from
the securitization trust after overcollateralization requirements have been
achieved. Prepayment assumptions are applied to each discrete security and
further to each product (i.e. ARM's, Fixed and 2/28's) within each security.
The estimated CPR varies over time based upon the relative maturity of the
loans included in each pool. The estimated annual CPR is 4% at inception and
increases in equal monthly increments until the peak estimated CPR is
achieved, generally within 12-23 months. Peak CPR's, range from 30% to 50% for
ARM's, 40% for 2/28's and 23% for fixed rate loans. These peaks are generally
maintained through month 36. Thereafter, peak CPR's are reduced in two twelve
month steps at which time terminal CPR's are reached. Terminal CPR's are
estimated at 20% for ARM's and 2/28's and 15% for fixed rate loans. The
Company also periodically provides for additional credit losses which may be
incurred on loans which the Company voluntarily purchases from the trusts.
 
 Gains on Sales of Loans
 
  Gains on sales of loans are determined by deducting from the gross proceeds
of the sales or securitizations the allocated basis in the loans sold or
securitized and related transaction costs. The initial fair value of interest-
only and residual certificates is included as proceeds in calculating gains on
sales of loans.
 
 Interest Income
 
  Interest income includes interest earned on mortgage loans held for sale.
Interest expense includes interest paid on the Company's outstanding warehouse
lines of credit, the Company's convertible subordinated debentures and the
Company's senior notes.
 
 Securities Valuation and Other Income
 
  Securities valuation and other income includes the change in unrealized
gains and losses on interest-only and residual certificates.
 
 Premises and Equipment
 
  Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation is recorded using the straight-line method over the
estimated useful lives of individual assets (three to five years). Leasehold
improvements are amortized over the terms of the related leases or the
estimated useful lives of improvements, whichever is shorter.
 
                                     F-61

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Dividends
 
  The Company intends to retain all of its future earnings to finance its
operations. The subsidiaries of the Company are restricted from paying
dividends to the Company or any of its subsidiaries due to covenants in the
Company's senior note agreement.
 
 Goodwill
 
  Goodwill, which represents the excess of purchases price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 15 years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation.
(See Note 12).
 
 Long-Term Investments
 
  Long-term investments, included in other assets, are carried at cost and
consist of preferred stock in Hallmark Government, Inc. of $360,000 at
December 31, 1997.
 
 Deferred Income Taxes
 
  The accompanying financial statements reflect income taxes for SPFC as if it
had been a separate entity for all years presented. SPFC accounts for income
taxes under the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under the asset and liability method, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
 
 Use of Estimates
 
  Management has made a number of estimates and assumptions relating to the
reporting of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
 
 Net Earnings Per Share
 
  In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS No.
128 establishes standards for computing and presenting earnings per share
(EPS). It simplifies the standards in APB Opinion No. 15, Earnings per Share,
for computing EPS by replacing primary earnings per share with basic earnings
per share and by alterning the calculation of diluted EPS, which replaces
fully diluted EPS. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. All
prior period EPS figures have been restated to conform to the provisions of
the Statement.
 
                                     F-62

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following illustrates the reconciliation of the numerators and
denominators of the basic and diluted earnings per share (EPS) computations:
 


                                               YEAR ENDED DECEMBER 31, 1995
                                           ------------------------------------
                                                          WEIGHTED    PER SHARE
                                             INCOME    AVERAGE SHARES  AMOUNT
                                           ----------- -------------- ---------
                                                             
   Basic EPS
   Net income available to common
    shareholders.........................  $ 7,337,435   15,562,500     $0.47
   Effect of dilutive securities:
     Stock options.......................          --           --
     Convertible subordinated notes......          --           --
                                           -----------   ----------     -----
   Diluted EPS...........................  $ 7,337,435   15,562,500     $0.47
                                           ===========   ==========     =====

                                               YEAR ENDED DECEMBER 31, 1996
                                           ------------------------------------
                                                          WEIGHTED    PER SHARE
                                             INCOME    AVERAGE SHARES  AMOUNT
                                           ----------- -------------- ---------
                                                             
   Basic EPS
   Net income available to common
    shareholders.........................  $27,631,989   18,552,500     $1.49
   Effect of dilutive securities:
     Stock options.......................                   481,422
     Convertible subordinated notes......      510,078    1,478,014
                                           -----------   ----------     -----
   Diluted EPS...........................  $28,142,067   20,511,936     $1.37
                                           ===========   ==========     =====

                                               YEAR ENDED DECEMBER 31, 1997
                                           ------------------------------------
                                                          WEIGHTED    PER SHARE
                                             INCOME    AVERAGE SHARES  AMOUNT
                                           ----------- -------------- ---------
                                                             
   Basic EPS
   Net income available to common
    shareholders.........................  $53,774,896   20,747,665     $2.59
   Effect of dilutive securities:
     Stock options.......................                 1,459,277
     Convertible subordinated notes......    2,864,198    3,151,260
                                           -----------   ----------     -----
   Diluted EPS...........................  $56,639,094   25,358,202     $2.23
                                           ===========   ==========     =====

 
 Foreign Currency Translation
 
  All assets and liabilities of the U.K. subsidiaries are translated into U.S.
dollars at the rate in effect as of the date of the financial statements.
Income and expense items are translated at the weighted average exchange rate
for the period. The resulting translation adjustments are recorded as a
component of shareholder's equity.
 
