-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HofVu3vKqhVORjqdow1RoIyXUch98Edc/hKevnpEWWnbZqRMDcM10wkAThi0X4NO Yc1JlP/WcTWPR3m86HAo7g== 0000898430-99-003937.txt : 19991022 0000898430-99-003937.hdr.sgml : 19991022 ACCESSION NUMBER: 0000898430-99-003937 CONFORMED SUBMISSION TYPE: SC 13E3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19991021 GROUP MEMBERS: SC 13E3 1 SCHEDULE 13E-3 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13E-3 RULE 13E-3 TRANSACTION STATEMENT (PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT of 1934) Imperial Credit Commercial Mortgage Investment Corp. - -------------------------------------------------------------------------------- (Name of Issuer) Imperial Credit Industries Inc. Imperial Credit Commercial Mortgage Investment Corp. ICCMIC Acquisition Corp. - -------------------------------------------------------------------------------- (Name of Person(s) Filing Statement) Common Stock, par value $0.0001 per share - -------------------------------------------------------------------------------- (Title of Class of Securities) 45272T 10 2 - -------------------------------------------------------------------------------- (CUSIP Number of Class of Securities) Irwin L. Gubman, Esq. Norbert M. Seifert, Esq. General Counsel General Counsel Imperial Credit Industries, Inc. Imperial Credit Commercial Mortgage 23550 Hawthorne Blvd. Investment Corp. Bldg. #1, Suite 240 11601 Wilshire Blvd, Suite 2080 (310) 791-8040 Los Angeles, CA 90025 (310) 231-1280 (Name and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of the Person(s) Filing Statement) Copies to: James R. Walther, Esq. Andrew L. Weil, Esq. Mayer, Brown & Platt Sonnenschein Nath & Rosenthal 350 S. Grand Ave., 25th Floor 8000 Sears Tower Los Angeles, CA 90071 Chicago, IL 60606 This statement is filed in connection with (check the appropriate box): a. [X] The filing of solicitation materials or an information statement subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the Securities Exchange Act of 1934. b. [ ] The filing of a registration statement under the Securities Act of 1933. c. [ ] A tender offer. d. [ ] None of the above. Check the following box if the soliciting materials or information statement referred to in checking box (a) are preliminary copies. [x]
CALCULATION OF FILING FEE - -------------------------------------------------------------------------------- Transaction Valuation* Amount of Filing Fee $300,646,425 $60,129 - --------------------------------------------------------------------------------
* Pursuant to, and as provided by, Rule 0-11(b)(1), the amount required to be paid with the filing of this Schedule 13E-3 is $60,129. This amount is based upon $11.50 (price per share being paid for outstanding shares pursuant to the merger), $1.10 (price per share being paid for 815,500 outstanding stock options with an exercise price of $15.00 per share) and $2.50 (price per share being paid for 621,750 outstanding stock options with an exercise price of $9.00 per share). The $11.50 per share price for outstanding shares of common stock and the $2.50 per share price for certain stock options are based on the currently proposed cash payment in the merger. These cash payments are subject to possible increase based on a not yet completed appraisal process. If such increase becomes applicable, an additional filing fee will be paid with an amended filing as contemplated by Rule 0-11(a)(3). [X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. Amount previously paid: $60,129 Filing party: Imperial Credit Commercial ------------ -------------------------- Mortgage Investment Corp. ---------------------------------------- Form or registration no.:Preliminary Schedule 14A Date Filed: October 21, 1999 -------------------------- -----------------------------
This Rule 13e-3 Transaction Statement on Schedule 13E-3 (the "Statement") is being filed in connection with the proposed merger (the "Merger") of ICCMIC Acquisition Corp ("Merger Sub"), a Maryland corporation, with and into Imperial Credit Commercial Mortgage Investment Corp., a Maryland corporation ("ICCMIC" or the "Company"), pursuant to a Merger Agreement (the "Merger Agreement") dated as of July 22, 1999 by and among Merger Sub, the Company and Imperial Credit Industries, Inc., a California corporation and sole corporate parent of Merger Sub ("Imperial Credit"). Upon the effectiveness of the merger (the "Effective Time"), each share of the Company's common stock issued and outstanding immediately prior to the Effective Time (other than shares held by Imperial Credit or any subsidiary of Imperial Credit or the Company) will be converted into at least $11.50 in cash, and the holders of such shares will also have the right to receive a final dividend of any previously undistributed taxable income of the Company after the Merger. The information contained (or incorporated by reference) in this Statement concerning the Company, including, without limitation, the deliberations of the special committee of the Company's Board of Directors in connection with the Merger, the opinion of the Company's financial advisor and the Company's capital structure and historical financial statements and projections, was supplied by the Company. Neither Imperial Credit nor Merger Sub takes responsibility for the accuracy of such information. The information contained (or incorporated by reference) in this Statement concerning Imperial Credit and Merger Sub was supplied by Imperial Credit. The Company takes no responsibility for the accuracy of such information. This Statement is being filed with the Securities and Exchange Commission (the "Commission") concurrently with a preliminary proxy statement filed by the Company pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Proxy Statement"). A copy of the Proxy Statement is attached hereto as Exhibit (d)(3). By filing this Schedule 13E-3, none of the joint signatories concedes that Rule 13e-3 under the Securities and Exchange of 1934, as amended, is applicable to the Merger or the Merger Agreement, including other transactions contemplated therein. The following Cross Reference Sheet is being supplied pursuant to General Instruction F to Schedule 13E-3 and shows the location in the Proxy Statement of the information required to be included in response to the items of this Statement. The information in the Proxy Statement, including all appendices thereto, is expressly incorporated herein by reference and the responses to each item herein are qualified in their entirety by the provisions of the Proxy Statement and the appendices thereto. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Proxy Statement. Cross Reference Sheet --------------------- Item in Schedule 13E-3 Caption or Location in the Proxy Statement - ------------------------- ---------------------------------------------- Item 1(a) .................... "The Companies -- Imperial Credit Commercial Mortgage Investment Corp." Item 1(b) ..................... "Summary -- Record Date; Stock Entitled to Vote;" "Information Concerning the Special Meeting -- Record 1 Date; Outstanding Common Stock Entitled To Vote; Quorum" and "Common Stock Market Price and Dividend Information" Item 1(c) ..................... "Common Stock Market Price and Dividend Information -- Market Prices" Item 1(d) ..................... Questions and Answers About the Proposed Merger;" "Summary -- What Stockholders Will Receive in the Proposed Merger;" "Special Factors: Background, Purpose and Effects of the Proposed Merger --Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger;" "The Merger Agreement --Covenants; Conduct of Business Pending the Proposed Merger" and "Common Stock Market Price and Dividend Information -- Dividend Policy" Item 1(e) ..................... "The Companies -- Imperial Credit Commercial Mortgage Investment Corp." Item 1(f) ..................... "Relationships and Transactions Between ICII, ICCMIC and Affiliates -- Purchases and Sales of Common Stock by ICII and its Affiliates" Item 2(a)-(d), (g)............. "The Companies -- Imperial Credit Industries, Inc.," "--ICCMIC Acquisition Corp.;" "Management of ICCMIC" and "Management of ICII and ICCMIC Acquisition Corp." Item 2(e) ..................... * Item 2(f) ..................... * Item 3(a) ..................... "Questions and Answers About the Proposed Merger;" "Summary;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Background of the Proposed Merger," "-- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger," "-- ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger," "--Potential Asset Sales Prior to the Proposed Merger;" "The Merger Agreement" and "Relationships and Transactions Between ICII, ICCMIC and Affiliates" Item 3(b) ..................... "Summary;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Background of the Proposed Merger" and "Interests of Certain Persons in the Proposed Merger" 2 Item 4(a) ..................... "Questions and Answers About the Proposed Merger;" "Summary -- Our Reasons for the Proposed Merger and Our Recommendation," "-- The Proposed Merger," "-- What Stockholders Will Receive in the Proposed Merger," "-- Completion and Termination of the Merger Agreement;" "Interests of Certain Persons in the Proposed Merger;" "The Merger Agreement;" "Fees and Expenses" and "Appendix A --Merger Agreement" Item 4(b) ..................... "Summary -- The Proposed Merger," "-- Votes Required," "--Treatment of Outstanding ICCMIC Stock Options," "--Potential Conflicts of Interest of ICCMIC's Directors and Officers;" "Information Concerning the Special Meeting -- Votes Required;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Benefits and Detriments to Nonaffiliated Stockholders;" "Interests of Certain Persons in the Proposed Merger -- Treatment of Stock Options," "--Agreements between Mark S. Karlan, ICII and the Manager;" "-- Indemnification of Directors and Officers;" "The Merger Agreement -- Merger Consideration," "-- Cancellation of ICCMIC Common Stock," "-- Stock Option and Other Plans," "-- Directors and Officers," "-- ICII Standstill Agreement," "--SPB Loans," "-- Termination Fees and Expenses" and "Appendix A -- Merger Agreement" Item 5(a)-(g) ................. "Summary -- The Proposed Merger;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Management Agreement; Appraisal," "-- ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger," "-- Consequences of the Proposed Merger," "-- Plans for ICCMIC after the Proposed Merger," "-- Financing; Source of Funds;" "The Merger Agreement" and "Appendix A -- Merger Agreement" Item 6(a)-(c).................. "Summary -- Financing; Source of Funds;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Financing; Source of Funds" and "Fees and Expenses" Item 6(d) ..................... * Item 7(a) ..................... "Summary -- Our Reasons for the Proposed Merger and Our Recommendation," "--ICII's Reasons for the Proposed Merger;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger," "-- Opinion of the Financial Advisor to the Special Committee," "-- ICII's Purpose for Pursuing the Proposed 3 Merger; Structure of the Proposed Merger" and "-- ICII's Analysis of the Proposed Merger" Item 7(b)...................... "Summary -- Solicitation of Alternative Transactions," "--Standstill; Qualifying Alternative Transaction;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Background of the Proposed Merger," "-- 60-Day Market Check," "-- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger," "-- ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger;" "The Merger Agreement -- Solicitation Period and Superior Proposals" and "-- ICII Standstill Agreement" Item 7(c)...................... "Summary -- Our Reasons for the Proposed Merger and Our Recommendation," "-- ICII's Reasons for the Proposed Merger," "-- Opinion of Financial Advisor;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger," "-- Opinion of the Financial Advisor to the Special Committee," "-- ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger" and "-- ICII's Analysis of the Proposed Merger" Item 7(d) ..................... "Questions and Answers About the Proposed Merger;" "Summary -- The Proposed Merger," "-- What Stockholders Will Receive in the Proposed Merger," "-- Management Agreement; Appraisal," "-- Treatment of Outstanding ICCMIC Stock Options," "-- Accounting Treatment," "-- Potential Conflicts of Interest of ICCMIC's Directors and Officers;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Management Agreement; Appraisal," "-- Benefits and Detriments to Nonaffiliated Stockholders," "-- ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger," "-- Consequences of the Proposed Merger," "--Plans for ICCMIC after the Proposed Merger," "-- No Appraisal Rights," "-- Material Tax Consequences," "-- Accounting Treatment;" "Interests of Certain Persons in the Proposed Merger;" "The Merger Agreement" and "Appendix A -- Merger Agreement" Item 8(a)-(b).................. "Summary --Our Reasons for the Proposed Merger and Our Recommendation," "-- ICII's Reasons for the Proposed Merger," "-- Solicitation of Alternative Transactions," "--Standstill; Qualifying Alternative Transaction," "-- Opinion of Financial Advisor;" "Special Factors: Background, Purpose 4 and Effects of the Proposed Merger -- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger," "-- 60-Day Market Check, " "--Opinion of the Financial Advisor to the Special Committee," "Management Agreement; Appraisal," "-- Benefits and Detriments to Nonaffiliated Stockholders," "-- ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger," "-- ICII's Analysis of the Proposed Merger" and "Appendix B -- Opinion of Prudential Securities Incorporated" Item 8(c)...................... "Summary -- Record Date; Stock Entitled to Vote," "-- Votes Required;" "Information Concerning the Special Meeting --Record Date; Outstanding Common Stock Entitled to Vote; Quorum" and "-- Votes Required" Item 8(d)...................... "Summary -- Our Reasons for the Proposed Merger and Our Recommendation," "-- Opinion of Financial Advisor;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Background of the Proposed Merger" and "-- Opinion of the Financial Advisor to the Special Committee" Item 8(e)...................... "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Background of the Proposed Merger" and "-- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger" Item 8(f)..................... "Summary -- Solicitation of Alternative Transactions;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Background of the Proposed Merger," "--60-Day Market Check" and "The Merger Agreement -- Solicitation Period and Superior Proposals" Item 9 ....................... "Summary -- Our Reasons for Proposed Merger and Our Recommendation," "--Opinion of Financial Advisor;" "Cautionary Statement Concerning Forward-Looking Statements;" "Special Factors: Background, Purpose and Effects of the Proposed Merger --Background of the Proposed Merger," "-- 60-Day Market Check," "-- Opinion of the Financial Advisor to the Special Committee;" "Appendix B-- Opinion of Prudential Securities Incorporated" and "Appendix C -- Summary of Appraisals of Robert A. Stanger & Co., Inc., Houlihan Lokey Howard & Zukin Financial Advisors, Inc. and Eastdil Realty, L.L.C." Item 10(a) .................... "Summary -- Share Ownership by Management" and "Securities Ownership" 5 Item 10(b) .................... "Relationships and Transactions Between ICII, ICCMIC and Affiliates -- Purchases and Sales of Common Stock by ICII and its Affiliates" Item 11 ..................... "Questions and Answers About the Proposed Merger;" "Summary -- Record Date; Stock Entitled to Vote," "-- Votes Required," "-- Share Ownership by Management;" "Information Concerning the Special Meeting -- Voting of Proxies;" "Interests of Certain Persons in the Proposed Merger -- Treatment of Stock Options;" "The Merger Agreement -- The Proposed Merger," "-- Merger Consideration," "-- Cancellation of ICCMIC Common Stock," "-- Payment Procedures," "-- Transfer of Common Stock," "--Stock Option and Other Plans," "-- ICII Standstill Agreement," "-- Covenants; Conduct of Business Pending the Proposed Merger" and "Common Stock Market Price and Dividend Information -- Dividend Policy" Item 12(a) .................... "Summary -- Share Ownership of Management" and "Information Concerning the Special Meeting -- Votes Required" Item 12(b) .................... "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger" and "-- ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger" Item 13(a) .................... "Special Factors: Background, Purpose and Effects of the Proposed Merger -- No Appraisal Rights" Item 13(b) .................... * Item 13(c) .................... * Item 14(a) .................... "Selected Historical Financial Data of ICCMIC" and "Where You Can Find More Information" Item 14(b) .................... * Item 15(a) .................... "Summary -- Financing Source of Funds," "-- Management Agreement; Appraisal;" "Information Concerning the Special Meeting -- Proxy Solicitation;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Management Agreement; Appraisal," "--ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed 6 Merger," "-- Plans for ICCMIC after the Proposed Merger," "--Financing; Source of Funds" and "Fees and Expenses" Item 15(b) .................... "Summary -- Opinion of Financial Advisor;" "Information Concerning the Special Meeting -- Proxy Solicitation;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Opinion of the Financial Advisor to the Special Committee," "-- Management Agreement; Appraisal;" "Fees and Expenses" and "Appendix C --Summary of Appraisals of Robert A. Stanger & Co., Inc., Houlihan Lokey Howard & Zukin Financial Advisors, Inc. and Eastdil Realty, L.L.C." Item 16 ..................... Entirety of Proxy Statement Item 17(a)-(f)................. Separately filed with this Statement - ---------------------- * The Item is inapplicable or the answer thereto is in the negative. 7 Item 1. Issuer and Class of Security Subject to Transaction --------------------------------------------------- (a) The information set forth on the cover page to the Proxy Statement and in the section entitled "The Companies -- Imperial Credit Commercial Mortgage Investment Corp." is incorporated herein by reference. (b) The exact title of the stock which is the subject of the Rule 13e-3 transaction is Common Stock, par value $0.0001 per share (the "Common Stock"). The information set forth in the sections of the Proxy Statement entitled "Summary -- Record Date; Stock Entitled to Vote;" "Information Concerning the Special Meeting -- Record Date; Outstanding Common Stock Entitled To Vote; Quorum" and "Common Stock Market Price and Dividend Information" is incorporated herein by reference. (c) The information set forth in the section of the Proxy Statement entitled "Common Stock Market Price and Dividend Information -- Market Prices" is incorporated herein by reference. (d) The information set forth in the sections of the Proxy Statement entitled "Questions and Answers About the Proposed Merger;" "Summary -- What Stockholders Will Receive in the Proposed Merger;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger;" "The Merger Agreement -- Covenants; Conduct of Business Pending the Proposed Merger" and "Common Stock Market Price and Dividend Information -- Dividend Policy" is incorporated herein by reference. (e) The information set forth in the section of the Proxy Statement entitled "The Companies -- Imperial Credit Commercial Mortgage Investment Corp." is incorporated herein by reference. (f) The information set forth in the section of the Proxy Statement entitled "Relationships and Transactions Between ICII, ICCMIC and Affiliates -- Purchases and Sales of Common Stock by ICII and its Affiliates" is incorporated herein by reference. Item 2. Identity and Background ----------------------- This statement is being filed jointly by the Company (which is the issuer of the class of equity securities that is the subject of the Rule 13e-3 transaction), Merger Sub and Imperial Credit. The information set forth in the sections of the Proxy Statement entitled "The Companies -- Imperial Credit Industries, Inc." and "-- ICCMIC Acquisition Corp." is incorporated herein by reference. (a)-(d) The information set forth in the sections of the Proxy Statement entitled "Management of ICCMIC" and "Management of ICII and ICCMIC Acquisition Corp." is incorporated herein by reference. (e)-(f) During the last five years, none of the Company, Merger Sub or Imperial Credit nor (to the knowledge of each of the Company, Merger Sub and Imperial Credit, respectively) any 8 executive officer or director of the Company, Merger Sub or Imperial Credit, respectively, (i) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining further violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of such laws. (g) The information set forth in the sections of the Proxy Statement entitled "Management of ICCMIC" and "Management of ICII and ICCMIC Acquisition Corp." is incorporated herein by reference. Item 3. Past Contacts, Transactions or Negotiations ------------------------------------------- (a) The information set forth in the sections of the Proxy Statement entitled "Questions and Answers About the Proposed Merger;" "Summary;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Background of the Proposed Merger," "--Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger," "-- ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger," "-- Potential Asset Sales Prior to the Proposed Merger;" "The Merger Agreement" and "Relationships and Transactions Between ICII, ICCMIC and Affiliates" is incorporated herein by reference. (b) The information set forth in the sections of the Proxy Statement entitled "Summary;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Background of the Proposed Merger" and "Interests of Certain Persons in the Proposed Merger" is incorporated herein by reference. Item 4. Terms of Transaction -------------------- (a) The information set forth in the sections of the Proxy Statement entitled "Questions and Answers About the Proposed Merger;" "Summary -- Our Reasons for the Proposed Merger and Our Recommendation," "-- The Proposed Merger," "-- What Stockholders Will Receive in the Proposed Merger," "-- Completion and Termination of the Merger Agreement;" "Interests of Certain Persons in the Proposed Merger;" "The Merger Agreement;" "Fees and Expenses" and in Appendix A is incorporated herein by reference. (b) The information set forth in the sections of the Proxy Statement entitled "Summary -- The Proposed Merger," "-- Votes Required," "-- Treatment of Outstanding ICCMIC Stock Options," "-- Potential Conflicts of Interest of ICCMIC's Directors and Officers;" "Information Concerning the Special Meeting -- Votes Required;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Benefits and Detriments to Nonaffiliated Stockholders;" "Interests of Certain Persons in the Proposed Merger --Treatment of Stock Options," "-- Agreements between Mark S. Karlan, ICII and the Manager;" "-- Indemnification of Directors and Officers;" "The Merger Agreement --Merger Consideration," "-- Cancellation of ICCMIC Common Stock," "-- Stock Option and Other Plans," "-- Directors and Officers," "-- ICII Standstill Agreement," "-- SPB Loans," "-- Termination Fees and Expenses" and in Appendix A is incorporated herein by reference. 9 Item 5. Plans or Proposals of the Issuer or Affiliate --------------------------------------------- (a)-(g) The information set forth in the sections of the Proxy Statement entitled "Summary -- The Proposed Merger;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Management Agreement; Appraisal," "-- ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger," "--Consequences of the Proposed Merger," "--Plans for ICCMIC after the Proposed Merger," "-- Financing; Source of Funds," "The Merger Agreement" and in Appendix A is incorporated herein by reference. Item 6. Source and Amount of Funds or Other Consideration ------------------------------------------------- (a) The information set forth in the sections of the Proxy Statement entitled "Summary --Financing; Source of Fund," and "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Financing; Source of Funds" is incorporated herein by reference. (b) The information set forth in the sections of the Proxy Statement entitled "Summary --Financing; Source of Funds," "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Financing; Source of Funds" and "Fees and Expenses" is incorporated herein by reference. (c) The information set forth in the sections of the Proxy Statement entitled "Summary --Financing; Source of Funds" and "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Financing; Source of Funds" is incorporated herein by reference. (d) Not applicable. Item 7. Purpose(s), Alternatives, Reasons and Effects. ---------------------------------------------- (a) The information set forth in the sections of the Proxy Statement entitled "Summary -- Our Reasons for the Proposed Merger and Our Recommendation," "-- ICII's Reasons for the Proposed Merger;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger," "-- Opinion of the Financial Advisor to the Special Committee," "--ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger" and "-- ICII's Analysis of the Proposed Merger" is incorporated herein by reference. (b) The information set forth in the sections of the Proxy Statement entitled "Summary --Solicitation of Alternative Transactions," "-- Standstill; Qualifying Alternative Transaction;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Background of the Proposed Merger," "-- 60-Day Market Check," "Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger," "ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger;" "The Merger Agreement -- Solicitation Period and Superior Proposals" and "-- ICII Standstill Agreement" is incorporated herein by reference. (c) The information set forth in the sections of the Proxy Statement entitled "Summary -- Our Reasons for the Proposed Merger and Our Recommendation," "-- ICII's Reasons for the 10 Proposed Merger," "--Opinion of Financial Advisor;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger," "-- Opinion of the Financial Advisor to the Special Committee," "-- ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger" and "-- ICII's Analysis of the Proposed Merger" is incorporated herein by reference. (d) The information set forth in the sections of the Proxy Statement entitled "Questions and Answers About the Proposed Merger;" "Summary -- The Proposed Merger," "-- What Stockholders Will Receive in the Proposed Merger," "-- Management Agreement; Appraisal," "-- Treatment of Outstanding ICCMIC Stock Options," "-- Accounting Treatment," "-- Potential Conflicts of Interest of ICCMIC's Directors and Officers;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Management Agreement; Appraisal," "-- Benefits and Detriments to Nonaffiliated Stockholders," "--ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger," "-- Consequences of the Proposed Merger," "-- Plans for ICCMIC after the Proposed Merger," "-- No Appraisal Rights," "-- Material Tax Consequences," "-- Accounting Treatment;" "Interests of Certain Persons in the Proposed Merger;" "The Merger Agreement" and in Appendix A is incorporated herein by reference. Item 8. Fairness of the Transaction --------------------------- (a)-(b) The information set forth in the sections of the Proxy Statement entitled "Summary --Our Reasons for the Proposed Merger and Our Recommendation," "-- ICII's Reasons for the Proposed Merger," "-- Solicitation of Alternative Transactions," "-- Standstill; Qualifying Alternative Transaction," "-- Opinion of Financial Advisor;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger," "-- 60-Day Market Check," "-- Opinion of the Financial Advisor to the Special Committee," "Management Agreement; Appraisal," "-- Benefits and Detriments to Nonaffiliated Stockholders," "--ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger," "--ICII's Analysis of the Proposed Merger" and in Appendix B is incorporated herein by reference. (c) The information set forth in the sections of the Proxy Statement entitled "Summary -- Record Date; Stock Entitled to Vote," "-- Votes Required;" "Information Concerning the Special Meeting -- Record Date; Outstanding Common Stock Entitled to Vote; Quorum" and "--Votes Required" is incorporated herein by reference. (d) The information set forth in the sections of the Proxy Statement entitled "Summary -- Our Reasons for the Proposed Merger and Our Recommendation," "-- Opinion of Financial Advisor;" "Special Factors: Background, Purpose and Effects of the Proposed Merger --Background of the Proposed Merger" and "-- Opinion of the Financial Advisor to the Special Committee" is incorporated herein by reference. 