4. PREMISES AND EQUIPMENT
 
    Premises and equipment consisted of the following at December 31, 1996 and
1997:
 


                                     DECEMBER 31,
                                -----------------------
                                   1996        1997
                                ----------  -----------
                                      
       Premises and equipment.. $3,634,193  $ 9,938,813
       Less accumulated
        depreciation and
        amortization...........   (597,805)  (2,278,122)
                                ----------  -----------
                                $3,036,388  $ 7,660,691
                                ==========  ===========

 
 
                                     F-63

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The table below summarizes the information about the fair value of the
financial instruments recorded on the Company's financial statements at
December 31, 1996 and 1997:
 


                                DECEMBER 31, 1996         DECEMBER 31, 1997
                            ------------------------- -------------------------
                            CARRY VALUE   FAIR VALUE  CARRY VALUE   FAIR VALUE
                            ------------ ------------ ------------ ------------
                                                       
Cash....................... $ 14,175,566 $ 14,175,566 $  7,886,412 $  7,886,412
Loans held for sale........  223,059,102  231,981,466  264,384,993  274,960,393
Interest-only and residual
 certificates..............   87,016,900   87,016,900  277,156,343  277,156,343
Notes Payable..............          --           --     3,431,972    3,431,972
Long Term Debt.............   75,000,000   75,000,000  175,000,000  175,000,000
Borrowings under warehouse
 lines of credit...........  152,680,395  152,680,395  205,031,055  205,031,055

 
  Because no market exists for certain of the Company's assets and
liabilities, fair value estimates are based on judgments regarding credit
risk, investor expectations of future economic conditions, normal cost of
administration and other risk characteristics, including interest rate and
prepayment risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
 
  The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, including the off balance sheet instruments
disclosed in Note 13, are as follows:
 
  Loans held for sale. The Company has estimated the fair values reported
based on recent sales and securitizations.
 
  Interest-only and residual certificates. Fair value determined using
estimated discounted future cash flows taking into consideration anticipated
prepayment rates, loss experience and prepayment penalties.
 
  The Company currently uses a 12% discount rate to calculate present value of
anticipated "out of the trust" cash flows that it anticipates receiving from
the securitization trust after overcollateralization requirements have been
achieved. Prepayment assumptions are applied to each discrete security and
further to each product (i.e. ARM's, Fixed and 2/28's) within each security.
The estimated CPR varies over time based upon the relative maturity of the
loans included in each pool. The estimated annual CPR is 4% at inception and
increases in equal monthly increments until the peak estimated CPR is
achieved, generally within 12-23 months. Peak CPR's, range from 30% to 50% for
ARM's, 40% for 2/28's and 23% for fixed rate loans. These peaks are generally
maintained through month 36. Thereafter, peak CPR's are reduced in two twelve
month steps at which time terminal CPR's are reached. Terminal CPR's are
estimated at 20% for ARM's and 2/28's and 15% for fixed rate loans. The
Company also periodically provides for additional credit losses which may be
incurred on loans which the Company voluntarily purchases from the trusts.
 
  Borrowings under warehouse lines of credit. The carrying value reported
approximates fair value due to the short-term nature of the borrowings and the
variable interest rates charged on the borrowings.
 
  Commitments to originate loans and loans in process. Many loan commitments
are expected to, and typically do, expire without being drawn upon. As the
rates and terms of the commitments to lend and loans in process are
competitive with others in which the Company operates, the values disclosed in
Note 15 are determined to be a reasonable estimate of fair value.
 
  Notes Payable. The carrying value reported approximates fair value due to
the nature of the borrowings.
 
                                     F-64

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Long Term Debt. The carrying value reported approximates fair value based on
the current debt rates.
 
  Hedging Transactions. The Company regularly securitizes and sells fixed and
variable-rate mortgage loans. To offset the effects of interest rate
fluctuations on the value of its fixed-rate loans held for sale, the Company
in certain cases will hedge its interest rate risk related to loans held for
sale by selling U.S. Treasury securities short or in the forward market.
 
  As of December 31, 1996 and 1997, the Company had open hedge positions of
$32.6 million and $65.6 million respectively, related to the sales of United
States Treasury securities in the forward market. The proceeds from the short
sale are shown net of the related liability in the accompanying balance sheet
at December 31, 1996 and 1997.
 
6. RELATED PARTY TRANSACTIONS
 
 Intracompany Cost Allocations
 
  During 1995 and 1996, the Company accrued allocated expenses for ICII that
are included as part of personnel and commission expense and general and
administrative expenses of $256,000 and $292,000, respectively. No
administrative services are being provided by ICII or SPTL, effective January
1, 1997.
 
 Borrowings from Affiliates
 
  The average borrowings from affiliates and interest rates used to determine
the weighted average interest on borrowings for the years ended December 31,
1995, 1996 and 1997 are as follows:
 


                                                YEARS ENDED DECEMBER 31,
                                            -----------------------------------
                                               1995         1996        1997
                                            -----------  ----------  ----------
                                                            
       Average borrowings.................. $34,777,138  $3,890,267  $1,250,000
       Interest rate.......................        3.69%       6.25%      12.00%
       Interest on borrowings.............. $ 1,284,282  $  230,236  $  125,000

 
 SPTL
 
  In March 1996, the Company entered into a $10 million revolving credit and
term loan agreement with SPTL (the "SPTL Agreement") which was scheduled to
expire on September 30, 1996. Advances under the SPTL Agreement were
collateralized by the Company's interest-only and residual certificates (other
than such interests retained by SPTL pursuant to the Contribution Transaction)
and bore interest at 2% above LIBOR. In April, 1996 the Company repaid all
borrowings outstanding under the SPTL Agreement and it was canceled.
 
 ICII
 
  On July 17, 1997, the Company borrowed $15 million from ICII due on October
17, 1997 and bore interest at a rate of 12%. The $15 million was repaid on
August 11, 1997 along with $125,000 in interest.
 
 Loan Servicing
 
  From the point of commencement of operations until March 1994, SPTL served
as the loan servicer for the Company and the Company was allocated its pro
rata portion of SPTL's loan servicing expenses.
 
                                     F-65

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  In March 1994, ICII assumed the role of loan servicer for a servicing fee of
approximately $7.50 per loan per month, so that the Company could complete its
first securitization. In September 1995, the Company began to utilize the
services of Advanta, an independent loan servicer, as the master servicer.
Fees charged by Advanta are $25 per loan and 37.5 basis points per annum on
the declining principal balance of each loan serviced, paid monthly,
respectively, which fees are higher than those previously paid to ICII due to
the additional collection activities performed by Advanta.
 
 Consulting Agreements
 
  In June 1996, the Company entered into a five-year consulting agreement with
The Dewey Consulting Group, owned by one of the Company's directors, John D.
Dewey. Under the agreement, Mr. Dewey has agreed to assist the Company in the
development of strategic alliances with selected mortgage lenders, including
the identification of potential strategic alliance participants. The Company
has agreed to compensate Mr. Dewey based upon actual strategic alliances
entered into and loan production and earnings resulting from those alliances
which amounts to .015% of the Company's share of warrants, interest-only cash
received, and interest-only strips. No amounts were paid in 1996 or owing at
December 31, 1996, $254,122 was paid in 1997 and $335,619 was owing at
December 31, 1997.
 
 Other
 
  The Company has outstanding receivables from Hallmark Government, Inc. of
$7,153,800, collateralized by first mortgage loans.
 
7. LONG TERM OBLIGATIONS
 
  Long Term Debt at December 31, 1996 and 1997 consists of the following:
 


                                                            DECEMBER 31,
                                                      ------------------------
                                                         1996         1997
                                                      ----------- ------------
                                                            
   Senior Notes, interest at 11.5%, due semi-
    annually, principal due November 1, 2004......... $       --  $100,000,000
   Convertible subordinated debentures, interest at
    6.75%, due
    semi-annually, principal due October 15, 2006....  75,000,000   75,000,000

 
  Interest on the senior notes is payable semi-annually. Debt issuance costs
of $3,647,368 at December 31, 1997 are included in other assets. These costs
have been deferred and are being amortized over seven years using the interest
method.
 
  The Convertible subordinated debentures are convertible into 3,151,125
shares of common stock, for a conversion price of $23.80 per share, at any
time prior to maturity. Interest on the debentures is payable semi-annually.
Debt issuance costs of $2,794,220 and $2,521,360 at December 31, 1996 and
1997, respectively, are included in other assets. These costs have been
deferred and are being amortized over ten years using the interest method.
 
  Notes Payable at December 31, 1997 represents a payable to Oceanmark Bank
for the purchase of Mortgage Division Assets and has a face amount of
$3,800,000. The note bears no interest and has a 36 month term. Principal is
payable in three equal installments of $1,266,667 at 12 months, 24 months and
36 months. The note was initially recorded at its present value of $3,268,000,
discounted at 7%. The discount will be amortized over the term of the note
using the interest method.
 