11 (e) The information set forth in the sections of the Proxy Statement entitled "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Background of the Proposed Merger" and "-- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger" is incorporated herein by reference. (f) The information set forth in the sections entitled "Summary -- Solicitation of Alternative Transactions;" "Special Factors: Background, Purpose and Effects of the Proposed Merger --Background of the Proposed Merger," "-- 60-Day Market Check" and "The Merger Agreement -- Solicitation Period and Superior Proposals" is incorporated herein by reference. Item 9. Reports, Opinions, Appraisals and Certain Negotiations ------------------------------------------------------ (a)-(c) The information set forth in the sections of the Proxy Statement entitled "Summary -- Our Reasons for Proposed Merger and Our Recommendations," "--Opinion of Financial Advisor;" "Cautionary Statement Concerning Forward-Looking Statements;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Background of the Proposed Merger," "-- 60-Day Market Check," "Opinion of the Financial Advisor to the Special Committee;" and in Appendices B and C is incorporated herein by reference. Exhibits (b)(2) and (b)(3) attached hereto are also incorporated by reference. Item 10. Interest in Securities of the Issuer ------------------------------------ (a) The information set forth in the sections of the Proxy Statement entitled "Summary -- Share Ownership by Management" and "Securities Ownership" is incorporated herein by reference. (b) The information set forth in the section of the Proxy Statement entitled "Relationships and Transactions Between ICII, ICCMIC and Affiliates -- Purchases and Sales of Common Stock by ICII and its Affiliates" is incorporated herein by reference. Item 11. Contracts, Arrangements or Understandings With Respect to the Issuer's ---------------------------------------------------------------------- Securities ---------- The information set forth in the sections of the Proxy Statement entitled "Questions and Answers About the Proposed Merger;" "Summary - - Record Date; Stock Entitled to Vote," "-- Votes Required," "-- Share Ownership by Management;" "Information Concerning the Special Meeting -- Voting of Proxies;" "Interests of Certain Persons in the Proposed Merger -- Treatment of Stock Options;" "The Merger Agreement -- The Proposed Merger," "-- Merger Consideration," "-- Cancellation of ICCMIC Common Stock," "--Payment Procedures," "-- Transfer of Common Stock," "-- Stock Option and Other Plans," "-- ICII Standstill Agreement," "-- Covenants; Conduct of Business Pending the Proposed Merger" and "Common Stock Market Price and Dividend Information -- Dividend Policy" is incorporated herein by reference. Item 12. Present Intention and Recommendation of Certain Persons With Regard to ---------------------------------------------------------------------- the Transaction --------------- 12 (a) The information set forth in the sections of the Proxy Statement entitled "Summary -- Share Ownership of Management" and "Information Concerning the Special Meeting -- Votes Required" is incorporated herein by reference. (b) The information set forth in the sections of the Proxy Statement entitled "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger" and "--ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger" is incorporated herein by reference. Item 13. Other Provisions of the Transaction ----------------------------------- (a) The information set forth in the section of the Proxy Statement entitled "Special Factors: Background, Purpose and Effects of the Proposed Merger -- No Appraisal Rights" is incorporated herein by reference. (b) Not applicable. (c) Not applicable. Item 14. Financial Information --------------------- (a) The information set forth in the sections of the Proxy Statement entitled "Selected Historical Financial Data of ICCMIC" and "Where You Can Find More Information" is incorporated herein by reference. (b) Not applicable. Item 15. Persons and Assets Employed, Retained or Utilized ------------------------------------------------- (a) The information set forth in the sections of the Proxy Statement entitled "Summary --Financing Source of Funds," "-- Management Agreement; Appraisal;" "Information Concerning the Special Meeting -- Proxy Solicitation;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Management Agreement; Appraisal," "- - ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger," "-- Plans for ICCMIC after the Proposed Merger," "-- Financing; Source of Funds" and "Fees and Expenses" is incorporated herein by reference. (b) The information set forth in the sections of the Proxy Statement entitled "Summary --Opinion of Financial Advisor;" "Information Concerning the Special Meeting -- Proxy Solicitation;" "Special Factors: Background, Purpose and Effects of the Proposed Merger -- Opinion of the Financial Advisor to the Special Committee," "-- Management Agreement; Appraisal;" "Fees and Expenses" and in Appendix C is incorporated herein by reference. 13 Item 16. Additional Information ---------------------- The information set forth in the Proxy Statement and the appendices thereto and the Exhibits hereto is incorporated herein by reference. Item 17. Material to be Filed as Exhibits -------------------------------- (a) Not Applicable. (b)(1) Fairness Opinion of Prudential Securities Incorporated dated July 22, 1999 (Incorporated by reference to Appendix B to the Preliminary Proxy Statement filed as Exhibit (d)(1) hereto). (b)(2) Valuation Opinion of Robert A. Stanger & Co., Inc. (b)(3) Valuation Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc. (c) Merger Agreement, dated as of July 22, 1999 among the Company, ICCMIC Acquisition Corp. and Imperial Credit. (Incorporated herein by reference to Appendix A to the Preliminary Proxy Statement filed as Exhibit (d)(1) hereto). (d)(1) Letter to Stockholders (included in the Preliminary Proxy Statement filed as Exhibit (d)(3) hereto). (d)(2) Notice of Special Meeting of Stockholders (included in the Preliminary Proxy Statement filed as Exhibit (d)(3) hereto). (d)(3) Preliminary Proxy Statement. (d)(4) Form of Proxy (included in the Preliminary Proxy Statement filed as Exhibit (d)(3) hereto). (d)(5) Press Release issued by the Company and Imperial Credit regarding the Merger Agreement, dated July 22, 1999 (incorporated by reference to the Current Report of form 8-K filed by Imperial Credit on July 26, 1999). (e) Not Applicable. (f) Not Applicable. - -------------------------- 14 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: October 20, 1999. IMPERIAL CREDIT INDUSTRIES, INC., a California corporation By: /s/ H. Wayne Snavely -------------------------------- Name: H. Wayne Snavely -------------------------------- Title: President -------------------------------- ICCMIC ACQUISITION CORP., a Maryland corporation By: /s/ H. Wayne Snavely -------------------------------- Name: H. Wayne Snavely -------------------------------- Title: President -------------------------------- 15 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: October 20, 1999. IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP., a Maryland corporation /s/ Norbert Seifert By: ______________________________ Name: Norbert Seifert Title: General Counsel, Senior Vice- President and Secretary 16 INDEX TO EXHIBITS
Exhibit Sequentially Number Description Numbered Page - ------- ----------- ------------- (a) Not Applicable. (b)(1) Fairness Opinion of Prudential Securities Incorporated dated July 22, 1999 (incorporated by reference to Appendix B to the Proxy Statement filed as Exhibit (d)(3) hereto). (b)(2) Valuation Opinion of Robert A. Stanger & Co., Inc. (b)(3) Valuation Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc. (c) Merger Agreement, dated as of July 22, 1999 among the Company, Merger Sub and Imperial Credit (incorporated herein by reference to Appendix A to the Preliminary Proxy Statement filed as Exhibit (d)(3) hereto). (d)(1) Letter to Stockholders (included in the Preliminary Proxy Statement filed as Exhibit (d)(3) hereto). (d)(2) Notice of Special Meeting of Stockholders (included in the Preliminary Proxy Statement filed as Exhibit (d)(3) hereto). (d)(3) Preliminary Proxy Statement. (d)(4) Form of Proxy (included in the Preliminary Proxy Statement filed as Exhibit (d)(3) hereto). (d)(5) Press Release issued by the Company and Imperial Credit regarding the Merger Agreement, dated July 22, 1999 (incorporated by reference to the Current Report of form 8-K filed by Imperial Credit on July 26, 1999). (e) Not Applicable. (f) Not Applicable.
17 EX-99.(B)(2) 2 VALUATION OPINION OF ROBERT A. STANGER & CO., INC. Exhibit (b)(2) [LETTERHEAD OF ROBERT A. STANGER & CO., INC.] September 13, 1999 Special Committee of the Board of Directors Imperial Credit Commercial Mortgage Investment Corp. 11601 Wilshire Boulevard, Suite 2080 Los Angeles, CA 90025 Gentlemen: The Special Committee of the Board of Directors (the "Special Committee") of Imperial Credit Commercial Mortgage Investment Corp. (the "Company") has advised us that the Company and ICCMIC Acquisition Corp. (the "Merger Sub"), a wholly owned subsidiary of Imperial Credit Industries, Inc. ("Imperial Credit") have entered into a merger agreement (the "Merger Agreement") pursuant to which the Merger Sub will merge with and into the Company with the Company continuing as the surviving corporation (the "Merger"). We have also been advised that Imperial Credit Commercial Asset Management Corporation (the "Management Company"), a subsidiary of Imperial Credit, manages the assets of and provides administrative services to the Company pursuant to a management agreement (the "Management Agreement") and that such Management Agreement will be terminated pursuant to the Merger Agreement. We have been advised that the Merger Agreement contemplates that the Company and Imperial Credit will obtain an independent appraisal of the value of the termination fee, if any, that would be payable to the Management Company pursuant to Section 15 of the Management Agreement if the Management Agreement was not renewed and terminated on October 22, 1999 (the "Management Agreement Amount"). You have requested that Robert A. Stanger & Co., Inc. ("Stanger") perform an appraisal of the estimated value of the Management Agreement Amount based upon Stanger's independent review of the Management Agreement and Merger Agreement and such other matters as Stanger deems appropriate. This report and the accompanying exhibits hereto (the "Report") is prepared in connection with that agreement dated as of August 13, 1999 between the Company and Stanger. Background on Robert A. Stanger & Co., Inc. 1 Stanger, founded in 1978, has provided investment banking and consulting services to clients located throughout the United States, including major New York Stock Exchange member firms and insurance companies and over seventy companies engaged in the management and operation of real estate and real estate related assets. The investment banking activities of Stanger include financial advisory services, asset and securities valuations, industry and company research and analysis, litigation support and expert witness services, and due diligence investigations in connection with both publicly registered and privately placed securities transactions. Stanger, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers, acquisitions, and reorganizations and for estate, tax, corporate and other purposes. In particular, Stanger's valuation practice involves the valuation of real estate mortgages secured by real estate, real estate management companies and related management contracts and other real estate related assets. Identification of Asset to be Valued The asset to be valued in connection with this Report is the termination fee, if any, that would be payable to the Management Company pursuant to Section 15 of the Management Agreement if the Management Agreement was not renewed by the Company and terminated on October 22,1999, which is herein referred to as the Management Agreement Amount. The Management Agreement is dated as of October 22, 1997. Purpose of Report The purpose of this Report is to estimate the value of the Management Agreement Amount based upon market conditions as of September 13, 1999. Function of Report The function of the Report is to provide an estimate of the value of the Management Agreement Amount solely for the use of the Special Committee. Stanger understands that this Report will be utilized as one of the two initial appraisal reports to be obtained in connection with the determination of the Management Agreement Amount pursuant to Section 15 of the Management Agreement. Date of Valuation The date of the valuation pursuant to this Report is September 13, 1999. Value Definition 2 Value, as used in this Report, is defined as the most probable price, as of the date specified herein, in cash, in terms equivalent to cash, or in other precisely revealed terms, for which the specified rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither party is under undue duress. Valuation Methodology and Analysis In connection with our analysis in support of the conclusion set forth herein, we have reviewed, among other things: (i) the Management Agreement; (ii) the prospectus for the initial public offering of common shares of the Company; (iii) Policies and Guidelines of the Company as set by the Board of Directors; (iv) quarterly and annual financial statements for the Company for 1998 and 1999, as available; (v) a summary of fees paid to the Management Company during 1998 and the first six months of 1999; (vi) management agreements for comparable real estate investment trusts investing in mortgages ("Mortgage REITs"); (vii) fees charged by comparable Mortgage REITs; (viii) the financial performance of comparable Mortgage REITs; (ix) actual operating performance of the Management Company for the year ended December 31, 1998 and the six months ended June 30, 1999 as reported by the Management Company; (x) annualized 1999 and budgeted 2000 operating performance of the Management Company, as estimated by the Management Company; (xi) offers for the Management Company received during the past two years; (xii) the Merger Agreement; ( xiii) a memorandum prepared by legal counsel to the Special Committee; (xiv) the financial terms of comparable transactions involving similar companies; and (xv) certain other data provided by the Company and the Special Committee. In addition, we have interviewed certain representatives of the Special Committee, its legal and financial advisor; representatives of the Management Company and Imperial Credit; a representative of legal counsel to the Company; and a representative of Friedman, Billings, Ramsey & Co., Inc., the dealer manager for the initial public offering for the Company. In arriving at a value estimate for the Management Agreement Amount, we considered, among others, three valuation analyses. A summary of the valuation analyses considered is as follows. Cost Analysis We considered the utilization of a Cost Analysis to value the Management Agreement Amount. Cost Analysis is premised upon the assumption that no prudent buyer would pay more for a property than the cost required to develop or create such property. In our view, Cost Analysis is not an appropriate method of analysis with respect to the Management Agreement Amount for the following reasons, among others: (i) specific costs are not easily ascribable to the development of a contract right such as the Management Agreement Amount; (ii) Cost Analysis is not a commonly used criteria by buyers of management companies or management contract rights; and (iii) cost 3 analysis is generally considered the least reliable indicator of value. For the reasons set forth above, among others, a Cost Analysis was not prepared in connection with the valuation of the Management Agreement Amount. Discounted Cash Flow Analysis We considered the utilization of a Discounted Cash Flow Analysis to value the Management Agreement Amount. Discounted Cash Flow Analysis is premised upon the assumption that no prudent investor would pay more than the present value, at a target rate of return, of the estimated cash flow to be derived from an investment. Discounted Cash Flow Analysis requires the development of proforma statements of cash flow over a multi-year period of operations, numerous assumptions regarding the revenues to be derived from assets under management, and expenses associated with the management of such assets and the estimation of the value of such cash flow at the end of the projection period (the "Reversion Value"). In addition, a Discounted Cash Flow Analysis requires the development of an appropriate discount rate which reflects the risks associated with the related income stream. Discounted Cash Flow Analysis is most commonly used in circumstances where a current level of cash flow is not indicative of prospective levels of cash flow, such as a contractual change in management or other fees which raises or lowers the fees and corresponding cash flow. In our view, the Discounted Cash Flow Analysis is not an appropriate method of analysis for the value of the Management Agreement Amount for the following reasons, among others: (i) numerous assumptions are required regarding future events relating to the assets under management and the fees derived therefrom which would produce a wide range of cash flows which, in turn I would require a wide range of Residual Value estimates upon the termination of the projection period and a wide range of discount rates to be applied to such income streams in order to estimate value; (ii) comparable transaction data with respect to discount rates and Reversion Value parameters is not generally available and therefore renders the Discounted Cash Flow Analysis inherently less reliable in this situation; and (iii) Discounted Cash Flow Analysis is not a primary valuation technique used by buyers of management companies or management agreements. For the reasons set forth above, among others, a Discounted Cash Flow Analysis was not prepared in connection with the valuation of the Management Agreement Amount. Capitalization of Earnings Analysis We considered the utilization of a Capitalization of Earnings Analysis to value the Management Agreement Amount. Capitalization of Earnings Analysis requires the development of an estimate of earnings before interest, taxes, depreciation and amortization ("EBITDA") and the capitalization of such earnings based upon an earnings multiple (the "EBITDA Multiple") derived from comparable transactions. In our view, the Capitalization of Earnings Analysis is an appropriate method of analysis for the Management Agreement Amount for the following reasons, among others: (i) EBITDA, as adjusted for normalized operations, is readily determinable from the information available with respect to the Management Agreement Amount; (ii) sufficient data from 4 comparable transactions is available to derive an appropriate EBITDA Multiple; and (iii) Capitalization of Earnings Analysis is a commonly used valuation technique in determining the value of a management company and related contract rights by buyers and sellers of such companies and rights. For the reasons set forth above, among others, a Capitalization of Earnings Analysis was prepared in connection with the Valuation of the Management Agreement Amount. Valuation Analysis Utilizing the Capitalization of Earnings Analysis, we first established a normalized level of EBITDA based upon a review of the historical results of the Management Company. We noted that, for the year ended December 31, 1998, the Management Company reported EBITDA of $3,350,000 during a period of substantial investment activity by the Company. We further noted that the Management Company reported EBITDA of S 1,995,000 for the six months ended June 30, 1999 and the Management Company has estimated full year 1999 EBITDA of $4,407,000. In addition, the Management Company estimated EBITDA for the year ending 2000 at $11,113,000 based upon substantial growth from fees associated with a substantial increase in assets of the Company (from approximately $700 million to more than $1.4 billion of average invested assets). In our view, it is appropriate to establish a base level of EBITDA based upon the current level of assets under management. The Management Agreement provides for termination, which in our view, precludes consideration of growth in Company assets under the management of the Management Company. Furthermore, the Merger Agreement appears to limit transactions other than in the ordinary course of business thereby minimizing, at this time, opportunities to reduce assets under management. As such, we have estimated the stabilized management fee based upon invested assets as of June 30, 1999. As of June 30, l999, we have estimated average invested assets at $717.2 million and the related management fee of 1% at $7,172,000. With respect to operating expenses, we have observed that actual Management Company operating expenses were reported at $2,990,000 for 1998 and $1,768,000 for the six months ended June 30, 1999. The Management Company has estimated operating expenses for the full year 1999 at $3,080,000 and for the year 2000 at $3,530,000, predicated on increases in assets under management. We also note that expenses of the Management Company are broadly chargeable to Company in accordance with Section 9 of the Management Agreement and that the prospectus for the initial public offering (the "IPO Prospectus") indicates that compensation to officers and employees of the Company shall not be paid by the Company. Although the Management Agreement appears to clearly indicate that expenses of the Management Company incurred on behalf of the Company are chargeable to the Company, it is not clear from the IPO prospectus and other information we reviewed, that general and administrative expenses such as rent are chargeable to the Company. We have been advised that expenses such as rent have been charged to and paid by the Company. Based upon our review of the matters set forth above with respect to expenses of the Management Company and our experience in the evaluation of management companies, we have 5 calculated a stabilized level of operating expenses equal to 50% of revenues or $3,586,000. Based upon our estimate of the management fee at $7,172,000 and our estimate of operating expenses of $3,586,000 we have estimated the stabilized level of EBITDA for the Management Company derived from the Management Agreement at $3,586,000. In order to establish an appropriate EBITDA Multiple we considered two primary sources or comparable data. First we considered EBITDA multiples for public companies in the real estate services business such as Jones Lang LaSalle, Trammel Crow, CB Richard Ellis and Grubb & Ellis. However, we concluded that such companies (i) generally were much larger than the value ascribable to the Management Agreement Amount; (ii) generally had more diverse sources of revenue; and (iii) possessed few attributes which could be deemed comparable to the Management Company's cash flow from the Management Agreement. Second, we considered selected transactions involving the acquisition. of private management companies in connection with consolidation transactions involving assets managed by such management companies. We observed that such transactions: (i) involved the valuation of management agreements which are terminable; (ii) involved, generally, management agreements which cover the management of assets owned by a limited number of ownership interests; and (iii) involved transactions wherein investor approval was sought or will be sought and obtained and wherein subsequent trading of the security resulting from the transaction confirmed the reasonableness of the overall value utilized in connection with such valuation. For the aforementioned reasons, we concluded that the EBITDA Multiple data derived from private management company transactions provides a reasonable and supportable range of data from which to derive an appropriate EBITDA Multiple. Our review of private management company transactions indicates that EBITDA Multiples have ranged from 5.0 to 11.4 during the past five years and such range has narrowed during the last three years to 5.0 to 8.76 with an average of 7.0. We attribute the narrowing of this range primarily to a general lowering of expectations with respect to management companies and the real estate related assets managed by them. We believe that the appropriate EBITDA Multiple for the Management Agreement Amount should be at the low end of the range for several factors, among others, as follows: (i) the Management Agreement, like others in this industry, is terminable; (ii) growth expectations for the Management Company, the Company and the Mortgage REIT industry are low as the financial performance of such industry has been negative during the past two years; (iii) the Management Company does not directly or indirectly control the Company as a controlling stockholder or as a general partner of a partnership; (iv) the language contained in Section 15 of the Management Agreement regarding the determination of the termination fee is vague; (v) the level of expense reimbursements to be received by the Management Company pursuant to the Management Agreement is unclear; and (vi) the Board of Directors of the Company has the authority to revise the Policies and Guidelines of the Company and reduce the level of assets under management, in the absence of the Merger Agreement. Based upon our review of the above factors, among others, we believe that an appropriate EBITDA Multiple for the determination of the 6 Management Agreement Amount would be in the range of 4.5 to 5.5 and we have concluded an EBITDA Multiple of 5.0. We note that this multiple is at the low end of the overall range due to the aforementioned factors. Our value conclusion therefore, is based upon our estimate of EBITDA associated with the Management Agreement of $3,586,000 and an EBITDA Multiple of 5.0 resulting in a value of $17,930,000 which we have rounded to $18,000,000. We note further that this concluded value for the Management Agreement Amount represents a revenue multiple of 2.5. We note that comparable Mortgage REIT's provide for termination fees indicating an implied revenue multiple range of 1.0 to an indeterminate amount for those transactions which provide for a termination fee assuming continuous renewal of the Management Agreement. In our view, those transactions providing for a termination fee based upon continuous renewal would not likely be valued at an EBITDA multiple exceeding the high-end of the EBITDA multiple range described above of 8.76, adjusted to reflect general declines in industry outlook of 20% to 30% resulting in an adjusted high-end EBITDA Multiple range of 6.1 to 7.0 and, assuming a 50% expense ratio, an adjusted revenue multiple of 3.0 to 3.5. We note that the derived revenue multiple for the Management Agreement Amount of 2.5 falls within the range of 1.0 and 3.5 established by our review of comparable Mortgage REIT management agreements. Assumptions and Limitations In preparing and rendering this Report, we have relied, without independent verification, on the completeness and accuracy, in all material respects, of all financial and other information furnished or otherwise communicated to us by the Company, the Management Company and or their respective agents, advisors or representatives. With respect to information provided to us by the Company, the Management Company and or their respective agents, advisors, and representatives, we have assumed that: (i) data provided to us was accurate and complete in all material respects; (ii) all budgets and projections provided to us were reasonably prepared on bases consistent with actual historical experience and reflect the best currently available estimates and good faith judgements; (iii) no material changes have occurred in the information reviewed between the date the information was provided to us and the date of this Report, and (iv) the Company, the Management Company and or their respective agents, advisors and representatives are not aware of any information of facts that would cause the information supplied to us to be incomplete or misleading in a material respect. In preparing and rendering this Report we have advised the Company and the Special Committee that we are not attorneys. We have advised the Company and the Special Committee, that in determining the Management Agreement Amount and preparing this Report, we have made certain assumptions regarding the interpretation of certain terms of the Management Agreement and other agreements. The Company and the Special Committee have authorized Stanger to make such assumptions and the Company and the Special Committee have been advised that such assumptions 7 made by Stanger may have affected the Management Agreement Amount conclusion reached by Stanger in this Report. Stanger has been authorized by the Company and the Special Committee to provided this estimate of value based on such assumptions. Among the assumptions made by Stanger in reaching the value conclusions herein are the following: (i) no action or inaction on the part of the Company or the Management Company have occurred or will occur in the near future which would enable the Company to terminate the Management Agreement for cause and without the payment of a termination fee; (ii) the Management Agreement does not require that the termination fee payable pursuant to Section 15 of the Management Agreement to be determined on the basis of an assumed liquidation of the assets of the Company and an immediate payment of liquidation proceeds to the shareholders of the Company; (iii) the Company or the Board of Directors does not have the authority to unilaterally change the terms of the Management Agreement to reduce the charges thereunder without the consent of the Management Company and the Management Company has not agreed and does not intend to agree to a reduction in fees payable pursuant to the Management Agreement; (iv) all fees paid by the Company to the Management Company are proper and consistent with the terms of the Management Agreement; (v) the Company or its Board of Directors has not altered the Policies and Guidelines of the Company and has not adopted a plan of liquidation; (vi) the Company and the Management Company at all relevant times desired to pay, upon termination of the Management Agreement, a termination fee based upon the assets then under management using reasonable valuation parameters and techniques determined by independent parties and without regard to the actual financial performances of the Company prior to the time of such termination; and (vii) neither the Management Agreement, Merger Agreement or any other agreement, whether written, oral or otherwise serves to define, limit or otherwise determine the amount of the Management Agreement Amount, other than Section 15 of the Management Agreement and Section 1.8 of the Merger Agreement. We hereby advise the Company and the Special Committee that we have not been requested to and therefore do not: (i) render any opinion as to the fairness, from a financial point of view, or reasonableness of the terms of, the Management Agreement (including without limitation Section 15 thereof) and the Merger Agreement (including without limitation Section 1.8 thereof); (ii) make any recommendation to the Special Committee, the Board of Directors of the Company, the Company or its shareholders with respect to (a) whether to approve or reject the Merger; (b) alternatives to the Merger; (c) the tax consequences of the Merger; or (d) any other aspect of the Management Agreement or the Merger Agreement other than our estimate of the value of the Management Agreement Amount. Certain information requested by this firm was not provided in connection with this assignment including information relating to the valuation of the termination fee and the report of experts representing the Management Company. We were not provided with access to such information and we were not permitted to review our preliminary findings or conclusions with 8 representatives of the experts representing the Management Company nor were such experts preliminary findings or conclusions communicated to us. Such information, if made available to us, could affect the conclusions reached herein. This Report is a summary report and does not purport to be a complete description of the analyses performed or the matters considered in reaching the conclusion herein. The analyses and summary set forth herein must be considered as a whole, and selecting portions of such summary or analyses, without considering all factors and analyses, could create an incomplete view of the process underlying the determination of the Management Agreement Amount. In rendering this Report, judgment was applied to a variety of complex analyses and assumptions. The assumptions made and the judgements applied in rendering the conclusion herein may not be readily susceptible to partial analysis in summary description. The fact that a specific analysis is referred to herein is not meant to indicate that such analysis was given greater weight than any other analysis. Value Conclusion This estimate of the value of the Management Agreement Amount is based upon the economic, market and other conditions in effect on, and the information made available to us as of, the date hereof. Our review was undertaken solely for the purpose of providing an opinion of value and we make no representation as to the adequacy of such review for any other purpose. This Report is only an estimate of the value of the Management Agreement Amount as of September 13, 1999 and should not be relied upon as being the equivalent of the price that would necessarily be received in the event of a sale or other disposition of the Management Agreement or the Management Company. Changes in corporate financing rates or changes in real estate markets may result in higher or lower values of the Management Agreement Amount. The use of other valuation methodologies might produce a higher or lower value. Our opinion is subject to the assumptions and limiting conditions set forth herein. We have used methods and assumptions deemed appropriate in our professional judgment; however, future events may demonstrate that the assumptions were incorrect or that other, different methods or assumptions may have been more appropriate. Based upon the review described in this Report and the assumptions and limiting conditions stated herein, it is our opinion that the value of the Management Agreement Amount as of September 13, 1999 is: EIGHTEEN MILLION DOLLARS ======================== $18,000,000 =========== This report is respectfully submitted to the Special Committee of the Board of Directors of 9 Imperial Credit Commercial Mortgage Investment Corp. Sincerely, /s/ Robert A. Stanger & Co., Inc. Robert A. Stanger & Co., Inc. Shrewsbury, New Jersey September 13, 1999 10 EX-99.