 
                                     F-66

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
8. INCOME TAXES
 
  For the 1996 period through the effective date of the IPO in June 1996, SPFC
is included in a consolidated tax return filing with ICII. For the 1996 period
subsequent to the IPO and 1997, SPFC will file a separate tax return on a
stand-alone basis.
 
  SPFC's income taxes were as follows for the years ended December 31, 1996
and 1997:
 


                                                 1995       1996        1997
                                              ---------- ----------- -----------
                                                            
     Current:
       Federal............................... $2,731,115 $ 3,680,000 $ 7,341,259
       State.................................    602,452     772,000   1,272,358
                                              ---------- ----------- -----------
         Total current.......................  3,333,567   4,452,000   8,613,617
     Deferred:
       Federal...............................  1,533,378  11,461,414  24,977,663
       State.................................    338,245   4,533,200   4,651,830
                                              ---------- ----------- -----------
         Total deferred......................  1,871,623  15,994,614  29,629,493
                                              ---------- ----------- -----------
     Total income taxes...................... $5,205,190 $20,446,614 $38,243,110
                                              ========== =========== ===========

 
  The following table shows the tax effects of temporary differences which
give rise to the primary components of SPFC's net deferred tax liability at
December 31, 1996 and 1997.
 


                                                           1996        1997
                                                        ----------- -----------
                                                              
       Deferred tax liabilities:
         Interest-only and residual certificates....... $18,445,495 $48,074,988
                                                        =========== ===========

 
  A reconciliation of the income tax provision and the amount computed by
applying the statutory Federal corporate income tax rate to income before
income taxes are as follows for the years ended December 31, 1996 and 1997:
 


                                                              1995  1996  1997
                                                              ----  ----  ----
                                                                 
       Statutory U.S. Federal income tax rate................ 35.0% 35.0% 35.0%
       Increases in rate resulting from state income taxes,
        net of Federal benefit...............................  6.5   7.5   6.5
                                                              ----  ----  ----
       Effective income tax rate............................. 41.5% 42.5% 41.5%
                                                              ====  ====  ====

 
  At the effective date of the IPO, the Company entered into a tax agreement
with ICII whereby, among other things, ICII will indemnify and hold the
Company harmless from any tax liability attributable to periods ending on or
before the effective date of the IPO in excess of such taxes as the Company
has already paid or recognized.
 
                                     F-67

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
9. EMPLOYEE BENEFIT PLANS
 
 Profit Sharing and 401(k) Plan
 
  Prior to October 1, 1997, employees of SPFC were eligible to participate in
the ICII 401(k) plan. The ICII 401(k) plan matched a portion of the employee
pretax contribution. Effective October 1, 1997 employees of SPFC are eligible
to participate in the SPFC 401(k) plan which came into effect at that time.
Employees may elect to enroll in the plan on the first day of any month,
provided that they have been employed by SPFC for at least six months.
Employees may contribute up to 15% of their compensation to the SPFC 401(k)
Plan and SPFC will match 50% of the first 6% of employee pretax contributions.
SPFC matching contributions are made as of December 31st each year. SPFC
recorded 401(k) matching expense of approximately $26,000, $111,000 and
$433,148 for the years ended December 31, 1995, 1996, and 1997, respectively.
 
10. STOCK OPTIONS
 
  Effective November 1, 1995, the Company reserved and granted options for
1,942,200 shares of Company common stock pursuant to the 1995 Senior
Management Stock Option Plan (the "Senior Management Plan"). All of the
options granted under the Senior Management Plan have been issued to senior
management personnel at an exercise price of $7.00 per share, the fair value
on the date of grant. The options vest ratably over a five-year period
commencing one year after the date of grant.
 
  Also effective November 1, 1995, the Company adopted the 1995 Stock Option,
Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), which
provides for the grant of qualified incentive stock options, incentive stock
options, and awards consisting of deferred stock, restricted stock, stock
appreciation rights and limited stock appreciation rights. The Stock Option
Plan authorizes the grant of options to purchase, and awards of, an aggregate
of 1,942,200 shares of Company common stock. If an option granted under the
Stock Option Plan expires or terminates, or an award is forfeited, the shares
subject to any unexercised portion of such option or award will again become
available for the issuance of further options or awards under the Stock Option
Plan.
 
  All share data related to shares issued and outstanding have been restated
to give retroactive recognition to a 4,150 for one stock split effective April
1, 1996 and a three for two stock split effective January 23, 1997.
 
  The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net earnings would have been reduced to the pro forma amounts
indicated below:
 


                                                 1995       1996        1997
                                              ---------- ----------- -----------
                                                            
Net Earnings:
  As reported...............................  $7,337,435 $27,631,989 $53,774,896
  Pro forma.................................   7,105,518  26,266,703  50,612,358
  Net Earnings Per Share:
  As reported: Basic........................       $0.47       $1.49       $2.59
       Diluted..............................       $0.46       $1.37       $2.23
  Pro forma: Basic..........................       $0.47       $1.42       $2.44
      Diluted...............................       $0.46       $1.31       $2.11

 
                                     F-68

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Stock option activity during the period indicated is as follows:
 


                                                     NUMBER OF  WEIGHTED AVERAGE
                                                      SHARES     EXERCISE PRICE
                                                     ---------  ----------------
                                                          
   Balance at December 31, 1994.....................       --          --
     Granted........................................ 1,942,200       $7.00
     Exercised......................................       --          --
     Forfeited......................................       --          --
     Expired........................................       --          --
                                                     ---------       -----
   Balance at December 31, 1995..................... 1,942,200        7.00
     Granted........................................ 1,078,500       12.57
     Exercised......................................       --          --
     Forfeited......................................  (113,250)      11.90
     Expired........................................       --          --
                                                     ---------       -----
   Balance at December 31, 1996..................... 2,907,450        8.85
     Granted........................................   868,750       11.15
     Exercised......................................   (22,950)      11.39
     Forfeited......................................  (276,300)      13.07
     Expired........................................       --          --
                                                     ---------       -----
   Balance at December 31, 1997..................... 3,476,950       $9.09

 
  At December 31, 1997, there were 384,500 additional shares available for
grant under the Stock Option Plan. The per share weighted-average fair value
of stock options granted during 1995, 1996 and 1997 was $15.74, $13.34 and
$11.17, respectively, on the date of grant using the Black Scholes option
pricing model with the following weighted-average assumptions: expected
dividend yield 0.00%, risk free interest rate of 5.42%, an expected life of 6
years and an annualized volatility rate of 66.57%.
 
  At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $7.00-15.00 and 8.20
years and $15.01-$20.00 and 8.80 years, respectively.
 
  At December 31, 1996 and 1997 there were 388,440, and 1,129,830 options,
respectively exercisable.
 
11. SHORT TERM BORROWINGS
 
 Lines of Credit
 
  The Company has obtained five lines of credit from investment banks, for the
purpose of funding one-to-four family residential first and second mortgage
loans, which is subject to certain operating and financial covenants and
collateral requirements. Total borrowings under the warehouse lines are
limited to $988.2 million and the lines are scheduled to expire between April
15, 1998 and December 14, 1998.
 
  As of December 31, 1996 and 1997, $152,680,395 and $205,031,055,
respectively, were outstanding on the lines of credit, on which interest was
charged based on the type of loan funded. Interest expense incurred for the
years ended December 31, 1995, 1996 and 1997 amounted to approximately
$131,000, $6,409,061 and $19,544,258, respectively with weighted average
interest rates ranging from 5.7% to 8.3% for 1997.
 
 Residual Facility
 
  In May, 1997 the Company entered into a residual financing facility of $30
million that allowed the Company to obtain debt secured by interest-only and
residual certificates. The Company drew upon $29.4 million of this facility
and repaid the full amount on November 4, 1997.
 
                                     F-69

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
12. ACQUISITIONS
 
  In 1996, the Company purchased 95% of the common stock of a diversified
financial services company for $5,000,000 in cash. The amount in excess of the
fair value of net assets acquired is $4,742,571. The Company acquired net
assets of $5,000,000 consisting primarily of goodwill of $4,742,571. The
results of operations of the acquired company have been included in the
consolidated financial statements since the date of acquisition.
 
  In May 1997, the Company purchased certain assets of a diversified financial
services company in exchange for a $3,800,000 note payable (see Note 7). The
amount in excess of the fair value of the net assets acquired was $2,320,884
which has been recorded as goodwill in the accompanying financial statements.
In addition, the Company acquired interest-only and residual certificates for
cash of $3.8 million.
 
  In December 1997, the Company purchased the loan servicing operation of NAMC
for $400,000. The Company acquired NAMC's servicing operations assets and
retained its loan servicing employees.
 
13. LOAN SERVICING
 
  Through December 1997 the company contracted for the servicing of
substantially all loans it originated, purchased and held for sale with
Advanta. This arrangement allowed the Company to increase the volume of loans
it originated and purchased without incurring the overhead investment in
servicing operations. As with any external service provider, the Company is
subject to risks associated with inadequate or untimely services. The Company
regularly reviews the delinquency of its servicing portfolio. Many of the
Company's borrowers require notices and reminders to keep their loans current
and to prevent delinquencies and foreclosures. A substantial increase in the
Company's delinquency rate or foreclosure rate could adversely affect its
ability to profitably access the capital markets for its financing needs,
including future securitizations.
 