(B)(3) 3 VALUATION OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN EXHIBIT (b)(3) [LOGO] [LETTERHEAD OF HOULIHAN LOKEY HOWARD & ZUKIN] --------------------------------------------- Financial Advisors September 14, 1999 Mr. H. Wayne Snavely Chairman of the Board Imperial Credit Commercial Asset Management Corp. 23550 Hawthorne Blvd. Building 1, Suite 110 Torrance, CA 90505 Mr. Mark Karlan President and Chief Executive Officer Imperial Credit Commercial Asset Management Corp. 11601 Wilshire Boulevard Los Angeles, CA 90025 Gentlemen: At your request and pursuant to our retainer agreement with you dated August 6, 1999, on behalf of Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") and Imperial Credit Commercial Asset Management Corp. (the "Manager"), we have analyzed certain financial and other information pertaining to ICCMIC and the Manager as set forth herein, and hereby submit this executive summary letter and our accompanying report. We understand that Imperial Credit Industries, Inc. ("ICII") currently owns approximately 9.0 percent of ICCMIC, and the remainder of ICCMIC is owned by the various public stockholders (including certain officers and directors of ICCMIC, the Manager, and ICII). ICII owns the Manager, and the Manager has entered into a management agreement (the "Management Agreement") with ICCMIC, dated as of October 22, 1997, pursuant to which the Manager formulates operating strategies and provides certain managerial and administrative functions for ICCMIC. ICCMIC has no employees and currently relies upon the Manager to operate its business on a day-to-day basis pursuant to the Management Agreement. The Management Agreement has certain provisions that allow ICCMIC to terminate the services of the Manager under the Management Agreement on or after October 22, 1999. The Management Agreement contemplates that such a termination or non-renewal requires the payment of a termination fee (the "Termination Fee") to the Manager (pursuant to Section 15 of the Management Agreement). The purpose of our analysis was to express in a written report our conclusions regarding the fair market value (the "Opinion") of the Termination Fee as of September 10, 1999. Mr. H. Wayne Snavely Mr. Mark Karlan Imperial Credit Commercial Asset Management Corp. September 14, 1999 Page 2 The term "fair market value," as used herein, is defined as the price at which an asset (or in this case the Management Agreement) would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties are able, as well as willing, to trade and are well-informed about the asset and the market for that asset. It is the understanding of Houlihan Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan Lokey"), upon which it is relying, that the Manager and ICCMIC's Board of Directors and any other recipient of this Opinion will consult with and rely solely upon their own legal counsel with respect to said definitions. No representation is made herein, or directly or indirectly by this Opinion, as to any legal matter or as to the sufficiency of said definitions for any purpose other than setting forth the scope of Houlihan Lokey's Opinion hereunder. In connection with this Opinion, we have made such reviews, analyses and inquiries as we have deemed necessary and appropriate under the circumstances. Among other things, we have: 1. Held discussions with the Manager's senior management to discuss the transaction, the operations, financial condition, future prospects, projected operations and performance of the Manager and ICCMIC; 2. Held discussions with certain independent members of ICCMIC's Board of Directors; 3. Reviewed Prudential Securities' presentations to ICCMIC's Board of Directors dated March 16, 1999 and May 3, 1999; 4. Reviewed ICCMIC's annual financial statements for the years ended December 31, 1998 and December 31, 1997 on form 10-K; 5. Reviewed unaudited financial statements of ICCMIC for the six months ending June 30, 1999 and June 30, 1998, respectively; 6. Reviewed the Management Agreement by and between ICCMIC and the Manager dated October 22, 1997; 7. Reviewed two-year projections for ICCMIC and the Manager as prepared by the Manager as of August 1999; 8. Reviewed the 1999 budget for the Manager as prepared by the Manager as of August 1999; 9. Reviewed minutes from meetings of ICCMIC's Board of Directors; 10. Reviewed proposals to purchase ICCMIC or merge with ICCMIC, including proposals to purchase the Manager, from various public and private entities; 11. Reviewed publicly available information on companies we deemed comparable to the Manager and ICCMIC; and Mr. H. Wayne Snavely Mr. Mark Karlan Imperial Credit Commercial Asset Management Corp. September 14, 1999 Page 3 12. Conducted such other analyses, studies and investigations as we deemed appropriate under the circumstances for rendering the opinion expressed herein. We have relied upon and assumed, without independent verification, that the financial forecasts and projections provided to us have been reasonably prepared and reflect the best currently available estimates of the future financial results and condition of ICCMIC and the Manager, and that there has been no material change in the assets, financial condition, business and prospects of ICCMIC or the Manager since the date of the most recent financial statements made available to us. We have not independently verified the accuracy and completeness of the information supplied to us with respect to ICCMIC or the Manager and do not assume any responsibility with respect to it. We have not made any physical inspection or independent appraisal of any of the properties or assets of ICCMIC or the Manager. In our analysis of the Termination Fee, we have taken into consideration the income and cash-generating capability of the Manager through the Management Agreement and associated rights. Typically, an investor contemplating an investment with income and cash-generating capability similar to the Management Agreement will evaluate the risks and returns of its investment on a going- concern basis. Accordingly, after due consideration of other appropriate and generally accepted valuation methodologies, the value of the Termination Fee has been developed primarily on the basis of capitalization of earnings and discounted cash flow approaches. Furthermore, we valued the Termination Fee viewing the Manager as a going- concern, meaning that the underlying tangible assets of ICCMIC are presumed, in the absence of a qualified appraisal of such assets, to attain their highest values as integral components of a business entity in continued operation and that liquidation of said assets would likely diminish the value of the whole to the shareholders and creditors of ICCMIC. All valuation methodologies that estimate the worth of an enterprise as a going- concern are predicated on numerous assumptions pertaining to prospective economic and operating conditions. Our opinion is necessarily based on business, economic, market and other conditions as they exist and can be evaluated by us at the date of this letter. Unanticipated events and circumstances may occur and actual results may vary from those assumed. The variations may be material. ICCCIC and the Manager, like other companies, business entities or assets analyzed by Houlihan Lokey or which are otherwise involved in any manner in connection with this Opinion, could be materially affected by complications that may occur, or may be anticipated to occur, in computer-related applications as a result of the year change from 1999 to 2000 (the "Y2K Issue"). In accordance with long-standing practice and procedure, Houlihan Lokey's services are not designed to detect the likelihood and extent of the effect of the Y2K Issue, directly or indirectly, on the financial condition and/or operations of a business or asset. is Further, Houlihan Lokey has no responsibility with regard to ICCMIC's or the Manger's efforts to make its systems, or any other systems (including its vendors and service providers), Year 2000 compliant on a timely basis. Accordingly, Houlihan Lokey shall not be responsible for any effect of the Y2K Issue on the matters set forth in this Opinion. Mr. H. Wayne Snavely Mr. Mark Karlan Imperial Credit Commercial Asset Management Corp. September 14, 1999 Page 4 Based upon the investigation, premises, provisos, and analyses outlined above, and subject to the attached "Limiting Factors and Other Assumptions" and more fully described in the accompanying report, it is our opinion that, as of September 10, 1999, the fair market value of the "Termination Fee" is reasonably stated in the amount of FORTY-FIVE MILLION DOLLARS ($45,000,000). In accordance with recognized professional ethics, our fees for this service are not contingent upon the opinion expressed herein, and neither Houlihan Lokey Howard & Zukin Financial Advisors, Inc. nor any of its employees have a present or future financial interest in ICCMIC or the Manager. Our Opinion, expressed above, is advisory in nature only. The abbreviated format of this Opinion, as requested, may not conform to specific guidelines set forth in the Uniform Standards of Professional Appraisal Practice (U.S.P.A.P.) pertaining only to the narrative content of reports. Nonetheless, our work files contain all necessary analyses and documentation to prepare a conforming narrative report, if so requested, and our work product is otherwise in compliance with applicable standards of U.S.P.A.P. /s/ HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC. LIMITING FACTORS AND OTHER ASSUMPTIONS In accordance with recognized professional ethics, the professional fee for this service is not contingent upon Houlihan Lokey Howard & Zukin Financial Advisors, Inc.'s ("Houlihan Lokey") conclusion of value, and neither Houlihan Lokey nor any of its employees has a present or future financial interest in ICCMIC or the Manager. The opinion of value expressed herein is valid only for the stated purpose and as of the September 10, 1999 valuation date. The conclusions are based upon the assumption that present management would continue to maintain the character and integrity of the enterprise through any sale, reorganization, or diminution of the owners' participation. The opinion letter and the conclusions arrived at herein are for the exclusive use of ICCMIC and the Manger. Furthermore, the opinion letter and conclusions arrived at herein are not intended by the author, and should not be construed by the reader, to be investment advice in any manner whatsoever. The conclusions reached herein represent the considered opinion of Houlihan Lokey based upon information furnished to it by ICCMIC and the Manger and other sources. The extent to which the conclusions and valuations arrived at herein should be relied upon, should be governed and weighted accordingly. No opinion, counsel or interpretation is intended in matters that require legal or other appropriate professional advice. It is assumed that such opinions, counsel or interpretations have been or will be obtained from the appropriate professional sources. CERTIFICATION The undersigned hereby certify that we have no present or contemplated future interest in the property that is the subject of this report and have no personal interest or bias with respect to the parties involved; neither our employment nor our compensation in connection with this report is in any way contingent upon the conclusions reached or values estimated and reflects our personal, unbiased professional judgment; this report sets forth all of the material facts, assumptions and limiting conditions affecting the analyses, values and conclusions contained herein; this appraisal has been prepared in conformance with the "Uniform Standards of Professional Appraisal Practice"; no person or persons other than those acknowledged below contributed significant professional assistance to the undersigned. Review Appraiser: /s/ Marjorie L. Bowen - --------------------- Marjorie L. Bowen Contributing Appraisers: /s/ Richard A. Entin - -------------------- Richard A. Entin /s/ Peter F. Fitzpatrick - ------------------------- Peter F. Fitzpatrick EX-99.(D)(3) 4 PRELIMINARY PROXY STATEMENT PELIMINARY COPY Subject to Completion, dated October 21, 1999 [LOGO OF IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.] ___________, 1999 Dear Stockholder: You are cordially invited to attend a special meeting of the stockholders of Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") to be held at ______________________________ Los Angeles, California ___________, on ________, ________________, 1999. at ____:00 ____.m, local time. At the special meeting, you will be asked to approve the merger agreement between ICCMIC and Imperial Credit Industries, Inc. and the proposed merger of a wholly-owned subsidiary of Imperial Credit Industries into ICCMIC, pursuant to which ICCMIC will become a wholly-owned subsidiary of Imperial Credit Industries. Currently, Imperial Credit Industries and certain of its affiliates own approximately 9.4% of ICCMIC's outstanding common stock. ICCMIC's manager, Imperial Credit Commercial Asset Management Corp., is a wholly-owned subsidiary of Imperial Credit Industries. If we complete the proposed merger, which would be a taxable transaction to you, you will receive $11.50 in cash for each share of ICCMIC common stock you own. The amount of cash you will receive per share is subject to possible increase, as described in the attached proxy statement. In addition, you will continue to receive regular quarterly dividends, if applicable, and a special final dividend from ICCMIC, as described in greater detail in the attached proxy statement. A special committee of ICCMIC's board of directors, comprised of ICCMIC's four independent directors, negotiated the terms of the merger agreement and the proposed merger with Imperial Credit Industries. The special committee has received an opinion from its financial advisor, Prudential Securities Incorporated, to the effect that the consideration to be received in the proposed merger by ICCMIC's stockholders, other than Imperial Credit Industries and certain of its affiliates, is fair to such ICCMIC stockholders from a financial point of view. The board of directors of ICCMIC, acting on the unanimous recommendation of the special committee, has unanimously approved and adopted the merger agreement and the proposed merger. The special committee and the full board of directors believe that the merger agreement and the proposed merger are fair to, and in the best interests of, ICCMIC's stockholders other than Imperial Credit Industries and certain of its affiliates. Accordingly, the ICCMIC board of directors recommends that you vote FOR the merger agreement and the proposed merger. The attached proxy statement provides detailed information concerning the special meeting and the proposed merger. Please read these materials carefully. Your vote is very important. Whether or not you plan to attend the special meeting, I urge you to complete, date, sign and promptly return the enclosed proxy card, or follow the instructions for telephone or Internet voting on the enclosed proxy card, to ensure that your shares will be voted at the meeting. The proposed merger will only be completed if it is approved by the affirmative vote of ICCMIC stockholders representing a majority of the total number of outstanding shares of ICCMIC common stock, and by a majority of shares entitled to vote at the special meeting that are not held by Imperial Credit Industries and certain of its affiliates. If you fail to return your proxy card and otherwise fail to vote by telephone, via the Internet or in person at the special meeting, the effect will be the same as a vote against the merger agreement and the proposed merger. On behalf of the board of directors, I thank you for your support and urge you to vote FOR approval of the merger agreement and the proposed merger. Sincerely, [Signature] Mark S. Karlan President and Chief Executive Officer ------------------------------- This proxy statement is dated ______, 1999 and is first being mailed to stockholders of ICCMIC on or about ______, 1999. [LOGO OF IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.] Imperial Credit Commercial Mortgage Investment Corp. Notice of Special Meeting of Stockholders To Be Held _____________, 1999 To the stockholders of Imperial Credit Commercial Mortgage Investment Corp. A special meeting of the stockholders of Imperial Credit Commercial Mortgage Investment Corp. will be held at the ____________________, Los Angeles, California _______ on _________________, 1999, at __:00 a.m., local time, so that stockholders may consider and vote on a proposal to approve the merger agreement, dated as of July 22, 1999, by and among ICCMIC, Imperial Credit Industries and ICCMIC Acquisition Corp., under which, among other things, ICCMIC Acquisition Corp. will merge into ICCMIC. We have attached a copy of the merger agreement as Appendix A to the proxy statement. The board of directors has set the close of business on ___________, 1999 as the record date to determine the stockholders entitled to notice of and to vote at the special meeting or any meeting resulting from an adjournment or postponement of the special meeting. The board of directors of ICCMIC unanimously recommends that you vote FOR approval of the merger agreement and the proposed merger. You are cordially invited to attend the special meeting. You may vote in person or by proxy. You may also vote by telephone or via the Internet. Whether or not you plan to attend, please act promptly to vote your shares for approval of the merger agreement and the proposed merger. We have included with this notice a proxy statement to explain the proposed merger in detail, and a proxy card for your use. If you attend the special meeting, you may vote your shares in person, even if you have previously submitted a proxy in writing. By Order of the Board of Directors, [Signature] Norbert M. Seifert Secretary Los Angeles, California Your vote is important. Please date and sign the enclosed proxy card and return it in the enclosed envelope as soon as possible. Please do not send your common stock certificates at this time. If the proposed merger is completed, you will be sent instructions regarding the surrender of your certificates. THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. TABLE OF CONTENTS
Page ------ Questions and Answers About the Proposed Merger....................................... 2 Who Can Help Answer Your Questions?................................................... 6 Summary............................................................................... 7 Our Reasons for the Proposed Merger and Our Recommendation.......................... 7 ICII's Reasons for the Proposed Merger.............................................. 8 The Proposed Merger................................................................. 9 The Special Meeting................................................................. 9 Record Date; Stock Entitled to Vote................................................. 9 Votes Required...................................................................... 9 Share Ownership by Management....................................................... 10 What Stockholders Will Receive in the Proposed Merger............................... 10 Management Agreement; Appraisal..................................................... 10 Treatment of Outstanding ICCMIC Stock Options....................................... 13 Solicitation of Alternative Transactions............................................ 14 Standstill; Qualifying Alternative Transaction...................................... 15 Opinion of Financial Advisor........................................................ 16 Completion and Termination of the Merger Agreement.................................. 16 Accounting Treatment................................................................ 17 Potential Conflicts of Interest of ICCMIC's Directors and Officers.................. 17 Financing; Source of Funds.......................................................... 20 Market Price of ICCMIC Shares....................................................... 21 Cautionary Statement Concerning Forward-Looking Statements............................ 21 The Companies......................................................................... 23 Imperial Credit Commercial Mortgage Investment Corp................................. 23 Imperial Credit Industries, Inc..................................................... 24 ICCMIC Acquisition Corp............................................................. 25 Information Concerning the Special Meeting............................................ 25 Time, Date, Place and Purpose of the Special Meeting................................ 25 Record Date; Outstanding Common Stock Entitled to Vote; Quorum...................... 26 Votes Required...................................................................... 26 Voting of Proxies................................................................... 26 Proxy Solicitation.................................................................. 28 Special Factors: Background, Purpose and Effects of the Proposed Merger............... 29 Background of the Proposed Merger................................................... 29 60-Day Market Check................................................................. 44 Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger.................................... 44 Opinion of the Financial Advisor to the Special Committee........................... 48 Financial Projections Relating to ICCMIC............................................ 54
i Management Agreement; Appraisal..................................................... 57 Benefits and Detriments to Nonaffiliated Stockholders............................... 58 ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger... 58 ICII's Analysis of the Proposed Merger.............................................. 60 Consequences of the Proposed Merger................................................. 62 Potential Asset Sales Prior to the Proposed Merger.................................. 63 Plans for ICCMIC after the Proposed Merger.......................................... 63 Conduct of the Business of ICCMIC if the Proposed Merger is not Completed........... 63 Financing; Source of Funds.......................................................... 64 No Appraisal Rights................................................................. 64 Material Tax Consequences........................................................... 64 Accounting Treatment................................................................ 66 Pending Litigation.................................................................. 67 Interests of Certain Persons in the Proposed Merger................................... 67 General............................................................................. 67 Overlapping Directors and Officers.................................................. 67 Treatment of Stock Options.......................................................... 68 Agreements between Mark S. Karlan, ICII and the Manager............................. 70 Indemnification of Directors and Officers........................................... 71 ICII/Manager Employment Retention Plan.............................................. 71 The Merger Agreement.................................................................. 72 The Proposed Merger................................................................. 72 Effective Time...................................................................... 72 Merger Consideration................................................................ 73 Cancellation of ICCMIC Common Stock................................................. 73 Payment Procedures.................................................................. 74 Transfer of Common Stock............................................................ 74 Stock Option and Other Plans........................................................ 74 Directors and Officers.............................................................. 75 Solicitation Period and Superior Proposals.......................................... 75 ICII Standstill Agreement........................................................... 76 SPB Loans........................................................................... 77 Representations and Warranties...................................................... 77 Covenants; Conduct of Business Pending the Proposed Merger.......................... 78 Conditions.......................................................................... 81 Termination; Withdrawal of Recommendations.......................................... 82 Termination Fees and Expenses....................................................... 83 Amendment and Waiver................................................................ 83 Fees and Expenses..................................................................... 84 Regulatory Requirements............................................................... 85 Selected Historical Financial Data of ICCMIC.......................................... 86 Common Stock Market Price and Dividend Information.................................... 87 Market Prices....................................................................... 87 Dividend Policy..................................................................... 88
ii Relationships and Transactions Between ICII, ICCMIC and Affiliates.................... 89 Relationships with the Manager...................................................... 89 Other Contractual Relationships Between ICII and its Affiliates and ICCMIC.......... 90 Purchases and Sales of Common Stock by ICII and its Affiliates...................... 91 Management of ICCMIC.................................................................. 92 Management of ICII and ICCMIC Acquisition Corp........................................ 92 Management of ICII.................................................................. 92 Management of ICCMIC Acquisition Corp............................................... 94 Securities Ownership.................................................................. 95 Proposals by Stockholders of ICCMIC................................................... 96 Independent Auditors.................................................................. 97 Where You Can Find More Information................................................... 97
APPENDIX A - Merger Agreement APPENDIX B - Opinion of Prudential Securities Incorporated APPENDIX C - Summary of Appraisals of Robert A. Stanger & Co., Inc., Houlihan Lokey Howard & Zukin Financial Advisors, Inc. and Eastdil Realty, L.L.C.
iii QUESTIONS AND ANSWERS ABOUT THE PROPOSED MERGER _________________________________________________________________ _______________________________________________________________________ Q: What will I receive in the A: If the proposed merger is completed, you will receive proposed merger? at least $11.50 in cash in exchange for each share of ICCMIC common stock that you own at the time of the proposed merger. You may receive additional cash, depending upon the results of the appraisal process described below that will be completed prior to the proposed merger. You will also receive a final dividend of any previously undistributed taxable income of ICCMIC to be paid promptly after the proposed merger, if it is completed. See "What will happen to my dividends?" If you sell shares of ICCMIC common stock after the ___________, 1999 record date and prior to the proposed merger, you will retain your right to vote at the special meeting unless you give a proxy to the purchaser of your stock. However, the right to receive the cash price in the proposed merger will transfer with the shares of common stock. Q: What is the appraisal process, A: ICCMIC is an "externally managed" real estate and how will it affect what I investment trust - meaning that the day-to-day operations receive in the proposed merger? of the company are conducted by a third party "manager." ICCMIC's manager, Imperial Credit Commercial Asset Management Corp., is a wholly-owned subsidiary of Imperial Credit Industries, Inc. ("ICII"). ICCMIC's management agreement with the manager provides that if ICCMIC terminates or fails to renew the management agreement, then ICCMIC must pay to the manager a termination fee. The merger agreement between ICCMIC and ICII requires that independent appraisers appraise the value of the termination fee. If the appraised value of the termination fee is less than $35 million, the $11.50 per share cash payment for each of your shares in the proposed merger will be increased by an amount of cash equal to the quotient of: . the difference between $35 million and the appraised value of the termination fee, divided by
2 . the sum of the number of shares held by ICCMIC stockholders other than ICII and its subsidiaries, and the number of shares subject to ICCMIC stock options that have an exercise price of less than $11.50 per share. The actual increase in cash consideration, if any, will depend on the results of the appraisal process and the actual number of outstanding relevant shares and stock options at the time of the proposed merger. The merger agreement does not entitle ICII or the manager to any cash payment as a part of the merger transaction. The appraisal of the termination fee was undertaken to determine the amount, if any, by which to increase the $11.50 per share merger consideration and the amount that a third party would be required to pay in an alternative transaction or that ICCMIC would be required to pay if the merger agreement is terminated without an alternative transaction. The appraisal process will also determine the amount of the termination fee payable if ICCMIC terminates or fails to renew the management agreement. However, the parties have agreed that ICCMIC will not be required to pay the termination fee unless the merger agreement is terminated, in which event the termination fee will be due and payable at that time. The appraisal of the termination fee will not reduce the amount of cash you receive in the proposed merger under any circumstances. If the appraised value of the termination fee exceeds $35 million, each ICCMIC stockholder other than ICII and its subsidiaries will receive $11.50 in cash per share. Q: How did you determine the A: The price and other terms of the proposed merger were price to be paid in the proposed negotiated with ICII by a special committee of ICCMIC's merger? board of directors, consisting of the four independent ICCMIC directors who are neither officers or employees of ICCMIC nor directors, officers, employees or affiliates of ICII. The special committee retained its own legal counsel and was assisted in this process by its financial advisor, Prudential Securities Incorporated, which provided the special committee with its written opinion that the consideration to be received in the proposed merger by ICCMIC's stockholders, other than ICII and certain of its affiliates, is fair to such ICCMIC stockholders from a financial point of view.
3 Q: What will happen to my A: The merger agreement permits ICCMIC to declare and dividends? pay regular quarterly dividends, in an amount up to 105% of its quarterly taxable income, if any, until the proposed merger is completed and we expect to do so. See "Common Stock Market Price and Dividend Information." In addition, immediately prior to the proposed merger, ICCMIC will declare a final cash dividend in an amount up to 100% of its taxable income, if any, during its then current tax year through the date of the proposed merger, reduced (but not below zero) by the amount of all prior dividends already paid with respect to that tax year. The record date for this final dividend will be the business day immediately before the closing of the proposed merger. The final dividend, if any, will be paid promptly after the proposed merger is completed. Q: What do I need to do now? A: After carefully considering the information contained in this proxy statement, please complete, date and sign your proxy card. Then mail your proxy card in the postage paid envelope as soon as possible, so that your shares may be voted in accordance with your instructions at the special meeting. Alternatively, you may follow the instructions on the enclosed proxy card for telephone and Internet voting. The ICCMIC board of directors unanimously recommends that you vote FOR approval of the merger agreement and the proposed merger. Q: What do I do if I want to A: You may change your vote: change my vote? . by sending a written notice stating that you would like to revoke your proxy which must be received by ICCMIC's transfer agent prior to the vote at the special meeting; . by signing a later dated proxy card and mailing it promptly so that is received by the ICCMIC transfer agent prior to the vote at the special meeting; . by following the instructions for telephone and Internet voting; or . by attending the special meeting and
4 voting your shares in person. Q: Should I send in my stock A: No, you should not send in your stock certificates certificates now? with your proxy card. If the proposed merger is completed, you will be sent written instructions for exchanging your ICCMIC stock certificates for the merger consideration. Q: If my shares are held in A: Your broker will vote your shares only if you provide "street name" by my broker, will instructions on how to vote to your broker. Please tell my broker vote my shares for me? your broker how you would like him or her to vote your shares. If you do not tell your broker how to vote, your shares will not be voted, which will have the same effect as a vote against the merger agreement and the proposed merger. Q: When do you expect the A: We are working to complete the proposed merger as proposed merger to be completed? quickly as possible. If it is approved, we expect to complete the proposed merger within several days of the special meeting. Q: What are the tax consequences A: The exchange of ICCMIC common stock for cash in the of the proposed merger? proposed merger will be a taxable transaction for federal income tax purposes and will also be a taxable transaction under most state and local tax laws. You will recognize gain or loss on your receipt of cash to the extent that the amount you receive exceeds, or is less than, your tax basis in your ICCMIC common stock. In addition, if you are a foreign stockholder, you may be subject to tax and withholding under the Foreign Investment in Real Property Tax Act of 1980. We describe the material United States federal income tax consequences of the proposed merger in more detail on pages 64 through 66. See "Special Factors: Background, Purpose and Effects of the Proposed Merger - Material Tax Consequences." Q: What other matters will be A: Maryland law and ICCMIC's bylaws do not permit any voted on at the special meeting? other matters to be presented at the special meeting except related procedural matters, including adjournment of the special meeting to a later date. Q: Do I have the right to have A: No. ICCMIC is organized under Maryland law. Under the value of my shares appraised Maryland law, ICCMIC stockholders do not have the right to if I dissent from the proposed dissent and receive the appraised value of their shares in merger? connection with the proposed merger. If you vote against the proposed merger and it takes place anyway, you will be bound by the terms of the merger agreement.
5 Q: Where can I find more A: Both companies file reports and other information information about ICCMIC and ICII? with the Securities and Exchange Commission. You may read and copy this information at the SEC's public reference facilities. You may call 1-800-SEC-0330 for information about these facilities. This information is also available at the Internet site the SEC maintains at http://www.sec.gov. You can also request copies of these documents from ICCMIC and ICII. Also, you can get information about ICII at its Internet site at http://www.icii.com. For more information, see "Where You Can Find More Information."
Who can help answer your questions? If you have more questions about the proposed merger or would like additional copies of this proxy statement, you should contact our proxy solicitor: D.F. King & Co., Inc. 77 Water Street New York, New York 10005 1-800-769-5414 6 SUMMARY This summary, together with the "Questions and Answers About the Proposed Merger" on pages 2 through 6, highlights selected information included in this proxy statement. It may not contain all of the information that is important to you. We have included page references directing you to a more complete description of each item presented in this summary. To understand the proposed merger fully and for a more detailed description of the legal terms of the transaction, you should read carefully this entire proxy statement and the other documents to which we have referred you. For more information about ICCMIC and ICII, see "Where You Can Find More Information." The actual terms of the proposed merger are contained in the merger agreement, a copy of which is attached as Appendix A to this proxy statement. All information contained in this proxy statement relating to ICII and ICCMIC Acquisition Corp. and their affiliates (other than ICCMIC and its subsidiaries) or to their respective actions, purposes, beliefs, intentions or plans has been supplied by ICII for inclusion herein and has not been independently verified by ICCMIC. This information includes, without limitation, certain information set forth under the captions "Summary - ICII's Reasons for the Proposed Merger," "- Financing; Source of Funds," "The Companies - - Imperial Credit Industries, Inc.," "- ICCMIC Acquisition Corp.," "Special Factors: Background, Purpose and Effects of the Proposed Merger - ICII's Purpose for Pursuing the Proposed Merger," " Structure of the Proposed Merger," "- ICII's Analysis of the Proposed Merger," "- Consequences of the Proposed Merger," "- Management Agreement; Appraisal," "- Potential Asset Sales Prior to the Proposed Merger," "- Plans for ICCMIC after the Proposed Merger," "- Financing; Source of Funds," "- Accounting Treatment," "Regulatory Requirements" (with respect to ICII), "Relationships and Transactions Between ICII, ICCMIC and Affiliates," "Management of ICII and ICCMIC Acquisition Corp." and "Securities Ownership." _________________________________________________________________ _______________________________________________________________________ Our Reasons for the Proposed Our primary reason for the proposed merger is to provide Merger and Our Recommendation ICCMIC stockholders other than ICII and its subsidiaries with (pages 44 through 48) the opportunity to liquidate their investment in ICCMIC for cash at a price representing a significant premium to the market price for ICCMIC common stock prior to the announcement of ICII's initial acquisition offer. The ICCMIC board of directors, acting on the unanimous recommendation of its special committee, has unanimously approved and adopted the merger agreement and the proposed merger and recommends that you vote FOR approval of the merger agreement and the proposed merger. The board of directors and the special committee believe that the merger agreement and the proposed merger are advisable, fair to and in the best interests of ICCMIC stockholders other than ICII and certain of its affiliates (i.e., Messrs. H. Wayne Snavely and Kevin E. Villani). In reaching their decision to recommend the proposed merger, the board of directors and the special committee considered a number of factors, including the price (see "- What Stockholders Will Receive in the Proposed Merger") and the right given to ICCMIC for a period of 60 days to solicit
7 alternative proposals that might be superior to the proposed merger (see "- Solicitation of Alternative Transactions"). The special committee also considered the fairness opinion of Prudential Securities Incorporated (see below) and the board of directors relied on the recommendation of the special committee. See "Special Factors: Background, Purpose and Effects of the Proposed Merger - Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger." ICII's Reasons for the Proposed ICII believes that the proposed merger will result in several Merger (pages 58 through 62) benefits to it, including: . the reacquisition of mortgage loans originated by ICII's wholly-owned subsidiary, Southern Pacific Bank ("SPB"), and the acquisition of other loans that are consistent with the loan origination and investment strategies of SPB will enhance SPB's portfolio of commercial mortgage loans; . the reduction of the separate operational and administrative costs of ICCMIC, including its on-going costs as a public company; and . the increased ability of the surviving corporation to retain capital for future investment rather than being required to comply with the federal tax law dividend requirements for REITs. See "Special Factors: Background, Purpose and Effects of the Proposed Merger - ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger." In addition, ICII believes that the proposed merger provides an opportunity for ICCMIC stockholders to sell their investment in ICCMIC at a price representing a substantial premium to the trading price of ICCMIC's common stock immediately prior to the initial announcement of ICII's interest in acquiring ICCMIC. ICII also believes that the merger price is attractive to it and in the best interest of its own stockholders based on ICII's knowledge of the assets of ICCMIC and the potential risks and rewards of holding or selling those assets over time. Lastly, ICII believes that the merger transaction, taken as a whole, fairly compensates ICII for the value of the management agreement that ICII's wholly-owned subsidiary, the manager, has with ICCMIC in a tax advantaged manner
8 resulting from the fact that the tax basis of ICCMIC's assets exceeds the merger price and related merger transaction costs. The Proposed Merger (pages 62 and If the proposed merger is completed, ICCMIC Acquisition 63) Corp., a wholly-owned subsidiary of ICII, will merge into ICCMIC. ICCMIC will continue as the surviving company. If the proposed merger is completed, ICCMIC will become a wholly-owned subsidiary of ICII, public trading of ICCMIC common stock will cease and ICCMIC's common stock will be delisted from the Nasdaq Stock Market. Stockholders other than ICII and its subsidiaries will no longer have any ownership interest in ICCMIC and will no longer participate in the future earnings and growth of ICCMIC or benefit from any increase in the value of ICCMIC common stock. The Special Meeting (pages 25 and We will hold a special meeting of ICCMIC stockholders to vote 26) on the merger on ____________, 1999 at __:00 a.m. local time, at the__________ , Los Angeles, California _______, subject to adjournments or postponements. At the special meeting, we will ask you to approve the merger agreement and the proposed merger. Record Date; Stock Entitled to You are entitled to vote at the special meeting if you owned Vote (page 26) shares of ICCMIC common stock at the close of business on ________ __, 1999. On September 30, 1999, 28.5 million shares of ICCMIC common stock were outstanding and held by 44 record holders on behalf of approximately 3,000 beneficial holders. Of those shares, 2,690,053 shares, or approximately 9.4%, are beneficially owned by ICII and certain of its affiliates. You will have one vote on the proposal to approve the merger agreement and the proposed merger for each share of ICCMIC common stock that you owned on that date. Votes Required (page 26) The approval of the merger agreement and the proposed merger requires the following votes: . the affirmative vote of ICCMIC stockholders holding at least a majority of the outstanding shares of ICCMIC common stock, and . the affirmative vote of ICCMIC stockholders holding at least a majority of the shares of ICCMIC common stock entitled to vote at the special meeting, other than the shares held by ICII and Messrs. Snavely and Villani.
9 Share Ownership by Management As of October 20, 1999, the directors and executive officers (pages 95 and 96) of ICCMIC were entitled to vote 229,103 shares of ICCMIC common stock, excluding ICCMIC stock options. These shares represent less than 1% of the outstanding shares of ICCMIC common stock. All of the directors and executive officers of ICCMIC have indicated to us that they intend to vote their shares in favor of the merger agreement and the proposed merger. In addition to their shares of ICCMIC common stock, as of October 20, 1999, the directors and executive officers of ICCMIC held stock options to acquire 1,164,250 shares of ICCMIC common stock, including stock options to acquire 623,583 shares that are currently exercisable or are exercisable within the next 60 days. What Stockholders Will Receive in If the proposed merger is completed, you will receive $11.50 the Proposed Merger (page 73) in cash for each share of ICCMIC common stock you own immediately before the completion of the proposed merger. In addition, you may receive an additional amount in cash for each share you own if the fee payable upon the termination of ICCMIC's management agreement is appraised below $35 million. The appraisal of the management agreement termination fee will not reduce the amount of cash you receive in the proposed merger. If the appraised value of the management agreement termination fee exceeds $35 million, you will still receive $11.50 in cash for each share of ICCMIC common stock that you own. For each calendar quarter prior to the one in which the proposed merger occurs, you will continue to receive regular quarterly dividends, based on ICCMIC's estimated taxable income. In addition, ICCMIC will declare a final cash dividend for the calendar quarter in which the proposed merger occurs, in an amount not in excess of 100% of its estimated taxable income, if any, during ICCMIC's then current tax year through the date of the proposed merger, reduced by the amount of all prior dividends already paid with respect to that tax year. Management Agreement; Appraisal ICCMIC is an "externally managed" real estate investment (pages 57 and 58) trust. This means that the day-to-day operations of the company are conducted by a third party "manager." ICCMIC's manager is Imperial Credit Commercial Asset Management Corp., which is a wholly-owned subsidiary of ICII. The management agreement provides that if ICCMIC terminates or fails to renew the management agreement, then ICCMIC must pay a termination fee to the manager determined by an independent appraisal process. ICCMIC's
10 management agreement with its manager is expected to expire on October 22, 1999. However, the parties have agreed that ICCMIC will not be required to pay the termination fee unless the merger agreement is terminated, in which event the termination fee will be due and payable at that time. In accordance with the procedures indicated in the merger agreement and the management agreement, the special committee (on behalf of ICCMIC) and the manager each selected an independent appraisal firm to conduct an appraisal of the value of the termination fee. ICCMIC selected Robert A. Stanger & Co., Inc. The manager selected Houlihan Lokey Howard & Zukin Financial Advisors, Inc. Under the procedures set forth in the merger agreement and the management agreement, the appraised value of the termination fee is to be determined as follows: . If Stanger and Houlihan Lokey were to arrive at appraised values that are identical or that differ by an amount that does not exceed 20% of the higher of the two values, the appraised value of the termination fee would equal the average of the two appraised values. . If, on the other hand, Stanger and Houlihan Lokey were to arrive at appraised values that differ by more than 20% of the higher of the two values, then the two firms would jointly select a third independent appraisal firm to conduct another appraisal. In that case, the appraised value that would control for purposes of the merger agreement would be the appraised value arrived at by the third appraiser, but could not be less than the lower of the two initial appraised values nor more than the higher of the two initial appraised values. However, the merger agreement provides that the final appraised value of the termination fee may not exceed $35 million. Each of Stanger and Houlihan Lokey has completed an appraisal of the value of the termination fee. Stanger arrived at an appraised value of the termination fee of $18 million. Houlihan Lokey arrived at an appraised value of the termination fee of $45 million. Because the two appraised values differ by more than 20% of the higher of the two values, a third independent appraiser, Eastdil Realty, L.L.C., has been selected by Stanger and Houlihan Lokey. The appraised value arrived at by Eastdil will be the appraised
11 value of the termination fee unless: . the Eastdil appraised value is less than $18 million (in which case the appraised value of the termination fee will be $18 million), or . the Eastdil appraised value is more than $35 million (in which case the appraised value of the termination fee will be $35 million). If the appraised value of the termination fee is less than $35 million, in addition to the $11.50 per share cash payment in the proposed merger, you will receive an amount of cash for each of your shares equal to the following per share amount: . the difference between $35 million and the appraised value, divided by . the sum of the number of shares held by ICCMIC stockholders other than ICII and its subsidiaries and the number of shares subject to ICCMIC stock options that have an exercise price of less than $11.50 per share. The following table illustrates how differences in the appraised value of the management agreement termination fee would affect the per share consideration to be received by ICCMIC stockholders. For this purpose, assume that there are 25,930,000 shares of ICCMIC common stock outstanding, excluding 2,570,000 shares held by ICII and its subsidiaries (as there were on September 30, 1999). Also assume that there are 621,750 shares issuable on exercise of outstanding ICCMIC stock options with an exercise price below $11.50 per share (as there were on September 30, 1999). Appraised Value of the Additional Aggregate Termination Fee Amount Per Share Payment Per Share Consideration -------------------------------------------------------------------- (in millions) $18 $0.64 $12.14 $25 $0.38 $11.88 $30 $0.19 $11.69 $35 $0.00 $11.50 $45 $0.00 $11.50 The amount in the middle column is the additional amount, if any, per share (above $11.50) you would receive in the
12 merger if the management agreement termination amount were appraised at varying amounts stated in the left column. The amount in the right column is the total you would receive in the merger for each of your shares of ICCMIC common stock if the termination amount is appraised at varying amounts stated in the left column. The "Additional Per Share Payment" amount is calculated by dividing . the difference between $35 million and the hypothetical appraised value (capped at $35 million) of the termination fee amount (varying values of the amount are listed above in the left column), by . 26,551,750, which is the sum assumed above of the outstanding shares (not including shares held by ICII and its subsidiaries) and the shares subject to ICCMIC options (with exercise prices below $11.50). Of course, these are only hypothetical examples, and the actual increase, if any, will depend on the results of the appraisal by Eastdil (see "Appendix C-Summary of Appraisals of Robert A. Stanger & Co., Inc., Houlihan Lokey Howard & Zukin Financial Advisors, Inc. and Eastdil Realty, L.L.C.") and the number of relevant outstanding shares of ICCMIC common stock and ICCMIC stock options at the time of the proposed merger. The merger agreement does not entitle ICII or the manager to any cash payment as a part of the merger transaction. The appraisal of the termination fee was undertaken to determine the amount, if any, by which to increase the $11.50 per share merger consideration and the amount that a third party would be required to pay in an alternative transaction or that ICCMIC would be required to pay if the merger agreement is terminated without an alternative transaction. The appraisal process will also determine the amount of the termination fee payable if ICCMIC terminates or fails to renew the management agreement. However, the parties have agreed that ICCMIC will not be required to pay the termination fee unless the merger agreement is terminated, in which event the termination fee will be due and payable at that time. Treatment of Outstanding ICCMIC As part of the proposed merger, all outstanding ICCMIC stock Stock Options (pages 68 through options will become immediately exercisable, and will either 70) be converted into immediately exercisable options to purchase ICII common stock or, at the election of the option holder, exchanged for cash.