  As of December 31, 1997 the Company's servicing portfolio (inclusive of
securitized loans where the Company has ongoing risk of loss) was
approximately $2.5 million. Through that date substantially all of the
Company's loan servicing had either been outsourced or subcontracted to
Advanta.
 
  The Company's acquisition in December 1997 of NAMC's loan servicing
operations allowed the Company in mid-January 1998 to begin its own loan
servicing operation for all new loans originated and purchased. In the second
quarter of 1998, the Company plans to transfer to its internal servicing
department the servicing of the loans included in the Company's December 1997
securitization and of remaining loans originated and purchased in December
1997 and January 1998.
 
14. COMMITMENTS AND CONTINGENCIES
 
 Financial Instruments with Off Balance Sheet Risk
 
  The Company is a party to financial instruments with off balance sheet risk
in the normal course of business. These financial instruments include
agreements to fund fixed and variable-rate mortgage loans and loans in
process. For agreements to fund fixed-rate loans, the contract amounts
represent exposure to loss from market fluctuations as well as credit loss.
The Company controls the credit risk of its agreements to fund fixed and
variable-rate loans through credit approvals, limits and monitoring
procedures.
 
  Agreements to fund mortgage loans are agreements to lend to customers as
long as there is no violation of any condition established in the contracts.
Such agreements generally have fixed expiration dates or other termination
clauses. Since some agreements may expire without being drawn upon, the total
agreement amounts do not necessarily represent future cash requirements. As of
December 31, 1997, the Company had agreements to fund loans of approximately
$43.0 million.
 
                                     F-70

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Sales of Loans and Servicing Rights
 
  In the ordinary course of business, SPFC is exposed to liability from
representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain circumstances,
SPFC is required to repurchase mortgage loans if there has been a breach of a
representation or warranty. For loans which have been securitized, the Company
includes an estimate of credit loss, using a risk free rate, in determining
its discounted recourse liability. On a periodic basis, the Company reviews
its assumptions in light of historical experience and economic trends to
evaluate their reasonableness in measuring the fair value of recorded assets.
 
  The Company's servicing agreement with Advanta provides that if the Company
desires to terminate the agreement without cause upon 90 days' written notice,
the Company will be required to pay Advanta an amount equal to 1.0% of the
aggregate principal balance of the mortgage loans being serviced by Advanta at
that time. The agreement also provides that a transfer service fee of $100 per
loan shall be paid to Advanta for any mortgage loan for which the Company
transfers servicing from Advanta to another servicer, without terminating the
agreement.
 
 Litigation
 
  The Company, its subsidiary Oceanmark Financial Corporation, and members of
its board directors are defendants in a lawsuit in US District Court for the
southern District of Florida. Oceanmark Bank, F.S.B. is the plaintiff. The
Company was served on March 9, 1998. The complaint relates to the Company's
acquisition of mortgages and notes of Oceanmark Bank beginning in 1995 and
ending with the Company's acquisition of the mortgage operations of Oceanmark
Bank and certain residual assets in May 1997 and events subsequent to the May
1997 acquisition. The complaint alleges, among other things, that employees of
Oceanmark Bank conspired with the Company to lower the purchase price of the
assets sold to the Company by Oceanmark Bank. The plaintiff seeks relief under
theories of racketeering, securities fraud, breach of contract, breach of
fiduciary duty, conspiracy, and negligence and requests compensatory and
punitive damages totaling $75 million.
 
  The Company's management believes that the Oceanmark claims are without
merit and intends to defend the Company's position vigorously. Management
believes that the resolution of this matter will not have a material adverse
effect on the Company's financial condition, results of operations or
liquidity.
 
  SPFC occasionally becomes involved in litigation arising in the normal
course of business. Management believes that any liability with respect to
such legal actions, individually or in the aggregate, will not have a material
adverse effect on the Company's financial position or results of operations.
 
 Operating Leases
 
  The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at December 31, 1997
were as follows:
 
                                                           
       1998......................................................... $ 4,190,910
       1999.........................................................   3,917,316
       2000.........................................................   3,092,437
       2001.........................................................   2,666,172
       2002.........................................................   2,057,852
                                                                     -----------
         Total...................................................... $15,924,687
                                                                     ===========

       
 
                                     F-71

 
                     SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Rent expense amounted to $309,607, $484,416 and $2,394,621 for the years
ended December 31, 1995, 1996 and 1997, respectively.
 