13 . Conversion into New ICII Stock Options. The exercise price of the new ICII stock options and the number of shares of ICII stock to be received on exercise of the new ICII stock options will be set so that the fair value of ICCMIC stock options held before the proposed merger will equal the fair value of the ICII stock options into which the ICCMIC stock options will be converted. Alternatively, incentive stock options will be converted into new ICII options under the formula of the Internal Revenue Code for incentive stock options if the holder of such incentive stock options fails to waive this method. . Exchange for Cash. Alternatively, holders of ICCMIC stock options may elect to exchange their options for cash instead of converting them into new ICII stock options. For ICCMIC stock options having an exercise price that is less than the cash per share merger consideration to be paid in the proposed merger, the cash payment will be the greater of the fair value of the ICCMIC stock options and the amount by which the per share merger consideration exceeds the exercise price of the stock options. For ICCMIC stock options having an exercise price that is more than the cash per share merger consideration, the cash-out price will be $1.10 per share, which is the amount ICCMIC and ICII have agreed is the fair value of those stock options. Prior to the approval of the merger agreement and the proposed merger by ICCMIC's board of directors, H. Wayne Snavely, Chairman of the ICCMIC board, and Kevin E. Villani, Vice Chairman of the ICCMIC board, each agreed to the cancellation of the ICCMIC stock options held by him. ICII has informed ICCMIC that, following the completion of the proposed merger, ICII will reimburse Messrs. Snavely and Villani for their cancelled stock options according to the option pricing formula, described above, provided in the merger agreement for exchange of ICCMIC stock options. Solicitation of Alternative During the 60-day period that expired at 12:01 a.m. on Transactions (page 75) October 13, 1999, ICCMIC was permitted by the merger
14 agreement to seek an alternative transaction that is more favorable to ICCMIC stockholders than the proposed merger. Both during and after this period, ICCMIC has the right to terminate the merger agreement in favor of an alternative transaction if, after consulting with an independent financial advisor, the ICCMIC board decides in good faith that the alternative transaction is more favorable than the ICII merger proposal and is reasonably capable of being consummated. In that case, ICCMIC would have to reimburse ICII for certain of its actual out-of-pocket transaction expenses up to a maximum of $2 million, as described below under "- Expense Reimbursement." With the assistance of its financial advisor, Prudential Securities, the special committee sought alternative transactions during the 60-day market check period that expired on October 13, 1999. The special committee, with advice from Prudential Securities, has determined that none of the proposals received during the solicitation period constituted a superior proposal. See "Special Factors, Background, Purpose and Effects of the Proposed Merger - 60-Day Market Check." Beginning October 13, 1999, ICCMIC may not solicit alternative transactions, and ICCMIC may not engage in discussions with third parties concerning an alternative transaction unless, after consulting with independent financial and legal advisors, the ICCMIC board decides in good faith that the alternative transaction is a superior proposal. Standstill; Qualifying The Merger Agreement provides that ICII, alone or with Alternative Transaction (pages others, may not seek to acquire ICCMIC or any of its 76 and 77) securities or assets other than through the ICII merger proposal or a "qualifying alternative transaction." ICII will be permitted, alone or with others, to propose a qualifying alternative transaction if the merger agreement is terminated by ICII after ICCMIC accepts a superior alternative transaction and the consideration to be paid in the superior alternative transaction does not consist entirely of cash or cash equivalent securities or instruments. A "qualifying alternative transaction" would be an increased all cash offer made by ICII and having terms and conditions that, in general, are no less favorable than the terms and conditions of the merger agreement, to the extent that the merger agreement's terms and conditions are applicable to the qualifying alternative transaction. ICCMIC's stockholders rights plan and charter substantially restrict ICII's ability to consummate a qualifying alternative transaction unless the ICCMIC board ultimately consents to such a transaction.
15 Opinion of Financial Advisor In deciding to recommend that the full ICCMIC board approve (pages 48 through 54) and adopt the merger agreement and the proposed merger, the special committee considered, among other factors, the opinion of its financial advisor, Prudential Securities, that the consideration to be received in the proposed merger by ICCMIC's stockholders, other than ICII and certain of its affiliates, is fair to such ICCMIC stockholders from a financial point of view. We have attached the opinion of Prudential Securities as Appendix B to this proxy statement. Please read it carefully. See "Special Factors: Background, Purpose and Effects of the Proposed Merger - Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger," for a description of the factors considered by the special committee. Completion and Termination of the Merger Agreement (pages 81 through 83) Conditions to Completion of the We will complete the proposed merger only if a number of Proposed Merger (pages 81 and conditions are satisfied or waived, including: 82) . ICCMIC stockholders approve the merger agreement and the proposed merger by the votes required under the merger agreement; . No law or court order prohibits the proposed merger; and . The representations and warranties made by each party to the merger agreement continue to be true and correct. Termination of the Merger ICCMIC and ICII can jointly agree to terminate the merger Agreement (pages 82 and 83) agreement, before or after stockholder approval, without completing the proposed merger. In addition, either company may terminate the merger agreement if: . We do not complete the proposed merger by January 31, 2000; . The ICCMIC stockholders fail to approve the
16 merger agreement and the proposed merger by the required votes; or . a governmental authority permanently prohibits the proposed merger. ICII also may terminate the merger agreement if: . ICCMIC's board no longer recommends that ICCMIC stockholders vote to approve the merger agreement and the proposed merger; . ICCMIC's board approves an alternative transaction; or . ICCMIC's representations and warranties in the merger agreement are untrue with respect to a material matter, or ICCMIC fails in a material respect to comply with its obligations under the merger agreement. ICCMIC also may terminate the merger agreement if: . ICCMIC's board approves a superior alternative transaction; or . ICII's representations and warranties in the merger agreement are untrue with respect to a material matter, or ICII fails in a material respect to comply with its obligations under the merger agreement. Accounting Treatment (pages 66 As required by generally accepted accounting principles, ICII and 67) will use the purchase method of accounting to account for the proposed merger, which means that ICII will reflect ICCMIC's assets and liabilities on its books based on their estimated fair value when the proposed merger is completed. Potential Conflicts of Interest Directors and officers of ICCMIC may have interests in the of ICCMIC's Directors and proposed merger that differ from, or are in addition to, your Officers (pages 67 through 72) interests as a stockholder, including the following: . Mr. Snavely, a director and executive officer
17 of ICII, and Mr. Villani, a director and former executive officer of ICII (Mr. Villani resigned as an executive officer of ICII as of September 30, 1999), are directors of ICCMIC and, as a result, have fiduciary duties to the stockholders of both companies. In addition, until October 22, 1999, the date of the anticipated expiration of the management agreement, Mark S. Karlan (President, Chief Executive Officer and a director of ICCMIC), Michael Meltzer (Chief Financial Officer and Treasurer of ICCMIC) and Norbert M. Seifert (General Counsel, Senior Vice President and Secretary of ICCMIC) hold the same executive officer positions at ICCMIC's manager, Imperial Credit Commercial Asset Management Corp., which is a wholly-owned subsidiary of ICII. Therefore, each of them may be confronted by issues, including the proposed merger, that present them with conflicts of interest. Because of their potentially conflicting fiduciary duties, and because their economic interests in the proposed merger may differ from your interests as a stockholder, the ICCMIC board of directors empowered the special committee to represent the interests of ICCMIC's stockholders in the evaluation and negotiation of the proposed merger. . Each of the directors and executive officers of ICCMIC, other than Messrs. Snavely and Villani, owns outstanding options to purchase ICCMIC common stock, some of which have exercise prices that exceed the per share merger price, and some of which are not yet exercisable. Upon approval of the merger agreement and the proposed merger by ICCMIC stockholders, all of these stock options will become immediately exercisable. See "-Treatment of Outstanding ICCMIC Stock Options." . Mr. Karlan entered into an employment agreement with the manager at the time of ICCMIC's initial public offering that, among other things, gives him the right to receive 15% of the economic value of the manager upon the occurrence of certain events. Mr.
18 Karlan and the manager have agreed that upon either the payment to the manager of a termination fee pursuant to a termination or buyout of the management agreement, or upon completion of the proposed merger, ICII will pay Mr. Karlan an amount equal to 15% of the appraised value of the termination fee (provided that such termination fee shall not exceed $35 million) reduced by certain appraisal and other costs. . Some of the directors and officers of ICCMIC, including Messrs. Karlan, Meltzer and Seifert, are also officers of the manager and, as such, participate in an "employment retention plan" that covers certain employees of ICII and the manager. The retention plan provides significant benefits to a participant if his or her employment with ICII, the manager or ICCMIC is terminated without cause or if he or she resigns for good reason following a change of control of any of those companies, or if his or her employment is terminated prior to a change in control at the request or suggestion of a person acquiring one of those companies. A supplemental letter agreement between Mr. Karlan and the manager states that completion of the proposed merger will constitute a change of control of ICCMIC for purposes of the retention plan. The employment of each of the manager's employees is expected to terminate as of October 22, 1999, the date of the anticipated expiration of the management agreement. In that event, those directors and officers of ICCMIC who participate in the retention plan would receive severance and/or other termination benefits upon the completion of the proposed merger. See "The Companies - Imperial Credit Commercial Mortgage Investment Corp.; Recent Developments." Mr. Karlan's benefits under the retention plan will be offset by the amount of any payment of similar severance benefits he receives under his employment agreement. . In the merger agreement, ICII has agreed to honor existing rights of indemnification and exculpation currently provided to ICCMIC's
19 directors and officers, to indemnify them against liability for acts occurring prior to the proposed merger and to maintain directors' and officers' liability insurance covering such acts for a period of six years following the proposed merger. See "Interests of Certain Persons in the Proposed Merger" and "Relationships and Transactions Between ICII, ICCMIC and Affiliates." Financing; Source of Funds (page ICII estimates that the total amount of funds required to pay 64) the merger consideration to the ICCMIC stockholders other than ICII and its subsidiaries will be approximately $300 million (assuming no adjustment following appraisal of the termination fee). In addition, ICII and ICCMIC estimate that there will be approximately $[____] in filing, legal, accounting and other fees and expenses payable by ICII and ICCMIC as described in more detail below under "Fees and Expenses." ICII has advised ICCMIC that: . ICII will obtain those funds from a combination of (i) cash and liquid assets held by ICII and its subsidiaries, (ii) cash and cash equivalents held by ICCMIC, excluding amounts that ICCMIC expects to pay as dividends in accordance with the merger agreement (ICCMIC had approximately $120 million of cash and cash equivalents as of September 30, 1999), and (iii) anticipated proceeds from sales of ICCMIC assets at or before the closing of the merger; . To the extent, if any, that additional cash may be required to complete the merger, ICII will obtain those funds from borrowings or other financing arrangements with third parties; . While ICII has had preliminary discussions regarding those financing arrangements, it currently believes that no third party financing arrangements will be necessary and it has not entered into any specific agreements or arrangements for that purpose. The merger is not subject to a financing contingency and ICII
20 will be required, subject to satisfaction of all of the conditions to its obligations under the merger agreement, to complete the merger whether or not ICII enters into any third party financing arrangements or is able to arrange for sale of ICCMIC assets at or following the closing of the merger. Market Price of ICCMIC Shares ICCMIC's common stock is traded on the Nasdaq Stock Market (page 87) under the symbol "ICMI." On May 12, 1999, the day before ICII publicly announced its initial $11.00 per share merger proposal to the ICCMIC board, the closing price of ICCMIC common stock on the Nasdaq Stock Market was $9.875. On July 22, 1999, the last trading day before we announced the signing of the merger agreement, the closing price of ICCMIC common stock on the Nasdaq Stock Market was $10.875. On _________, 1999, the most recent practicable trading day on the Nasdaq Stock Market prior to the mailing of this proxy statement, the closing price of ICCMIC common stock on the Nasdaq Stock Market was _________. The market price of shares of ICCMIC common stock fluctuates. These fluctuations may affect your determination as to the attractiveness of the proposed merger. You are urged to obtain current market quotations for ICCMIC common stock prior to making any decision with respect to the proposed merger.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS We have made statements in this proxy statement and in the documents that are incorporated by reference in this proxy statement that constitute "forward-looking statements." These statements relate, among other things, to information or assumptions about earnings per share, capital and other expenditures, dividends, financing plans, capital structure, cash flows, pending legal proceedings and claims, future economic performance, operating income improvements, cost savings and management's plans, goals and objectives for future operations. These forward-looking statements generally may be identified by their reference to a future period or periods or by the use of forward- looking terminology such as "may," "will," "intend," "should," "expect," "anticipate," "believe," "estimate," "continue," the negatives of those terms or similar expressions. You should understand that forward-looking statements are necessarily estimates reflecting the judgment of management of ICCMIC, not guarantees of future performance. Forward-looking statements are subject to a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such statements and that are difficult to predict and beyond ICCMIC's control. Important factors that could cause actual results to differ materially from estimates or projections contained in forward-looking statements include, among others, the following: . changes in national, regional or local economic environments; 21 . the highly competitive nature of the real estate acquisition, mortgage, leasing and securitization markets, including products and pricing; . the uncertainty concerning the future attractiveness of the real estate acquisition, mortgage, leasing and securitization markets generally; . the appraised value of the termination fee payable under the management agreement; . whether and on what terms ICCMIC will receive a proposal for an alternative transaction that is, or is believed by ICCMIC's board to be, more attractive than the ICII merger proposal; . government fiscal and monetary policies; . changes in prevailing interest rates; . the course of negotiations, if any, between ICCMIC and potential alternative bidders; . the fulfillment of contractual conditions by the parties to the merger agreement; . factors inherent in the valuation and pricing of interests in commercial mortgage-backed securities; and . other factors generally understood to affect the real estate acquisition, mortgage and leasing markets and security investments. These factors and other factors that could cause actual results to differ materially from estimates and projections contained in forward-looking statements are described in ICCMIC's periodic reports filed with the Securities and Exchange Commission (the "SEC") on Forms 10-K, 10-Q and 8-K, and any amendments we have filed with respect to these periodic reports and any other filings we have made with the SEC, all of which we have incorporated by reference in this proxy statement. The information set forth in "Special Factors: Background, Purpose and Effects of the Proposed Merger - Opinion of Financial Advisor to the Special Committee", "- Financial Projections Relating to ICCMIC" and "Appendix C - Summary of Appraisals of Robert A. Stanger & Co., Inc., Houlihan Lokey Howard & Zukin Financial Advisors, Inc. and Eastdil Realty, L.L.C." also includes forward-looking statements concerning projected financial information. ICCMIC does not, as a matter of course, publicly disclose internal budgets, plans, estimates, forecasts or projections as to future revenues, earnings or other financial information. In addition, ICCMIC has had only a relatively short operating history and therefore does not have a substantial history to measure the accuracy of its internal budgets, plans, estimates, forecasts and projections. Such information has been included or described in this proxy statement for the limited purpose of giving ICCMIC stockholders information concerning financial projections that (i) in the case of those financial projections described in "Special Factors: Background, Purpose and Effects of the Proposed Merger - Financial Projections Relating to ICCMIC," reflect information contained in projections prepared by Prudential Securities, based substantially on information and assumptions provided by ICCMIC's management, which were presented to ICCMIC's special committee in its consideration of the proposed merger, and (ii) in the case of those financial projections described in Appendix C, were prepared by the manager and provided to each of Robert A. Stanger & Co., Inc. ("Stanger"), Houlihan Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan Lokey") and Eastdil Realty, L.L.C. ("Eastdil") in connection with their appraisals of the amount payable in connection with a termination or non-renewal of the management agreement. All such financial projections were prepared for internal use and not with a view to publication or compliance with the published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants regarding projections and forecasts. All such information was 22 based on estimates and assumptions concerning ICCMIC's future business prospects, revenues and operations. While they are presented with numerical specificity, the estimates and assumptions underlying the projections involved judgments with respect to, among other things, future economic, competitive and financial market conditions and future business decisions. These estimates and assumptions may not be realized and are, by their nature, subject to significant business, economic and competitive uncertainties including those set forth above. As a result, the matters to which these estimates and assumptions relate are difficult to predict and many of the relevant factors are beyond ICCMIC's control. We do not guarantee that the projections will be accurate. Actual results may be significantly higher or lower than those shown. Also, ICCMIC's independent auditors have not examined or performed any procedures on this information. In light of these uncertainties, you should not regard these projections as a representation by ICCMIC or any other person that the projected or indicated results will be achieved. We caution you not to place undue reliance on this information. Except to the extent required under the federal securities laws, ICCMIC does not intend to make publicly available any update or other revisions to the projections to reflect the occurrence of unanticipated events or circumstances existing after the date of preparation. In connection with your review of the financial projections referred to above, you should read the information contained in ICCMIC's Annual Report on Form 10-K, as amended, for the year ended December 31, 1998 and the other information included or incorporated by reference in this proxy statement. All subsequent written and oral forward-looking statements attributable to ICCMIC or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required under the federal securities laws, ICCMIC does not intend to make publicly available any updates or revisions to forward-looking statements to reflect circumstances arising after the date of the preparation of such forward-looking statements. THE COMPANIES Imperial Credit Commercial Mortgage Investment Corp. ICCMIC was organized as a Maryland corporation on July 31, 1997. ICCMIC commenced operations on October 22, 1997, the date of completion of its initial public offering. ICCMIC is taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). Imperial Credit Commercial Asset Management Corp. (the "manager"), which is a wholly-owned subsidiary of ICII, manages the day-to-day operations of ICCMIC, subject to the supervision of ICCMIC's board of directors. ICCMIC's executive offices are located at 11601 Wilshire Boulevard, Suite 2080, Los Angeles, California 90025, and its telephone number is (310) 231-1280. In October 1997, the SEC declared effective registration statements on Form S-11 relating to ICCMIC's initial public offering of 34,500,000 shares of common stock at a price of $15.00 per share. As part of ICCMIC's initial public offering, 2,970,000 shares of common stock were sold to ICII and approximately 500,000 shares of common stock were sold to directors, officers and employees of ICCMIC, the manager and ICII and members of their immediate families, in each case net of the underwriting discount. On October 22, 1997, ICCMIC completed the offering of the 34,500,000 shares, including 4,500,000 shares to cover over- allotments, with gross proceeds of $513.9 million and net proceeds to ICCMIC of $479.3 million. During 1998, ICCMIC repurchased six million shares of its common stock at an average price of $9.39 per share, pursuant to previous authorizations of its board of directors. The highest and lowest prices at which these repurchases were made were $10.625 and $6.923, respectively. 23 ICCMIC invests primarily in real estate related assets with a view to maximizing both income for distribution to stockholders and stockholder value, consistent with levels of risk that it perceives as acceptable. ICCMIC determines whether risk levels are acceptable in making investment decisions through asset and collateral analyses and by evaluating investment risks and potential rewards. Pending investment of its funds in real estate related assets, ICCMIC invests its funds in readily marketable securities or interest bearing deposit accounts, consistent in each case with maintaining its status as a REIT. ICCMIC's real estate related assets primarily consist of multifamily and commercial mortgage loans, commercial real property, and interests in multifamily and commercial mortgage-backed securities ("CMBS"). A majority of ICCMIC's mortgage loans and all of its CMBS interests were acquired from ICII and two of ICII's affiliates, SPB and Franchise Mortgage Acceptance Company ("FMAC"). ICCMIC operates in four principal business segments for financial reporting purposes. These four business segments are: . small balance mortgage loan pools acquired, . individual large balance mortgage loans originated or acquired, . real property, and . securities available-for-sale. Further business segment information is presented in note 13 to ICCMIC's consolidated financial statements, included in ICCMIC's Annual Report on Form 10-K/A for the year ended December 31, 1998, which is incorporated by reference in this proxy statement. See "Where You Can Find More Information." In the past, ICCMIC has acquired investments from ICII, SPB, which is one of ICII's wholly-owned subsidiaries, and FMAC, a 38%-owned affiliate of ICII, as well as from unrelated third parties. Recent Developments. ICCMIC's management agreement with the manager is expected to expire on October 22, 1999. ICCMIC's board of directors intends to hire approximately 16 employees of the manager on a full-time salaried basis to manage ICCMIC's day-to-day operations. ICCMIC's board of directors believes that this internalization of management operations will result in significant cost savings to ICCMIC. Imperial Credit Industries, Inc. ICII is a diversified commercial lending, financial services and investment holding company with headquarters in Torrance, California. ICII's principal business activities are primarily conducted through its wholly and majority owned subsidiaries including SPB, Imperial Business Credit Inc. ("IBC"), Imperial Credit Commercial Asset Management Corp., Imperial Credit Lender Services, Inc. and Imperial Credit Asset Management, Inc. ICII also has an approximate 38% equity interest in FMAC, which was a former ICII consolidated 24 subsidiary. ICII was incorporated in 1986, and had consolidated assets of $2.0 billion as of June 30, 1999. Its principal executive offices are located at 23550 Hawthorne Boulevard, Building 1, Suite 210, Torrance, California 90505, and its telephone number is (310) 791-8080. ICII's core businesses originate loans and leases funded primarily by FDIC insured deposits and its business strategy currently emphasizes: . holding the majority of the loans and leases that it originates for investment, except for certain multifamily and commercial real estate loans originated by SPB and leases originated by IBC for sale; . investing in and managing businesses in high margin niche segments of the financial services industry; . maintaining conservative, disciplined underwriting and credit risk management; . originating loans and leases on a wholesale basis, where possible; . managing and advising investment funds; . providing investment banking and broker/dealer services to middle market companies and private individuals; and . maintaining business and financial flexibility to take advantage of changing market conditions with respect to specific financial services businesses. ICII has diversified its business lines to include investment products and asset management services in order to reduce its dependence on residential and commercial mortgage lending. It now provides financial services products in the following sectors: business lending, commercial mortgage lending, asset management services and investment banking and brokerage services. ICCMIC Acquisition Corp. ICCMIC Acquisition Corp. is a Maryland corporation formed on June 24, 1999 by ICII solely for the purpose of accomplishing the proposed merger. ICCMIC Acquisition Corp. has no significant assets or liabilities and its offices are located at the principal executive offices of ICII. INFORMATION CONCERNING THE SPECIAL MEETING Time, Date, Place and Purpose of the Special Meeting We are sending you this proxy statement in connection with the solicitation of proxies by the board of directors for use at the special meeting of stockholders of ICCMIC that has been called to vote on the merger agreement and the proposed merger described in this proxy statement, including any 25 meeting resulting from adjournments or postponements of the special meeting. The merger agreement is attached as Appendix A to this proxy statement. We will hold the special meeting on ____________, 1999 at __:00 a.m. local time, at the _______________, Los Angeles, California _______. Record Date; Outstanding Common Stock Entitled To Vote; Quorum The record date for the special meeting has been fixed as the close of business on __________, 1999. Only holders of ICCMIC common stock of record on the record date are entitled to notice of and to vote at the special meeting. You will have one vote on the proposal to approve the merger agreement and the merger for each share of ICCMIC common stock that you own on that date. On the record date, _____ million shares of ICCMIC common stock were outstanding and were held by _____ record holders on behalf of approximately _________ beneficial holders. The presence in person or by proxy of a majority of the shares of common stock outstanding will constitute a quorum for the transaction of business at the special meeting. If a quorum is not present at the special meeting, or a quorum is present but additional time is desired to solicit proxies, we expect that the meeting will be adjourned or postponed. Votes Required Under the Maryland General Corporation Law and ICCMIC's charter, approval of the merger agreement and the proposed merger requires the affirmative vote of the holders of a majority of the total number of outstanding shares of ICCMIC common stock. The merger agreement also requires the approval of the holders of a majority of the total number of shares of ICCMIC common stock entitled to vote at the special meeting, that are not held by ICII or by Messrs. Snavely and Villani, who are affiliates of ICII. As of the record date, ICII and these other persons beneficially owned an aggregate of 2,690,053 shares of ICCMIC common stock (approximately 9.4% of the outstanding common stock), which they are required under the merger agreement to vote for approval of the merger agreement and the proposed merger. Failure to return an executed proxy card or to vote by telephone, via the Internet or in person at the special meeting, broker non-votes, which we describe below under "- Voting of Proxies," or abstentions will constitute, in effect, a vote against approval of the merger agreement and the proposed merger. Voting of Proxies Submitting Proxies. ICCMIC stockholders may vote their shares by attending the special meeting and voting their shares in person, at the meeting, by voting by telephone or via the Internet, or by completing, signing and mailing the enclosed proxy card in the enclosed, postage prepaid envelope. All proxy cards in the enclosed form that are properly executed and returned to the transfer agent, U.S. Stock Transfer Corporation, prior to the special meeting, and not properly revoked, will be voted, at the special meeting or any meeting resulting from an adjournment or postponement of the special meeting, in accordance with the instructions contained on the proxy card. If a proxy card is signed by a stockholder and returned without instructions, the shares represented by the proxy will be voted FOR approval of the merger agreement and the proposed merger and, as appropriate, FOR adjournment for the purpose of soliciting additional proxies. 26 ICCMIC stockholders whose shares are held in the name of a broker, bank or other record holder must either direct the record holder of their shares as to how to vote their shares or obtain a proxy from the record holder to vote at the special meeting. Under applicable rules of the National Association of Securities Dealers, brokers who hold shares in street name for customers who are the beneficial owners of those shares are prohibited from giving a proxy to vote those customers' shares with respect to the proposal to be voted on at the special meeting in the absence of specific instructions from the customer. A broker's failure to vote because of the absence of customer instructions is commonly referred to as a broker non-vote. Shares of ICCMIC common stock represented at the special meeting for which proxies have been received, but with respect to which holders of shares have abstained from voting, will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum. For ICCMIC stockholders, an abstention or a broker non-vote will have the same effect as a vote against approval of the merger agreement and the proposed merger. Maryland law and ICCMIC's bylaws do not permit any matters to be presented at the special meeting other than those described in this proxy statement and procedural matters relating to the meeting. Stockholders should not send in any stock certificates with their proxy cards. A letter of transmittal with instructions for the surrender of certificates representing ICCMIC common stock will be mailed to ICCMIC stockholders shortly after the proposed merger is completed. See "The Merger Agreement - Payment Procedures." Revoking Proxies. ICCMIC stockholders may revoke their proxies at any time prior to the time their proxies are voted at the special meeting by: . giving written notice to ICCMIC's transfer agent, as provided below; . mailing a signed, later dated proxy that is received by ICCMIC's transfer agent before the taking of the vote at the special meeting; . telephone or Internet proxy, using the instructions included on the enclosed proxy card; or . voting in person at the special meeting. Attendance at the special meeting will not in and of itself constitute a revocation of a proxy previously given. Any written notice of revocation of a proxy must be sent so as to be delivered before the taking of the vote at the special meeting to the following address: U.S. Stock Transfer Corporation 1745 Gardena Avenue Glendale, California 91204-2991 Attention: Mr. Richard Brown ICCMIC stockholders who require assistance in changing or revoking a proxy should contact D.F. King & Co., Inc. ("D.F. King") at the address and phone number provided in this proxy statement under the heading "Who Can Help Answer Your Questions?" 27 Proxy Solicitation The expense of preparing, printing and mailing this proxy statement and the proxies solicited hereby will be borne by ICCMIC. In addition to the use of the mails, proxies may be solicited by directors, officers and regular employees of ICCMIC, without additional compensation, by personal interviews, written communications, telephone, telegraph or facsimile transmission or via the Internet or other means of communication. ICCMIC also will request brokerage firms, nominees, custodians and fiduciaries to forward proxy materials to beneficial owners and will, upon request, reimburse those record holders for their costs of forwarding the materials at customary rates. ICCMIC has retained D.F. King to assist in the solicitation of proxies. D.F. King will receive a fee of $5,000 as compensation for its services and will receive reimbursement of its related out-of-pocket expenses, including reimbursement for completed phone calls to stockholders. ICCMIC has agreed to indemnify D.F. King against certain liabilities arising out of the engagement. 28 SPECIAL FACTORS: BACKGROUND, PURPOSE AND EFFECTS OF THE PROPOSED MERGER Background of the Proposed Merger The Initial Public Offering and the Ensuing Market Changes. ICCMIC completed its initial public offering on October 22, 1997 at an offering price of $15.00 per share. It was intended that the proceeds of the offering would be used to invest primarily in performing multifamily and commercial mortgage loans, real estate and interests in multifamily and commercial mortgage-backed securities. The loans and mortgage-backed securities were to be acquired from ICII, including its SPB subsidiary and unrelated parties. ICCMIC fully invested the proceeds from its initial public offering by mid-1998. In order to permit further investment, ICCMIC obtained a $500 million warehouse line of credit from Morgan Guaranty Trust Company of New York in March 1998. During the 12 month period following ICCMIC's initial public offering, ICCMIC's stock price, along with those of most other mortgage REITs, declined significantly. ICCMIC's stock price dropped from its high of $19.00 per share shortly after the completion of its initial public offering to prices substantially below its per share book value, reaching a low closing price of $6.875 per share on October 8, 1998. The Stock Repurchase Plans. In response to the low market price of ICCMIC common stock, ICCMIC's board began discussing a potential stock repurchase plan at its June 4, 1998 meeting. At a special meeting of the board held on July 29, 1998, ICCMIC's board approved the repurchase of up to 3,000,000 shares of ICCMIC's common stock. The board recognized that the repurchase would decrease the amount of capital available to ICCMIC for investments but determined that, given market conditions and the decline in net yields on ICCMIC's investments, the stock repurchase program, on balance, would be in the best interests of ICCMIC's stockholders. In approving the repurchase program, ICCMIC intended to provide liquidity to those of its stockholders who wanted to sell their stock, while at the same time increasing ICCMIC's future per share net income, funds from operations and dividends. These stock repurchases were completed on August 26, 1998, with 3,000,000 shares being repurchased at prices ranging from a high of $10.625 per share to a low of $9.125 per share, with an average repurchase price of $10.20 per share. Following these stock repurchases, ICCMIC's stock price continued to decline, dipping to a closing price of $9.00 per share in August of 1998. On August 28, 1998, in response to this further decline, the board, after consulting with its investment banker at the time, Friedman, Billings, Ramsey & Co., Inc. ("Friedman Billings"), authorized an additional stock repurchase program of 3,000,000 shares at prices not to exceed $11.00 per share. This second stock repurchase program was completed on October 19, 1998, with an additional 3,000,000 shares being repurchased at prices ranging from a high of $8.875 per share to a low of $6.923 per share, with an average repurchase price of $8.58 per share. The Wilshire Proposal. By letter dated September 11, 1998, Wilshire Real Estate Investment Trust Inc., a REIT whose securities are traded on the Nasdaq Stock Market, made an unsolicited offer to acquire ICCMIC. The offer stated that the exchange ratio for ICCMIC's stock would be based upon the respective net asset values of each of ICCMIC and Wilshire and Wilshire's stock price at that time. ICCMIC's stockholders would have had the right to receive up to 20% of their consideration in cash. According to Wilshire's September 17, 1998 press release, Wilshire's offer valued ICCMIC's stock at $11.33 per share. 29 On September 18, 1998, ICCMIC's board met to consider the Wilshire offer, as well as certain other matters. At the meeting, Friedman Billings advised the board that accepting the Wilshire offer would not be in the best interests of ICCMIC's stockholders. Friedman Billings also advised the board that, given the Wilshire offer and the prevailing stock market conditions that valued ICCMIC below its net asset value, the board should consider appropriate protective measures as well as an expansion of its stock repurchase plan. After extensive discussion, the board rejected the Wilshire offer based on a number of factors, including: . the board's belief that the Wilshire offer was inadequate and did not reflect the inherent value of ICCMIC and its portfolio of assets; . the advice of Friedman Billings that the Wilshire offer was inadequate and not in the best interests of ICCMIC and its stockholders; . the belief that continued pursuit of ICCMIC's business plan would produce greater short-term and long-term value for ICCMIC's stockholders than would the Wilshire proposal; . the belief that the substantial discount to the book value of ICCMIC's assets at which ICCMIC's common stock then traded would decrease significantly as then-current dislocations in the equity and mortgage backed securities markets were resolved; . the belief that the highly leveraged nature and risk profile of the assets held by Wilshire would expose stockholders of an entity holding such assets to significant risks; . Wilshire's apparent lack of liquidity reflected on its balance sheet; . the fact that Wilshire's management was not exclusively dedicated to Wilshire; and . the fact that Wilshire's stock was very thinly traded. Also at the September 18, 1998 meeting, the board adopted a stockholders rights plan. The rights plan was designed to enable ICCMIC's stockholders to realize the long-term value of their investment in ICCMIC by encouraging potential acquirers to negotiate with the board prior to attempting a takeover. The board also authorized the repurchase of an additional 6,000,000 shares of ICCMIC common stock, bringing the total authorized repurchases to 12 million shares. On September 21, 1998, ICCMIC publicly announced the rejection of the Wilshire offer, the additional 6,000,000 share repurchase authorization and the adoption of the stockholders rights plan. Additional Proposals. In the next several days, ICCMIC was contacted through Mr. Snavely by a number of parties who indicated an interest in pursuing a merger transaction. ICCMIC also received a 30 new proposal from Wilshire (which included a proposal to purchase ICCMIC's management agreement with its manager for $60 million and which refined the terms of the exchange ratio). At a September 24, 1998 special meeting of ICCMIC's board, the board discussed the additional indications of interest that had been received and Wilshire's revised proposal, as well as ICCMIC's strategy for responding to them. The board determined that the revised Wilshire proposal was inadequate for the same reasons expressed with respect to Wilshire's earlier proposal and because ICCMIC's stockholders would bear a significant risk of a potential decline in Wilshire's stock price. The board also determined to suspend ICCMIC's stock repurchase plan temporarily because of the discussions regarding potential transactions. At the September 24, 1998 meeting, the board also discussed its procedure for considering future proposals. First, the board appointed Mr. Snavely and one of the four independent directors, Joseph A. Jaconi, Jr., to act as a strategic planning committee to receive and report on any future proposals that ICCMIC might receive. Second, in view of the fact that Friedman Billings had significant investment banking relationships with ICII, the board charged the strategic planning committee with developing suggestions regarding the retention of an independent investment banker to advise ICCMIC on its strategic options. During November 1998, ICCMIC received a number of written proposals from third parties. At a special meeting of ICCMIC's board on November 24, 1998, Mr. Karlan reported that he and Messrs. Jaconi, Snavely and Villani had met with four such third parties, and intended to meet with others, subject to the review of the board. The board extensively discussed and reviewed each of the following proposals: . a common stock for common stock merger with a private equity REIT (the "Private Equity REIT"), with the exchange ratio based on the respective net asset values of ICCMIC and the Private Equity REIT, and which provided that the surviving company would internalize management by acquiring and terminating the existing management agreement and the manager's stock options in ICCMIC for a $50 million cash payment to the manager; . a common stock for preferred stock merger with a public equity REIT (the "Public Equity REIT"), with the value of the preferred stock based on ICCMIC's net asset value, and which provided for either a $52 million cash payment to the manager for termination of the management agreement, subject to the review of the independent members of the ICCMIC board, or the appraised value of the manager's termination fee under the management agreement (which the Public Equity REIT's proposal stated could justify a $52 million value); . a common stock for common stock merger with a public commercial mortgage REIT (the "Commercial Mortgage REIT"), with the exchange ratio based on the respective share prices of ICCMIC and the Commercial Mortgage REIT, which provided to the manager the option of either payments of 30% of the fees earned by the Commercial Mortgage REIT's external manager, up to a maximum of $5 million per year or the Commercial Mortgage REIT's lump-sum payment to the manager equal to the 15% discounted present value of this income stream; and 31 . a common stock for common stock merger with a public financial services REIT (the "Financial Services REIT"), with the exchange ratio based on the market price of the common stock of the Financial Services REIT relative to ICCMIC's book value per share, which provided for a $25 million cash payment to the manager for the acquisition and termination by the Financial Services REIT's advisor of the management agreement, and a $25 million cash payment to the manager for the acquisition by the Financial Services REIT of the manager's stock options in ICCMIC and other consideration, which included a noncompetition agreement and a right of first refusal to acquire certain loans owned by the manager and its affiliates. In addition, the board discussed the following: a proposal by a private real estate entrepreneur to acquire all of ICCMIC's common stock at a price of $12.50 per share in cash, conditioned upon a payment to the manager of $40 million ($35 million in cash and $5 million in other assets of ICCMIC) for termination of the management agreement, subject to a due diligence and financing contingency; a proposal by a mortgage banking company in which ICCMIC stockholders would have received $10 in cash and $3 in the common stock of the mortgage banking company for each share of ICCMIC common stock, provided that the management agreement was to be terminated for a then unspecified payment that would have reduced dollar for dollar the total consideration payable to ICCMIC stockholders, all subject to a due diligence contingency; a proposal by a title insurance company to acquire the management agreement and ICII's 3,070,000 shares of ICCMIC common stock for $68 million in cash or, in the alternative, $50 million in cash and $23 million of the title insurance company's stock, subject to a due diligence contingency; and a proposal for a sale to ICCMIC of a loan origination company for $50 million, coupled with a purchase of up to 10 million shares of ICCMIC's common stock at a cash price of $12.00 per share, and a cash payment for termination of the management agreement equal to the greater of $25 million and the appraised value of the termination fee, all subject to a due diligence contingency. Following the board's discussion of all of these proposals, and discussion of whether ICCMIC should pursue other alternatives, including liquidation, the board determined that it was in the best interests of ICCMIC and its stockholders to pursue the proposal made by the Private Equity REIT. The Private Equity REIT proposed a merger in which ICCMIC stockholders would receive one share of the common stock of the Private Equity REIT for each 1.55 shares of ICCMIC common stock, and the Private Equity REIT would pay $50 million in cash to the manager to terminate the management agreement and to acquire and terminate the manager's stock options in ICCMIC. This ratio was based upon the Private Equity REIT's $22.50 estimate of its net asset value per share and the Private Equity REIT's $14.50 estimate of ICCMIC's net asset value per share, all subject to due diligence verification by both parties. Stockholders of the Private Equity REIT would also receive, for each six shares of the Private Equity REIT held by them, a warrant to purchase one share of the surviving company's common stock at a $14.50 exercise price. The proposal provided ICCMIC's stockholders with a limited amount of downside protection, in the form of contingent value rights, in the event that the surviving company's stock were to trade for less than $14.50 per share on December 31, 2001. The Private Equity REIT proposal was viewed as attractive by the board for a number of reasons, including the board's high opinion of the quality of the Private Equity REIT's management, its relationships in the investment banking and commercial real estate communities, and the fact that it was an equity REIT (in light of the higher trading multiples of the common stock of equity REITs compared to that of mortgage REITs.). The board expressed varying concerns about the other proposals, including the liquidity of the securities to be received, the ability to consummate the transactions, failure to provide for the acquisition of all of ICCMIC's stock and the adequacy of the offered consideration. Negotiations with the Private Equity REIT. Between November 24, 1998 and December 14, 1998, a number of meetings were held between representatives of ICCMIC and the Private Equity REIT, 32 and the parties conducted due diligence investigations of each other. On November 25, 1998, ICCMIC and the Private Equity REIT executed an exclusivity agreement in which they agreed to negotiate exclusively with each other for a period of time initially expiring on December 15, 1998, and later extended to January 6, 1999. On December 14, 1998, representatives of the Private Equity REIT made a presentation to ICCMIC's board. After excusing the Private Equity REIT's representatives, the board discussed the Private Equity REIT proposal extensively. Thereafter, the four independent members of the board, Mr. Jaconi, Patric H. Hendershott, Kenneth A. Munkacy and Louis H. Masotti, convened a separate meeting attended by an attorney from Sonnenschein Nath & Rosenthal, counsel to ICCMIC. After discussing the proposal, the independent board members unanimously voted to continue due diligence efforts and to commence negotiating definitive merger documents with the Private Equity REIT. The independent directors also unanimously voted to retain Prudential Securities as their financial advisor to analyze and report on the proposed transaction. On December 22, 1998, the full board approved the retention of Prudential Securities as financial advisor to the independent directors by unanimous written consent. After further due diligence and negotiations over a period of several weeks, ICCMIC's management concluded that the Private Equity REIT's original proposal was not attractive in light of concerns about the amount of its debt, and the parties began discussing alternate deal structures. At a January 22, 1999 special meeting, the board, including the independent directors, accepted the recommendation of Prudential Securities and ICCMIC's management to reject the Private Equity REIT's final proposal and the board voted to terminate exclusive negotiations with that party. Following the January 22, 1999 meeting, Prudential Securities received new proposals from the Commercial Mortgage REIT (see "Negotiations with the Commercial Mortgage REIT" below), the Financial Services REIT and the Public Equity REIT, and a proposal from a bank holding company (the "Bank Holding Company"). The Financial Services REIT's new proposal was for a common stock for common stock merger and provided for a payment to the manager, at the manager's option, of either $50 million in cash or $25 million in cash and $25 million in the Financial Services REIT's stock for the acquisition and termination of the management agreement, acquisition of the manager's stock options in ICCMIC and other consideration. The new proposal from the Public Equity REIT was for a common stock for preferred stock merger and provided for a payment to the manager of $50 million in cash to terminate the management agreement. The Bank Holding Company's proposal, which was subject to a financing contingency, was for an acquisition of ICCMIC in which ICCMIC's stockholders would have the option to receive $11.00 per ICCMIC share in cash or Bank Holding Company stock, provided that the cash consideration could not exceed 67% of the total consideration. The Bank Holding Company would pay $25 million in cash to ICII for the management contract and an additional $20 million to ICII for the acquisition of the manager's stock options, certain noncompetition agreements and the right of first refusal to purchase loans from SPB. With the assistance of Prudential Securities, these four proposals were revised and improved in March. The terms of these four proposals were reviewed in depth by the board at its March 16, 1999 regular board meeting. In reviewing the four proposals, the board considered various factors presented by Prudential Securities that weighed in favor of ICCMIC pursuing a merger or sale transaction, including, among others, the following: . the importance of greater size and scale in the capital markets and in the mortgage REIT sector; 33 . the attractiveness to a third party of ICCMIC's strategic and financial assets; and . market conditions at that time limiting ICCMIC's ability to substantially grow as a stand-alone organization. Prudential Securities then recommended that the board focus its evaluation on the proposals of the Commercial Mortgage REIT and the Financial Services REIT. Prudential Securities noted that each of the four proposals included the payment to the manager of a significant cash fee ($45 million in the case of the Bank Holding Company and $50 million in the case of the Commercial Mortgage REIT, the Financial Services REIT and the Public Equity REIT) for the termination of ICCMIC's management agreement and, in two of those proposals, additional consideration from the manager. In addition, Prudential noted that the cost of these termination fee payments would be borne by ICCMIC stockholders to the extent of their interest in the combined company in the case of the Commercial Mortgage REIT and the Financial Services REIT but would be borne entirely by ICCMIC stockholders in the case of the Bank Holding Company and Public Equity REIT proposals (because those proposals had been based on ICCMIC net asset values reflecting adjustment for the termination fee). In addition, the Bank Holding Company's relatively small capital base and the Public Equity REIT's apparent goal of liquidating ICCMIC limited the value of the stock to be issued in those proposed transactions to ICCMIC's stockholders. In contrast, Prudential Securities was of the view that the proposals from the Commercial Mortgage REIT and the Financial Services REIT had strategic benefits to ICCMIC. Under these two proposals, there was the potential for the combined company to achieve a value for ICCMIC stockholders over the medium- to long-term that was significantly greater than ICCMIC's liquidation value. Following the presentation by Prudential Securities, the independent directors again convened in private session with legal and financial advisors in attendance. In this session, the independent directors discussed the four proposals. The independent directors also discussed the conflicts of interest of Messrs. Snavely, Villani and Karlan due to their direct or indirect interest in ICCMIC's management agreement. The independent directors concluded that ICCMIC should follow the recommendations of Prudential Securities and pursue negotiations with the Commercial Mortgage REIT and the Financial Services REIT. After the full board reconvened, upon the recommendation of the independent directors, the board approved the independent directors' recommendation to pursue negotiations with the Commercial Mortgage REIT and the Financial Services REIT. The board also approved an amendment to its engagement letter with Prudential Securities to increase Prudential Securities' fee from $1.5 million to $3.75 million upon the consummation of a successful merger transaction due to the expanded scope of Prudential Securities' assignment. Following this meeting, ICCMIC, through Prudential Securities and the independent directors, conducted negotiations with the Commercial Mortgage REIT. ICCMIC also sought to discuss a transaction with the Financial Services REIT, but focused principally on the Commercial Mortgage REIT after concluding that the Financial Services REIT would not proceed expeditiously with its due diligence if it were not given exclusive bidder status. In addition, during this period, Messrs. Snavely and Villani held discussions with the Bank Holding Company. Negotiations with the Commercial Mortgage REIT. The Commercial Mortgage REIT proposal was, as of March 19, 1999, a stock for stock exchange with each ICCMIC stockholder to receive 1.4 shares of the Commercial Mortgage REIT's stock for each share of ICCMIC common stock. In addition, ICCMIC would have the right to designate two of the eight members of the surviving company's board of directors. The Commercial Mortgage REIT conditioned its offer on ICCMIC's exercising its rights to resell for cash to two ICII affiliates (SPB and FMAC) various loans ICCMIC had previously acquired from those parties. Those loans included loans, in the aggregate principal amount of approximately $50 34 million, which had been removed from ICCMIC's March 1999 collateralized mortgage obligation securitization transaction. The Commercial Mortgage REIT proposal also contained an agreement for the surviving company to pay to the manager $50 million in cash to terminate the management agreement. ICCMIC stockholders would have owned 65% of the surviving company if the Commercial Mortgage REIT proposal had been consummated. On April 3, 1999, the Commercial Mortgage REIT revised its proposal to include a reduced payment to the manager of $45 million in cash to terminate the management agreement. Immediately prior to the board meeting of May 3, 1999, the Commercial Mortgage REIT again revised its proposal to provide that each ICCMIC stockholder would receive 1.43 shares of the Commercial Mortgage REIT's stock rather than 1.4 shares for each share of ICCMIC common stock. In addition, the Bank Holding Company revised its offer on April 30, 1999, increasing its bid from $11.00 to $11.125 per ICCMIC share in cash or Bank Holding Company stock, but reduced the ceiling on the cash consideration to 50% of the total consideration. At the meeting of May 3, 1999, ICCMIC's directors heard an evaluation of the revised Commercial Mortgage REIT proposal and a summary of the Bank Holding Company proposal. After hearing summaries of these proposals, the independent directors, in private session, discussed the terms of each proposal and the ramifications of the management agreement termination fee payment. At that meeting, the independent directors retained Wachtell, Lipton, Rosen & Katz as their counsel. After consulting with its financial and legal advisors, the independent directors reached the following conclusions: . subject to favorable resolution of the management agreement termination fee payment (described in the third bullet below), ICCMIC should pursue a transaction with the Commercial Mortgage REIT; . the Bank Holding Company offer should be rejected, and if the Commercial Mortgage REIT transaction were not consummated, the alternatives would be for ICCMIC to pursue its strategic or other alternatives; . the independent directors would not approve a transaction which included a cash payment of more than $35 million to terminate the management agreement; and . if, within 48 hours, ICII did not agree to accept a $35 million cash payment to terminate the management agreement, rather than the $45 million cash payment that had been offered by the Commercial Mortgage REIT in its most recent proposal, the independent directors would not authorize the final negotiation of the proposed Commercial Mortgage REIT transaction. ICII did not respond to the independent directors' demands within 48 hours, and negotiations with the Commercial Mortgage REIT did not proceed. 