15. CONSOLIDATING CONDENSED FINANCIAL INFORMATION
 
  Following is consolidating condensed financial information of SPFC, the
Subsidiary Guarantors of the 11 1/2% Senior Notes due 2004 issued in November
1997 and the Subsidiary which is not a Subsidiary Guarantor:
 
                          CONSOLIDATING BALANCE SHEET
 


                                                      AS OF DECEMBER 31, 1997
                          ---------------------------------------------------------------------------------
                                        SUBSIDIARY  NON-GUARANTOR
                              SPFC      GUARANTORS   SUBSIDIARY     SUBTOTAL    ELIMINATIONS      TOTAL
                          ------------ ------------ ------------- ------------  -------------  ------------
                                                                             
         ASSETS
Cash....................  $    408,286 $  2,047,362  $ 5,430,764  $  7,886,412  $         --   $  7,886,412
Loans held for sale.....   133,110,124   61,330,849   67,991,237   262,432,210      1,952,783   264,384,993
Interest-only and
 residual certificates..   277,156,343          --           --    277,156,343            --    277,156,343
Investment in
 subsidiaries...........    11,220,645          --           --     11,220,645    (11,220,645)          --
Other assets............   104,244,775   53,563,593    1,507,189   159,315,557   (119,397,912)   39,917,645
                          ------------ ------------  -----------  ------------  -------------  ------------
   Total assets.........  $526,140,173 $116,941,804  $74,929,190  $718,011,167  $(128,665,774) $589,345,393
                          ============ ============  ===========  ============  =============  ============
Borrowings of credit
 under warehouse line...  $143,789,768 $        --   $61,241,287  $205,031,055  $         --   $205,031,055
Deferred tax liability..    44,111,149    4,213,931     (211,030)   48,114,050        (39,062)   48,074,988
Convertible subordinated
 notes..................   175,000,000          --            --   175,000,000             --   175,000,000
Other liabilities.......    29,454,384   95,414,744   14,111,962   138,981,090   (116,896,647)   22,084,443
                          ------------ ------------  -----------  ------------  -------------  ------------
   Total liabilities....   392,355,301   99,628,675   75,142,219   567,126,195   (116,935,709)  450,190,486
                          ============ ============  ===========  ============  =============  ============
Shareholders' equity:
 Common stock...........    54,100,644       25,343          --     54,125,987        (25,365)   54,100,622
 Contributed capital....       247,500   11,649,637          --     11,897,137    (11,649,637)      247,500
 Translation
  adjustment............           --           --        (8,745)       (8,745)           --         (8,745)
 Retained earnings......    79,436,728    5,638,149     (204,284)   84,870,593        (55,063)   84,815,530
                          ------------ ------------  -----------  ------------  -------------  ------------
   Total shareholders'
    equity..............   133,784,872   17,313,129     (213,029)  150,884,972    (11,730,065)  139,154,907
                          ------------ ------------  -----------  ------------  -------------  ------------
   Total liabilities and
    shareholders'
    equity..............  $526,140,173 $116,941,804  $74,929,190  $718,011,167  $(128,665,774) $589,345,393
                          ============ ============  ===========  ============  =============  ============

 
 
                                     F-72

 
                      SOUTHERN PACIFIC FUNDING CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
                      CONSOLIDATING STATEMENT OF EARNINGS
 


                                                  YEAR ENDED DECEMBER 31, 1997
                          -------------------------------------------------------------------------------
                                        SUBSIDIARY  NON-GUARANTOR
                              SPFC      GUARANTORS   SUBSIDIARY     SUBTOTAL   ELIMINATIONS     TOTAL
                          ------------  ----------- ------------- ------------ ------------  ------------
                                                                           
Revenues:
 Gains on sales of
  loans.................  $118,230,144  $27,091,191  $3,082,531   $148,403,866 $       --    $148,403,866
 Interest income........    36,941,438    9,213,663   2,916,618     49,071,719  (9,764,960)    39,306,759
 Securities valuation
  and other income......    (2,766,667)   4,511,716    (110,874)     1,634,175         --       1,634,175
                          ------------  -----------  ----------   ------------ -----------   ------------
  Total revenues........   152,404,915   40,816,570   5,888,275    199,109,760  (9,764,960)   189,344,800
                          ============  ===========  ==========   ============ ===========   ============
Expenses:
 Interest on other
  borrowings............    26,074,145    8,958,966   2,344,952     37,378,063  (9,764,960)    27,613,103
 Personnel and
  commission Expense....    28,091,560   15,184,601   1,751,543     45,027,704         --      45,027,704
 General and
  administrative
  Expense...............    15,430,810    7,020,069   2,140,983     24,591,862      94,125     24,685,987
                          ------------  -----------  ----------   ------------ -----------   ------------
  Total expenses........    69,596,515   31,163,636   6,237,478    106,997,629  (9,670,835)    97,326,794
                          ============  ===========  ==========   ============ ===========   ============
Earnings before taxes...    82,808,400    9,652,934    (349,203)    92,112,131     (94,125)    92,018,006
Income taxes............    34,412,306    4,014,785    (144,919)    38,282,172     (39,062)    38,243,110
                          ------------  -----------  ----------   ------------ -----------   ------------
  Net earnings..........  $ 48,396,094  $ 5,638,149  $ (204,284)  $ 53,829,959 $   (55,063)  $ 53,774,896
                          ============  ===========  ==========   ============ ===========   ============

 
                     CONSOLIDATING STATEMENT OF CASH FLOWS
 


                                                  YEAR ENDED DECEMBER 31, 1997
                         -----------------------------------------------------------------------------------
                                       SUBSIDIARY   NON-GUARANTOR
                             SPFC      GUARANTORS    SUBSIDIARY      SUBTOTAL     ELIMINATIONS     TOTAL
                         ------------  -----------  -------------  -------------  ------------ -------------
                                                                             
Net cash provided by
 (used in) operating
 activities............. $(95,039,704) $ 4,276,336  $(55,180,048)  $(145,943,416)  $ 187,190   $(145,756,226)
Net cash used in
 investing activities...   (3,096,096)  (5,723,418)     (630,475)     (9,449,989)        --       (9,449,989)
Cash flows from
 financing activities:
 Net changes in:
  Borrowings under
   warehouse lines of
   credit...............   (8,890,627)         --     61,241,287      52,350,660         --       52,350,660
  Proceeds from long
   term debt............   96,263,878          --            --       96,263,878         --       96,263,878
  Other.................      302,523      187,190           --          489,713    (187,190)        302,523
                         ------------  -----------  ------------   -------------   ---------   -------------
Net cash provided by
 (used in) financing
 activities.............   87,675,774      187,190    61,241,287     149,104,251    (187,190)    148,917,061
Net change in cash......  (10,460,026)  (1,259,892)    5,430,764      (6,289,154)        --       (6,289,154)
Cash at beginning of
 period.................   14,175,566          --            --       14,175,566         --       14,175,566
                         ------------  -----------  ------------   -------------   ---------   -------------
Cash at end of year..... $  3,715,540  $(1,259,892) $  5,430,764   $   7,886,412   $     --    $   7,886,412
                         ============  ===========  ============   =============   =========   =============

 
                                      F-73

 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE
TRUST OR THE SUBSIDIARY GUARANTORS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE TRUST, THE COMPANY OR THE
SUBSIDIARY GUARANTORS SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECU-
RITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURI-
TIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
 
                               -----------------
 
                               TABLE OF CONTENTS


                                                                            Page
                                                                            ----
                                                                         
Available Information.....................................................     i
Incorporation by Reference................................................    ii
Prospectus Summary........................................................     1
Risk Factors..............................................................    26
Use of Proceeds...........................................................    43
Accounting Treatment......................................................    43
Capitalization............................................................    44
Selected Consolidated Financial Data......................................    45
Management's Discussion and Analysis of Financial Condition and Results of
 Operations ..............................................................    48
Business..................................................................    73
Management................................................................   111
Security Ownership of Certain Beneficial Owners and Management............   118
Certain Transactions......................................................   119
The Exchange Offer........................................................   134
The Trust.................................................................   144
Description of Securities.................................................   145
Description of Debentures.................................................   161
Description of Trust Guarantee............................................   189
Relationship Among the Par Securities, the Debentures and the Trust
 Guarantee................................................................   191
United States Federal Income Tax Consequences.............................   193
ERISA Considerations......................................................   196
Plan of Distribution......................................................   197
Legal Matters.............................................................   197
Experts...................................................................   197
Index of Principal Definitions............................................   198
Index to ICII Consolidated Financial Statements...........................   F-1
Index to SPFC Financial Statements........................................  F-54

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                                  $70,000,000
                                IMPERIAL CREDIT
                                CAPITAL TRUST I
 
                 REMARKETED REDEEMABLE PAR SECURITIES, SERIES B
 
                    (Liquidation Amount $1,000 per Security)
                    *Fully and unconditionally guaranteed by
 
            [LOGO OF IMPERIAL CREDIT INDUSTRIES, INC. APPEARS HERE]
 
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                                   PROSPECTUS
                                  May 15, 1998
 
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*  Taken together, the Company's obligations under the Declaration of Trust,
   the Debentures, the Indenture and the Trust Guarantee provide, in the
   aggregate, a full and unconditional guarantee of payments of distributions
   and other amounts due on the Par Securities. No single document standing
   alone or operating in conjunction with fewer than all of the other documents
   constitutes such guarantee. It is only the combined operation of these
   documents that has the effect of providing a full and unconditional
   guarantee of the Trust's obligations under the Par Securities.
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