35 ICII's Initial Proposal and Formation of the Special Committee. On May 13, 1999, ICII announced in a press release its proposal to acquire all of the outstanding shares of ICCMIC common stock not already owned by ICII for a price of $11.00 per share in cash. In response to this proposal, a special meeting of the ICCMIC board of directors was convened on May 18, 1999, and upon the recommendation of counsel to the independent directors, a special committee of the board was formed, consisting of the four independent directors. The purpose of the special committee was to review, evaluate and negotiate the terms of any proposed extraordinary transaction between ICCMIC and ICII to ensure fairness to ICCMIC's stockholders and to recommend to the board any extraordinary transaction involving ICCMIC. The ICCMIC board voted unanimously to give the special committee full authority to retain separate legal counsel, financial advisors, accountants, appraisers and other experts it needed to perform its duties, and to pay each member of the special committee additional compensation of $25,000. The special committee then retained the financial and legal advisors that had previously been retained by the independent directors. Joint Proposal of ICII and Commercial Mortgage REIT. Immediately prior to and during the May 18, 1999 board meeting, ICII, in addition to its all cash proposal, communicated to the independent directors a joint proposal by ICII and the Commercial Mortgage REIT to acquire ICCMIC. At a meeting of the special committee immediately following the May 18, 1999 board meeting, the special committee directed its financial advisors to meet with representatives of ICII and the Commercial Mortgage REIT, as well as their respective financial advisors, to determine the precise terms of the proposal. During the period from May 18 through May 21, 1999, Prudential Securities met with ICII and the Commercial Mortgage REIT and their respective financial advisors. At a telephonic meeting of the special committee on May 21, 1999, Prudential Securities reported to the special committee the revised terms of the joint proposal from ICII and the Commercial Mortgage REIT. The terms of the revised joint proposal included the following points: . the structure of the joint proposal would take the form of a merger of ICCMIC into a subsidiary of ICII, with ICII simultaneously selling selected assets of ICCMIC to the Commercial Mortgage REIT in exchange for shares of the Commercial Mortgage REIT's stock; . ICCMIC stockholders would be given the individual right to choose between receiving $11.25 in cash or 1.43 shares of the Commercial Mortgage REIT's common stock for each ICCMIC share (or a combination of cash and stock); . the cash portion of the transaction consideration would be subject to an aggregate cap of 60% of the consideration; and . due to the proposed structure of the transaction, ICCMIC's management agreement with Imperial Credit Commercial Asset Management Corp. would not be terminated and no amounts would be due under the termination provisions of that agreement. These terms reflected an increase from the original terms communicated by ICII on May 18, 1999 of $11.00 per share for the cash consideration and 1.40 shares of the Commercial Mortgage REIT's common stock for the stock consideration. At its May 21, 1999 meeting, the special committee determined that because of the lack of more favorable strategic alternatives available to ICCMIC at that time, it was desirable to proceed with the negotiation of the joint proposal, subject to the following conditions: 36 . a written term sheet from ICII and the Commercial Mortgage REIT; . the greatest possible freedom among ICCMIC stockholders regarding the election between cash or stock; . an increase in the cash consideration above $11.25 per share and the stock consideration above 1.43 per share; and . an understanding of the proposed treatment of ICCMIC's employees. The special committee, after discussion with its legal and financial advisors, then established preferred procedures regarding communications and conduct among the parties, in consideration of the potential conflicts involved in the proposed transaction. These procedures were subsequently communicated to ICII and the Commercial Mortgage REIT. During the weekend of May 22 and 23, 1999, discussions continued among Prudential Securities, ICII and the Commercial Mortgage REIT regarding the terms of the joint proposal and the conditions outlined at the May 21 special committee meeting. On May 24, 1999, a term sheet was provided by ICII and the Commercial Mortgage REIT outlining in writing the terms previously communicated to the special committee. At a telephonic meeting of the special committee held on May 25, 1999, Prudential Securities communicated to the special committee the results of its discussions with ICII and the Commercial Mortgage REIT since the May 21 meeting. Among other things, Prudential Securities reported that ICII and the Commercial Mortgage REIT could not increase the 60% cap on aggregate cash consideration under their proposed structure. Prudential Securities also reported that ICII was not willing to increase the per share cash consideration above $11.25 per share, having already increased its offer from $11.00. At the conclusion of that meeting, the special committee directed its legal and financial advisors to continue discussions with ICII and the Commercial Mortgage REIT in order to develop the terms of the transaction for a more formal review by the special committee. During the week of May 25, negotiations continued between the special committee and its legal and financial advisors, on the one hand, and ICII and the Commercial Mortgage REIT, and their respective legal and financial advisors, on the other hand. During this period, the precise terms of the transaction were elaborated and clarified for the parties in the form of a draft transaction agreement. Although substantial progress was made in negotiating the overall terms of the transaction, little progress was made in improving the economic terms of the joint proposal from ICCMIC's perspective. On May 31, ICII delivered to the special committee a message that if the special committee did not approve the joint proposal by the end of the day on June 1, 1999, then ICII would commence an unsolicited tender offer for ICCMIC at $11.00 per share in cash. On that same day, one of ICCMIC's large institutional stockholders communicated to ICCMIC that it would oppose a merger transaction in which the consideration to be received by ICCMIC's stockholders was all stock. On June 1, 1999, the special committee again met by telephone conference call. At this meeting, Prudential Securities summarized for the special committee the negotiations during the course of the past week. Prudential Securities also noted the lack of progress made in negotiating a more favorable transaction from an economic perspective. The special committee then reviewed the events over the previous nine months, including the lack of viable alternative transactions with third parties at that time other than ICII and the Commercial Mortgage REIT. Prudential Securities then reviewed with the special committee the strategic alternatives available to ICCMIC at the time of the June 1 meeting, including: 37 . the joint transaction with ICII and the Commercial Mortgage REIT; . a transaction with the Commercial Mortgage REIT alone, if the Commercial Mortgage REIT was still amenable to such a transaction; . a sale of ICCMIC for cash to ICII or to a third party pursuant to a formal auction; . remaining independent and continuing to pursue ICCMIC's long term strategy; and . liquidation. After discussing these options with its legal and financial advisors, the special committee determined that, at the present time and in light of ICCMIC's long term prospects, it made sense to attempt to complete an extraordinary transaction and not continue independently. The special committee also determined that it was not yet willing to commence a liquidation of ICCMIC's assets. The special committee based this conclusion in part on an estimate of the net liquidation value of ICCMIC's assets of $12.12 per share prepared by Prudential Securities (without any independent valuation or appraisal and before taking into account an estimate of the termination fee payable by ICCMIC upon termination of its management agreement). In reaching this conclusion, the special committee also considered the uncertainties of a liquidation process. The special committee then determined that, at the time of the June 1 meeting, it was not yet willing to commit to sell ICCMIC for cash to the highest bidder, considering the potential gains from a strategic combination, including such a combination with the Commercial Mortgage REIT. At the June 1 meeting, the special committee also discussed concerns raised by a stock for stock transaction, including the possibility that such a transaction would not be accepted by ICCMIC's stockholders. However, the special committee determined that it was unwilling at that time to continue to negotiate a transaction with ICII, whether or not ICII commenced an unsolicited tender offer, given the special committee's view as to the then current offer price level. The special committee concluded the meeting by directing its legal and financial advisors to determine if the Commercial Mortgage REIT was still interested in pursuing a strategic business combination rather than the joint proposal and, if so, to commence negotiations on that basis. Special Committee Negotiations with the Commercial Mortgage REIT. During the week of June 1, 1999, the financial and legal advisors to the special committee commenced negotiations with the Commercial Mortgage REIT and its legal and financial advisors. The parties discussed a proposed stock for stock merger of ICCMIC with the Commercial Mortgage REIT on the following terms: . an exchange ratio of 1.43 shares of the Commercial Mortgage REIT's common stock for each share of ICCMIC common stock; . in addition, stockholders would receive, for each share of ICCMIC common stock, a contingent value right that would pay up to $1 if the Commercial Mortgage REIT's common stock failed to trade above $8 per share for 20 consecutive days during the three year period following the merger. On a comparative per share basis, the contingent value right provided for a minimum aggregate merger consideration of approximately $11.44 of the Commercial Mortgage REIT's common stock per share of ICCMIC common stock; and 38 . an assumed payment to ICII by the Commercial Mortgage REIT of $40 million in cash as a termination fee under the management agreement. At a telephonic meeting of the special committee held on June 7, 1999, the special committee reviewed the proposed terms of the stock for stock merger with the Commercial Mortgage REIT. At that meeting, Prudential Securities noted that the liquidation value of ICCMIC's assets, after taking into account a termination fee, if one were to be paid under ICCMIC's management agreement in the event of a liquidation of ICCMIC's assets, approximated the value of the stock to be received in the merger with the Commercial Mortgage REIT. Negotiations Resulting in the Proposed Merger. Also at the June 7 meeting, Prudential Securities advised the special committee of a revised proposal it had received from ICII. ICII that day had informed Prudential Securities that it was now willing to enter into a transaction with ICCMIC providing for the following terms: . an $11.50 per share, all cash offer for all of the outstanding shares of ICCMIC common stock not already owned by ICII; . a market check opportunity for ICCMIC to solicit alternative offers from third parties for a limited period of time after signing an agreement with ICII; and . a $40 million cash payment by ICCMIC for termination of the management agreement. ICII also indicated that it would either enter into this all cash transaction or the joint proposal with the Commercial Mortgage REIT. However, if neither transaction were acceptable to the special committee, ICII advised that it would promptly commence an unsolicited tender offer for ICCMIC. The special committee viewed the economics of ICII's new proposal as promising. The special committee determined that ICII's offer would be much stronger if it could be structured to provide for a fair process with a level playing field for the solicitation of alternative bids. At the conclusion of the June 7 meeting, the special committee directed its legal and financial advisors to negotiate with ICII in order to further develop the precise terms of ICII's new proposal. At the same time, the special committee directed its legal and financial advisors to continue negotiations with the Commercial Mortgage REIT and to try to obtain more favorable terms. During the period from June 7 through June 9, 1999, members of the special committee and its financial and legal advisors held discussions with ICII and the Commercial Mortgage REIT as directed at the June 7 meeting. The special committee's counsel prepared a term sheet and a definitive transaction agreement containing the special committee's position with respect to ICII's new all cash proposal. A telephonic meeting of the special committee was held on June 9, 1999 to discuss the progress made with each of ICII and the Commercial Mortgage REIT since the June 7 meeting. At that meeting, the special committee was informed that, based on ICII's negotiation positions, ICII was not willing to commit to a market check process on the terms considered appropriate by the special committee. At that same meeting, Mr. Jaconi, the chairman of the special committee, informed the rest of the committee that prior to this meeting he had received from the Commercial Mortgage REIT a further revised proposal with the following terms: . a cash election merger, providing ICCMIC stockholders with a choice of $12.00 cash or 1.45 shares of the Commercial Mortgage REIT's common stock (which, given the market 39 price of the Commercial Mortgage REIT's common stock at the time, was worth approximately $10.50 per share); . a cap on the cash consideration of 25% of the aggregate consideration; and . a contingent value right that would provide ICCMIC stockholders with 75% of the amount, if any, by which $30 million exceeded the appraised value of ICCMIC's management agreement termination fee. Because of the enhanced proposal by the Commercial Mortgage REIT and ICII's unwillingness to agree to the proposed "market check" process, the special committee determined at that meeting to proceed with the negotiation of a definitive agreement with the Commercial Mortgage REIT. Prudential Securities was further directed to report to ICII that the special committee would not consider ICII's proposal on the terms communicated by ICII prior to that meeting. During the period from June 9 through June 13, 1999, the chairman of the special committee, together with the special committee's legal and financial advisors and ICCMIC's management, proceeded to negotiate and finalize terms of a definitive agreement with the Commercial Mortgage REIT. During that period, representatives of ICCMIC and the Commercial Mortgage REIT met in person and by telephone conference call to discuss issues remaining between the parties. On June 11, 1999, ICII announced in a press release its revised all cash proposal to acquire ICCMIC at $11.50 per share. On June 13, 1999, the board of directors of the Commercial Mortgage REIT approved the form of definitive merger agreement between the Commercial Mortgage REIT and the Company and delivered a letter to the special committee to that effect. The letter further stipulated that the approval would remain outstanding on the condition that the ICCMIC board of directors approve the merger with the Commercial Mortgage REIT that same date. On that same date, ICII delivered to the chairman of the special committee a revised proposal, including the following points: . ICII would agree to the termination of the management agreement without the payment of cash consideration to ICII if a merger with ICII were to be consummated; . ICII would agree to a $40 million cap on the appraised value of the management agreement termination fee; . ICII would agree to return to ICCMIC's stockholders up to $10 million if the appraised value of the management agreement termination fee were less than $30 million; . ICII would agree to accept the appraised value of the management agreement termination fee from third parties submitting superior proposals; and . ICII would agree to cause the repurchase from ICCMIC of all remaining disputed mortgage loans with SPB and FMAC. A meeting of the special committee was held on June 13, 1999 in San Francisco, California at which the special committee considered the letter received from the Commercial Mortgage REIT and the revised proposal received from ICII. Prudential Securities advised the special committee that it had revised its estimate of ICCMIC's net liquidation value to $12.57 per share (without any independent valuation or appraisal) and had contrasted this value with management's estimated liquidation value of 40 $13.10 per share. In each case, the estimated amount was expressed before taking into account the termination fee payable under ICCMIC's management agreement (which, estimated at $35 million in the aggregate, amounted to approximately $1.23 per share). After taking into account an assumed value of $35 million for the management agreement termination fee, the result was a net expected realization in liquidation of approximately $11.34 per share, which was less than the value of the latest ICII proposal. In addition, the special committee considered the perceived timing and valuation risks associated with a liquidation process. In assessing the merits of the latest ICII proposal, the special committee concluded that the market check process envisioned by ICII's latest proposal was not acceptable to the special committee. The special committee then prepared a list of terms it viewed as important to provide for a fair process with a level playing field including, among other provisions, a confidentiality and standstill agreement, a 60-day market check period and no right of first refusal for ICII, which provisions the special committee determined, based on the advice of its financial advisors, would provide ICCMIC with an effective market test. These terms were communicated by the special committee to Messrs. Snavely and Villani during the meeting. The chairman of the special committee then polled the members of the special committee and determined that, in light of ICII's revised proposal, there were insufficient votes to carry a resolution to recommend the merger with the Commercial Mortgage REIT. At the conclusion of the meeting, the special committee directed its legal and financial advisors to negotiate and prepare a term sheet with ICII reflecting the additional and revised terms acceptable to the special committee. Immediately after the meeting, Prudential Securities informed the Commercial Mortgage REIT of the special committee's determination that it would then proceed with negotiations with ICII. During the week of June 14, the chairman of the special committee, together with the special committee's legal and financial advisors, negotiated a term sheet reflecting mutually acceptable terms for ICII's all cash offer, including a 60-day market check process. At a telephonic meeting of the special committee on June 17, 1999, the special committee received an update on the status of negotiations between ICII and the special committee's legal and financial advisors. The chairman of the special committee reported to the special committee that, among other things, ICII was insisting on the ability to launch an unsolicited offer if the merger agreement were terminated for an alternative proposal that was not an all cash transaction. In addition, he reported that ICII was insisting on a break-up fee if the merger agreement was terminated for an alternative transaction. On June 18, 1999, ICCMIC held its annual meeting of stockholders in Torrance, California. After the meeting, the special committee again met to discuss the further progress made negotiating with ICII. At that meeting, the chairman of the special committee noted for the other independent directors that the previous night substantial progress had been made in the negotiations with ICII and a term sheet had been agreed upon with ICII. The special committee concluded this meeting by directing its legal and financial advisors to promptly negotiate a definitive merger agreement which the special committee could formally consider and reflecting the terms agreed upon by ICII and the special committee. During the week of June 21, 1999, representatives of the special committee, together with its legal and financial advisors and ICCMIC's management, continued to negotiate with representatives of ICII and its legal and financial advisors. On June 25, 1999, the special committee met in Los Angeles, California to consider the approval of the draft merger agreement with ICII. The special committee's financial and legal advisors made presentations and reviewed, among other things, the matters set forth in "- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger." Prudential Securities also 41 presented analyses of the terms of the proposed merger with ICII, including a review of the analyses presented in "- Opinion of the Financial Advisor to the Special Committee." The special committee was informed that there were still certain unresolved issues with ICII, including, among other things, ICII's desire for a break-up fee, the refinement of the "qualifying alternative transaction" concept under the merger agreement (see "The Merger Agreement - ICII Standstill Agreement") and the receipt of legal opinions in appropriate form. At the conclusion of this meeting, the special committee again directed its advisors to finalize negotiations with ICII, including the resolution of all remaining outstanding issues and to report on the progress at the next meeting of the special committee. The special committee next met telephonically on July 1, 1999. At this meeting, a representative of ICCMIC's Maryland counsel, Piper & Marbury L.L.P., reviewed with the special committee aspects of Maryland law related to the transaction. The special committee also addressed the remaining issues not yet resolved under the merger agreement. In particular, the special committee was opposed to waiving ICCMIC's shareholder rights plan for the limited purpose of permitting ICII to bring a "qualifying alternative transaction" in response to a non-cash superior proposal. The special committee's financial and legal advisors reviewed the material terms of the latest draft of the merger agreement. Representatives of Prudential Securities discussed the 60-day market check process permitted by the draft agreement, as well as the economics of the proposed merger agreement provisions relating to the management agreement termination fee. The special committee was informed that, as drafted, the merger agreement fixed the maximum value of the termination fee payable under the management agreement at $35 million. If the appraised value of that termination fee were less than $35 million, the amount of the shortfall would be paid to ICCMIC's stockholders as an increase in the merger consideration. In addition, the special committee was advised that the appraised value of the termination fee would be equally binding on a third party superior proposal. Prudential Securities noted that the fixed economics of the termination fee enabled the market check process to proceed without a formal valuation having been obtained. Third party bidders would have to account for $35 million of value in any case, whether the amount was distributed to ICCMIC stockholders or paid to the manager as a termination fee. At the meeting, the chairman of the special committee polled the members of the special committee regarding their support for the transaction. The chairman of the special committee determined that there were insufficient votes to carry a resolution to recommend the ICII transaction on the terms as then negotiated. Immediately after the July 1 meeting, the chairman of the special committee communicated to the full board of directors of ICCMIC on behalf of the special committee the special committee's determination with respect to ICII's proposal. During the course of the first two weeks of July discussions continued among the members of the special committee, their legal and financial advisors and ICII and its legal and financial advisors in an effort to finalize a negotiated agreement on terms acceptable to all members of the special committee. The special committee again met telephonically on July 19, 1999 to discuss the progress made with ICII since the last meeting. At that meeting, representatives of Prudential Securities reviewed with the special committee the timing of the proposed transaction with ICII generally, as well as the timing of the 60-day market check process and the management agreement appraisal process. At that meeting, the special committee made a list of the final issues to be addressed by the parties prior to signing a definitive merger agreement between ICCMIC and ICII. 42 At a telephonic meeting of the full board of directors of ICCMIC, the chairman of the special committee communicated to ICII the special committee's final position on the issues discussed at the meeting just ended. During the period from July 19 through July 21, 1999, negotiations continued between the parties. On July 21, 1999 a final draft of the merger agreement was distributed reflecting the parties' resolution of the various issues communicated to ICII after the July 19 meeting. In addition, on July 21, the special committee and the full ICCMIC board received the opinion of Piper & Marbury that the transaction was not prohibited by the Maryland Business Combination Statute. Approval of Transaction with ICII. At a meeting of the special committee on July 22, 1999 held in Torrance, California, the special committee met to consider the revised merger agreement with ICII. Prudential Securities, as the special committee's financial advisor, updated its presentation previously delivered at the June 25 meeting, and covering the analyses set forth in "- Opinion of the Financial Advisor to the Special Committee." Prudential Securities then rendered an oral opinion, which was subsequently confirmed in writing, that, as of the date of that meeting and based on and subject to the matters stated in the written fairness opinion, the consideration to be received in the proposed merger by ICCMIC stockholders, other than ICII and its subsidiaries, was fair to the ICCMIC stockholders from a financial point of view. The special committee's legal counsel reviewed for the special committee the terms of the proposed merger agreement and ICCMIC's Maryland counsel reviewed for the special committee the relevant provisions of Maryland law applicable to the proposed transaction. The special committee then considered, in addition to the presentations of its legal and financial advisors, among other things, the various strategic and other alternatives then available to ICCMIC, as well as the other factors set forth in "- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger." The special committee concluded that the terms of the ICII transaction, described more fully in "The Merger Agreement," were preferable to any other alternative available to ICCMIC and that the transaction was in the best interest of ICCMIC's shareholders. After further discussion and consideration, the special committee unanimously adopted resolutions recommending that the full ICCMIC board of directors approve and adopt the merger agreement with ICII. After the special committee's meeting, a meeting of the full ICCMIC board was convened to consider the special committee's recommendation. At the board meeting, the chairman of the special committee summarized for the full board the special committee's analysis and recommendations, including, among other things, the various strategic and other alternatives then available to ICCMIC, as well as the other factors set forth in "-Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger". Prudential Securities then reviewed with the board the materials that it had delivered to the special committee on June 25 and July 22. Prudential Securities then reviewed in detail the various techniques it had used in evaluating ICCMIC and the proposed merger, including the analyses set forth under "- Opinion of the Financial Advisor to the Special Committee." Prudential Securities then reviewed its oral opinion, later confirmed in writing, that the consideration to be received in the proposed merger by ICCMIC stockholders, other than ICII and its subsidiaries, was fair to the ICCMIC stockholders from a financial point of view. The special committee's legal counsel next reviewed for the full board the terms of the merger agreement and the proposed merger. ICCMIC's legal counsel then reviewed in detail the fiduciary obligations of the directors to ICCMIC and its stockholders. The board next discussed the potential conflicts of interest of Messrs. Snavely, Villani and Karlan, as well as relevant provisions of the merger agreement. The board then unanimously determined that the merger agreement and the proposed merger were fair to, and in the best interests of, ICCMIC and its stockholders, and approved and adopted the merger agreement and the proposed merger. The board 43 next proceeded to discuss in detail, and approve, the provisions for the conversion of ICCMIC stock options described under "Interests of Certain Persons in the Proposed Merger - Treatment of Stock Options." At the conclusion of the July 22 meeting, Mr. Snavely, on behalf of ICII, and Mr. Karlan, on behalf of ICCMIC, executed the merger agreement. 60-Day Market Check The merger agreement permitted ICCMIC to conduct an unrestricted solicitation of potentially superior proposals for a period of 60 days. This 60-day "market check" period commenced on August 13, 1999, the date on which ICCMIC retained Stanger, and ended at 12:01 a.m. on October 13, 1999. In connection with the market check, Prudential Securities, on behalf of the special committee, contacted 47 parties that it viewed as potential acquirors of ICCMIC, including investment advisors, specialty finance investors, financial institutions, opportunity funds, large capitalization property REITs and strategic investors. Indications of interest were received from 23 of the 47 parties that were contacted, and Prudential Securities distributed confidential offering memoranda to those 23 interested parties. No indications of interest were received from parties outside of the group of potential acquirors contacted by Prudential Securities. The deadline for initial proposals from these parties was September 24, 1999. On September 24 and 27, 1999, Prudential Securities received proposals from four of the 23 parties. Prudential Securities advised the special committee that the proposals received during the market check period represented the likely parties interested in ICCMIC and that Prudential Securities did not expect that there would be any other potential acquirers. The 60-day market check period has expired and the special committee, with advice from Prudential Securities, has determined that none of the proposals received during the market check period constituted a superior proposal. Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger At a meeting held on July 22, 1999, the special committee unanimously determined: . that the proposed merger and the other transactions contemplated by the merger agreement are fair to, and in the best interests of, the ICCMIC stockholders other than ICII and certain of its affiliates; . to recommend that the board of directors approve and adopt the merger agreement and the proposed merger; and . to recommend that the board of directors recommend to the ICCMIC stockholders that they vote to approve the merger agreement and the proposed merger. At a meeting of the ICCMIC board of directors held promptly after the conclusion of the July 22 special committee meeting, at which all of the members of the board of directors were present, the board of directors, based on the unanimous recommendation of the special committee, unanimously: 44 . determined that the merger agreement and the proposed merger are advisable, fair to, and in the best interests of, ICCMIC and the ICCMIC stockholders; . approved and adopted the merger agreement and the proposed merger; and . determined to recommend to the ICCMIC stockholders that they vote to approve the merger agreement and the proposed merger. See "- Background of the Proposed Merger" and "- ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger." The Special Committee. In determining that the merger agreement and the proposed merger are fair to, and in the best interests of, the ICCMIC stockholders other than ICII and certain of its affiliates, the special committee considered, among other things, the following factors to support the special committee's fairness determination: . the minimum cash payment of $11.50 per share to be received by ICCMIC stockholders other than ICII and its subsidiaries; . the fact that ICII agreed to increase the per share merger consideration to the extent that the appraised value of the termination fee payable under the management agreement is less than $35 million, without any corresponding decrease in the merger consideration if the appraised value exceeds $35 million; . the special committee's view of the business, assets, values and prospects of ICCMIC, including discussions with ICCMIC's senior management (consisting solely of employees of the manager, a subsidiary of ICII) and the special committee's financial advisors regarding ICCMIC's business, assets, values and prospects; . the opinion of Prudential Securities, described below, that, as of the date of the opinion and based on and subject to the matters contained in the written fairness opinion, the consideration to be received by ICCMIC's stockholders, other than ICII and certain of its affiliates, is fair to such ICCMIC stockholders from a financial point of view (see "- Opinion of the Financial Advisor to the Special Committee"); . the stockholder approval condition, under which completion of the proposed merger requires the affirmative vote of a majority of the outstanding shares of common stock entitled to vote at the special meeting other than the shares held by ICII and Messrs. Snavely and Villani; 45 . ICCMIC's opportunity under the merger agreement, during the 60-day period following the engagement of the initial appraisers, to explore and solicit alternative proposals that might be superior to the proposed merger, and during that period and thereafter, to terminate the merger agreement upon receiving and approving an alternative transaction superior to the proposed merger; . ICII's agreement that, if the merger agreement is terminated (other than as a result of a breach of the merger agreement by ICCMIC), the manager would accept the lesser of the appraised value of the termination fee and $35 million in full satisfaction of the amount payable because of the termination or non-renewal of the management agreement; . the fact that ICII agreed to purchase approximately $3.9 million of mortgage loans previously acquired by ICCMIC from SPB (if not first repurchased by SPB); . its review of the other potential mergers and strategic alternatives that may have been available to ICCMIC at that time, including the contacts, discussions and analyses described in "- Background of the Proposed Merger" and "- Opinion of the Financial Advisor to the Special Committee" regarding possible mergers, acquisitions and business combinations; . the fact that the minimum $11.50 per share cash price represented a premium of approximately 16.5% to the closing price of ICCMIC's common stock on the Nasdaq Stock Market of $9.875 on May 12, 1999, the day before ICII made its initial $11.00 offer, and exceeds the highest closing price for ICCMIC's common stock since August 1998; . the fact that the 16.5% premium above the pre-announcement ICCMIC stock price is more than the average percentage premium paid in acquisitions since 1996 involving REITs and financial services companies that, like ICCMIC, had book values between $200 million and $1.5 billion; . current industry, economic and market conditions and trends in the real estate acquisition, mortgage and leasing markets generally, including the highly competitive nature of these markets and the uncertainty concerning the future success of participants in these markets; . the fact that the valuation multiples achieved by ICCMIC based upon the minimum $11.50 per share cash price payable in the proposed merger exceeded current price to earnings and price to funds from operations multiples for almost all comparable public mortgage REITs; . the fact that the minimum $11.50 per share cash price exceeded the per share estimated net present value of the projected future cash flows of ICCMIC; 46 . the net present value of the liquidation of ICCMIC's assets of $12.57 per share as previously estimated by Prudential Securities (without any independent valuation or appraisal of such assets), before deducting the termination fee payable upon termination or non-renewal of the management agreement; . the ability of ICII to complete the proposed merger including, in particular, its ability to fund the aggregate purchase price; and . the terms and conditions of the merger agreement, in addition to those noted above, including: . ICCMIC's right to continue to declare and pay regular quarterly dividends and a final dividend constituting the remainder of its taxable income, if any, for the year through the date of the proposed merger not previously paid to ICCMIC stockholders, . the limited scope of the parties' representations, warranties and covenants, and . the limited number of conditions to the obligations of ICII to perform under the merger agreement. In determining that the proposed merger is fair to, and in the best interests of, ICCMIC stockholders other than ICII and certain of its affiliates, the special committee also considered a number of potential countervailing factors in its deliberations concerning the proposed merger, including: . the fact that, following the proposed merger, ICCMIC stockholders other than ICII will no longer participate in the future earnings or growth of ICCMIC or benefit from any increases in the value of ICCMIC's common stock or its assets; . potential or actual conflicts of interest of the directors and officers of ICCMIC in connection with the proposed merger, which are more fully described in "Interests of Certain Persons in the Proposed Merger" and "Relationships and Transactions Between ICII, ICCMIC and Affiliates"; and . the fact that ICCMIC stockholders may, depending on their tax basis in their ICCMIC stock, recognize a taxable gain upon the completion of the proposed merger. In the view of the special committee, these potential countervailing factors did not, individually or together, outweigh the advantages of the proposed merger. The special committee believes that the proposed merger is procedurally fair because: . the special committee consisted exclusively of independent directors appointed and empowered to review, evaluate and negotiate on an arm's-length basis the terms of any proposed extraordinary transaction and to ensure fairness to ICCMIC's stockholders; 47 . the special committee retained and was advised by independent legal counsel; . the special committee retained and was advised by Prudential Securities as its independent financial advisor to assist it in evaluating the proposed merger; and . under the terms of the merger agreement, completion of the proposed merger requires stockholder approval of the merger agreement and the proposed merger by a majority of the outstanding shares of common stock entitled to vote at the special meeting other than the shares held by ICII and certain of its affiliates (namely, Messrs. Snavely and Villani). The Board of Directors. The board of directors, at its July 22, 1999 meeting, heard and considered the analysis and report of Prudential Securities, the unanimous recommendation of the special committee and the factors enumerated above that were considered by the special committee. Based on these considerations, the board unanimously determined that the merger agreement and the proposed merger are fair to, and in the best interests, of ICCMIC stockholders other than ICII and certain of its affiliates. The board then unanimously approved and adopted the merger agreement and the proposed merger and unanimously recommended that ICCMIC's stockholders vote to approve the merger agreement and the proposed merger. You should be aware, in considering the recommendation of the special committee that was adopted by the board of directors, that three members of the board of directors, Messrs. Snavely, Villani and Karlan, are also directors and officers of ICII or the manager. Those relationships could present these directors with conflicts of interest. The board of directors and the special committee considered the potential and actual conflicts of interest in making their recommendation and in approving and adopting the merger agreement and the proposed merger. See "Interests of Certain Persons in the Proposed Merger" and "Relationships and Transactions Between ICII, ICCMIC and Affiliates." General. The above discussion regarding the information and factors considered by the special committee and the board of directors is not intended to be exhaustive. We believe, however, that it includes all material factors considered by them in making their respective decisions. In view of the variety of factors considered in connection with their respective evaluations of the merger agreement and the proposed merger, the special committee and the board of directors could not quantify or otherwise attempt to assign relative weights to the specific factors they considered in reaching their respective determinations. In addition, individual members of the special committee or the board of directors may have given different weight to different factors. In the course of their deliberations, neither the special committee nor the board of directors established a range of values for ICCMIC. Opinion of the Financial Advisor to the Special Committee On July 22, 1999, Prudential Securities delivered its written opinion to the special committee to the effect that, as of that date, the $11.50 per share price payable in cash was fair to ICCMIC's stockholders, other than ICII and certain of its affiliates, from a financial point of view. In its opinion, Prudential Securities noted that the $11.50 per share price is subject to potential increase under the terms of the merger agreement. Prudential Securities made a presentation of the financial analysis underlying its oral opinion at meetings of the special committee on June 25 and July 22, 1999 and at a meeting of the board of directors on July 22, 1999. This analysis is summarized below. All of the members of the special committee and the board of directors participated in their respective meetings on July 22, 1999 and had an opportunity to ask questions regarding Prudential Securities' presentation. 48 In requesting the Prudential Securities opinion, the special committee did not give any special instructions to Prudential Securities or impose any limitations upon the scope of the investigation that Prudential Securities deemed necessary to enable it to deliver its opinion, although Prudential Securities was not engaged to solicit alternative transactions, except in connection with the 60-day market check contemplated by the merger agreement. A copy of the Prudential Securities opinion, which sets forth the assumptions made, matters considered and scope of the review undertaken, is attached to this proxy statement as Appendix B and is incorporated by reference in this proxy statement. The summary of the Prudential Securities opinion set forth below is qualified in its entirety by reference to the full text of the Prudential Securities opinion. We urge you to read the Prudential Securities opinion in its entirety. A copy of the full Prudential Securities report given to the special committee is available for inspection and copying at the principal executive offices of ICCMIC during regular business hours. You, or your representative, may inspect or copy the Prudential Securities report during those hours. The Prudential Securities opinion is directed only to the fairness of the merger consideration offered to holders of ICCMIC common stock (other than ICII and certain of its affiliates) from a financial point of view and does not constitute a recommendation to any stockholder as to how he or she should vote at the special meeting or as to any other action he or she should take regarding the proposed merger. In conducting its analysis and arriving at its opinion, Prudential Securities reviewed such information and considered such financial data and other factors as it deemed relevant under the circumstances, including, among other things, the following: . ICCMIC's historical financial statements, including those included in ICCMIC's Annual Reports on Form 10-K for the fiscal years ended December 31, 1997 and 1998 and ICCMIC's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1999, September 30, 1998, June 30, 1998 and March 31, 1998, including any amendments thereto; . information furnished to Prudential Securities by ICCMIC relating to the business, earnings, cash flow, assets and prospects of ICCMIC; . the historical market prices and trading volumes of ICCMIC's common stock and the common stock of selected publicly traded companies Prudential Securities deemed reasonably similar to ICCMIC, and the historical and projected results of operations of ICCMIC and the historical and selected future earnings estimates of those companies Prudential Securities deemed to be reasonably similar to ICCMIC; . publicly available financial and operating data concerning selected companies engaged in businesses Prudential Securities deemed comparable to ICCMIC or otherwise relevant to its inquiry; . the financial terms of other transactions Prudential Securities deemed relevant; . the merger agreement; and 49 . such other financial studies, analyses and investigations and matters as Prudential Securities deemed necessary. In connection with its review and analysis and in arriving at its opinion, Prudential Securities relied upon the accuracy and completeness of the financial and other information provided by ICCMIC's management (consisting solely of employees of the manager, which is a subsidiary of ICII). Prudential Securities has not undertaken or been provided with any independent verification of such information or any independent valuation or appraisal of the assets or liabilities of ICCMIC. Prudential Securities assumed that information furnished by ICCMIC with respect to future financial performance was reasonable and reflected the best currently available estimates and judgment of ICCMIC's management. Further, the Prudential Securities opinion is necessarily based on economic, financial and market conditions as they existed on, and can only be evaluated as of, July 22, 1999. The Prudential Securities opinion does not address, nor should it be construed to address, the relative merits of the proposed merger and alternative business strategies that may be available to ICCMIC. The Prudential Securities opinion and the presentation to the special committee was one of the many factors taken into consideration by the special committee in making its determination to recommend approval and adoption of the merger agreement and the proposed merger. The Prudential Securities presentation to the ICCMIC board of directors was one of the many factors taken into consideration by the board in making its decision to enter into the merger agreement. Consequently, the analyses of Prudential Securities described below should not be viewed as determinative of the opinions of the special committee and the board of directors with respect to the merger consideration to be paid in the proposed merger to ICCMIC stockholders other than ICII and certain of its affiliates. The merger consideration was determined through arm's-length negotiations between the special committee and ICII and was approved by the special committee. The decision to enter into the merger agreement and to accept the merger consideration was solely that of the ICCMIC board of directors, acting upon the recommendation of the special committee. In arriving at its opinion, Prudential Securities performed a variety of financial analyses, including those summarized herein. The preparation of a fairness opinion is a complex process that involves various determinations as to the most appropriate and relevant methods of financial analysis and, therefore, such an opinion is not necessarily susceptible to partial analysis or summary description. Prudential Securities believes its analysis must be considered as a whole and that selecting portions thereof or portions of the factors considered by it, without considering all such analyses and factors, could create an incomplete view of the evaluation process underlying its opinion. Prudential Securities made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond ICCMIC's control. Any estimates contained in Prudential Securities' analyses are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. Additionally, estimates of the values of businesses and securities do not purport to be appraisals and do not necessarily reflect the prices at which businesses or securities may be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. Subject to the foregoing, the following is a summary of the material financial analyses presented to the special committee and the board of directors on July 22, 1999. Comparable Companies Analysis. Prudential Securities used a comparable companies analysis to establish implied ranges for the merger consideration to be offered to ICCMIC stockholders. Prudential Securities analyzed publicly available historical and projected financial results of selected companies 50 Prudential Securities considered reasonably comparable to ICCMIC, including multiples of current stock price to: . funds from operations per share for the three months ended March 31, 1999 on an annualized basis ("LQA FFO"); . earnings per share for the three months ended March 31, 1999 on an annualized basis ("LQA EPS"); . estimated 1999 earnings per share ("1999 Projected EPS"); . estimated 2000 earnings per share ("2000 Projected EPS"); and . book value per share as of March 31, 1999. The companies analyzed included: Amresco Capital Trust, Anthracite Capital Inc., Chastain Capital Corp., Clarion Commercial Holdings, Inc., CRIIMI MAE, Inc., IMPAC Commercial Holdings, Ocwen Asset Investment Corp., PMC Commercial Trust, Resource Asset Investment Trust, Starwood Financial Trust and Wilshire Real Estate Investment Trust Inc. (the "Comparable Companies"). All of the trading multiples of the Comparable Companies were based on closing stock prices on June 21, 1999 (the "June 21 Closing Price"). The earnings per share estimates were obtained from publicly available information. Estimates were not available for all of the Comparable Companies for all periods. The Comparable Companies were found to have a June 21 Closing Price estimated to be within a range of 3.3x to 7.6x LQA FFO, 3.4x to 9.3x LQA EPS, 4.8x to 10.9x 1999 Projected EPS, 4.9x to 7.9x 2000 Projected EPS and 0.5x to 1.0x book value per share. Applying the $11.50 offer price to such valuation measures results in implied multiples of 9.4x LQA FFO, 10.4x LQA EPS, 9.8x 1999 Projected EPS, 8.5x 2000 Projected EPS and 0.8x book value per share, respectively. Prudential Securities orally informed the special committee that the closing price on July 20, 1999 did not result in a meaningful change in the results cited above. Precedent Transaction Premium Analysis. Prudential Securities reviewed certain information regarding all cash acquisition transactions meeting the following criteria: . the acquired company operated either as a REIT or a financial services company; . the transactions were announced in 1996 or later; and . the acquired company had a book value between $200 million and $1.5 billion. Prudential Securities reviewed the prices paid in these transactions as a percentage premium over the closing price of the acquired company in each transaction. Prudential Securities then determined the 51 mean of the premiums paid in these transactions, and found that the mean premium was 9.0% over the price one day prior to the announcement, 7.8% over the price one week prior to the announcement and 7.8% over the price four weeks prior to the announcement. By comparison, the minimum $11.50 per share price reflected a 16.5% premium over ICCMIC's closing stock price one day prior to the announcement of ICII's initial $11.00 per share proposal on May 13, 1999, a 24.3% premium over the closing price one week before that announcement and a 26.0% premium over the closing price four weeks prior to that announcement. Prudential Securities also calculated the implied multiple of the price paid in these acquisitions to the preceding twelve months earnings per share. The mean multiple for these transactions was 19.5 times actual earnings per share. Applying this calculation to the $11.50 per share cash price in the proposed merger and ICCMIC's earnings per share for the last twelve months of $0.62 yields a multiple of 18.5 times earnings per share. None of the Comparable Companies or the acquired entities in any of the precedent transactions is identical to ICCMIC. Accordingly, a complete analysis of the results of the foregoing calculations cannot be limited to a quantitative review of such results and involves complex considerations and judgments concerning differences in financial and operating characteristics of the Comparable Companies and the applicable transactions and acquired companies and other factors that could affect the public trading value and consideration paid for each of the Comparable Companies and acquired entities, as well as ICCMIC. Stock Trading Analysis. Prudential Securities reviewed the latest twelve months ended June 21, 1999 historical trading prices for ICCMIC's common stock and noted that the low stock price was $6.50 per share (reached in October 1998), that the high stock price was $13.94 per share (reached in June 1998) and that ICCMIC common stock last traded at $11.50 per share in July of 1998. Stand-Alone Projections. Prudential Securities also considered ICCMIC's prospects as a continuing stand-alone entity. Four-year financial projections were developed based on the following assumptions: . the revaluation of ICCMIC's assets to their estimated fair market value; . the resale to SPB of the loans to be repurchased by ICII or SPB under the merger agreement; and . the resale to FMAC of loans previously acquired from it. The projections also assumed that ICCMIC's principal business activities would include: . small balance first mortgage loan pool acquisitions; . real property acquisitions; . mezzanine lending; and 52 . small balance first mortgage loan pool securitizations. The projections further assumed that these business activities would be primarily financed through: . secured warehouse loan facilities for small balance loan pool acquisitions; . first mortgage debt for real property acquisitions; and . equity financing from available cash resources for mezzanine lending and equity financing for the subordinated classes of mortgage-backed securities investments. The projections also assumed certain asset sales with concurrent paydown of associated debt, and that no incremental equity capital would be raised during the projection period, that the stock price would equal the equity book value per share by the end of the projection period and that dividends would grow at a rate of 5% per year. Applying these assumptions, Prudential Securities performed a discounted cash flow analysis of ICCMIC using a 15% discount rate. Applying this analysis, Prudential Securities arrived at a net present value per share for ICCMIC of $10.85. Projected financial and other information concerning ICCMIC and the impact of the proposed merger on ICCMIC stockholders are not necessarily indicative of future results. All projected financial information is subject to numerous contingencies, many of which are beyond the control of ICCMIC management. The preceding discussion of financial projections should be read together with the discussion under the caption "Cautionary Statement Concerning Forward-Looking Statements." The special committee selected Prudential Securities to provide a fairness opinion because it is an internationally recognized investment banking firm engaged in the valuation of businesses and their securities in connection with mergers and acquisitions and for other purposes and has substantial experience in transactions similar to the proposed merger. Pursuant to an engagement letter agreement between Prudential Securities and the independent directors of ICCMIC, Prudential Securities agreed to act as financial advisor to the independent directors who constitute the special committee in connection with the evaluation of proposed strategic and sale transactions regarding ICCMIC. Pursuant to this engagement letter, ICCMIC paid Prudential Securities a fee of $100,000 upon execution of the letter and $400,000 plus expenses when Prudential Securities rendered its fairness opinion to the special committee. Upon the closing of the proposed merger or a superior alternative transaction, ICCMIC will be required to pay Prudential Securities an additional fee of $3.25 million plus expenses. In the event a superior alternative transaction is consummated, ICCMIC will be required to pay Prudential Securities an additional fee equal to 4% of the amount by which the value to be received by ICCMIC stockholders other than ICII and its subsidiaries in the superior alternative transaction exceeds the value to be received by ICCMIC stockholders other than ICII and its subsidiaries in the proposed merger. ICCMIC will also indemnify Prudential Securities and certain related persons against certain liabilities, including liabilities under securities laws, arising out of the proposed merger or Prudential Securities' engagement. In April 1999, an affiliate of Prudential Securities entered into a lending agreement with ICCMIC pursuant to which that affiliate made available to ICCMIC a secured warehouse lending facility of up to $300 million. That facility was terminated by ICCMIC in June 1999 because ICCMIC had a substantial cash position at the time and wished to avoid incurring loan facility fees that would otherwise have been payable under that facility. In addition, Prudential Securities may actively trade ICCMIC common stock 53 for its own account or for the accounts of its customers and, accordingly, may at any time hold a long or short position in ICCMIC common stock. Financial Projections Relating to ICCMIC The following financial projections relating to ICCMIC should be read together with the discussion under the caption "Cautionary Statement Concerning Forward-Looking Statements." Projected Balance Sheet (in thousands)
Year 1 Year 2 Year 3 Year 4 ------ ------ ------ ------ Total Assets $912,335 $839,081 $763,535 $688,939 ======== ======== ======== ======== Total Liabilities 547,004 473,783 399,492 327,136 Total Stockholders' Equity 365,331 365,298 364,043 361,803 -------- -------- -------- -------- Total Liabilities & Stockholder $912,335 $839,081 $763,535 $688,939 Equity ======== ======== ======== ======== 28,500 28,500 28,500 28,500 Common Shares Outstanding $ 12.82 $ 12.82 $ 12.77 $ 12.69 Book Value per Share/1/ - ----------------------------------- /1/ Marked to estimated market values.
54 Projected Income Statement (in thousands)
Year 1 Year 2 Year 3 Year 4 ------ ------ ------ ------ Total Revenue $81,009 $85,477 $88,398 $92,916 Total Expenses 45,894 49,600 51,948 55,565 ------- ------- ------- ------- Net Earnings $35,115 $35,877 $36,450 $37,351 ======= ======= ======= ======= Funds from Operations/1/ $38,570 $39,982 $41,355 $43,056 ======= ======= ======= ======= Diluted Earnings per Share $ 1.23 $ 1.26 $ 1.28 $ 1.31 Diluted Funds from Operations/1/ per Share $ 1.35 $ 1.40 $ 1.45 $ 1.51 Funds from Operations/1/ Annual Growth Rate 18.4% 3.7% 3.4% 4.1% Dividends $34,200 $35,910 $37,706 $39,591 Dividends per Share $ 1.20 $ 1.26 $ 1.32 $ 1.39 Funds from Operations/1/ Payout Ratio 88.7% 89.8% 91.2% 92.0% Diluted Common Shares Outstanding 28,500 28,500 28,500 28,500
__________________________ 1/ Funds from Operations means net earnings adjusted by adding back non-cash - - charges, such as depreciation, certain amortization expenses and most non- recurring gains and losses. 55 Projected Cash Flow Statement
Year 1 Year 2 Year 3 Year 4 ------ ------ ------ ------ (in thousands) Total Cash Provided (Used) by $ 38,773 $ 39,531 $ 41,370 $ 42,536 Operating Activities Total Cash Provided (Used) for Investing Activities (322,204) 69,286 49,811 56,178 Total Cash Provided (Used) by Financing Activities 204,171 (109,558) (112,445) (112,418) --------- --------- --------- --------- Net Increase (Decrease) in Cash and Cash (79,260) (741) (21,264) (13,704) Equivalents Cash and Cash Equivalents at Beginning of Period 116,539 37,279 36,537 15,273 --------- --------- --------- --------- Cash and Cash Equivalents at End of Period $ 37,279 $ 36,537 $ 15,273 $ 1,569 ========= ========= ========= =========
56 Management Agreement; Appraisal General. ICCMIC's management agreement with the manager provides that if ICCMIC terminates or fails to renew the management agreement after October 22, 1999, then ICCMIC shall pay the manager a termination fee. The merger agreement between ICCMIC and ICII provides for an appraisal of the value of the termination fee pursuant to a process set forth in the management agreement, except that the merger agreement imposes a $35 million cap on the termination fee, and for the merger consideration payable to ICCMIC stockholders other than ICII and its subsidiaries to be adjusted depending on the results of the appraisal process. If the appraised value of the termination fee is less than $35 million, then the $11.50 per share cash payment for each share of ICCMIC common stock (other than shares held by ICII and its subsidiaries) will be increased by an amount of cash equal to the quotient of: . the difference between $35 million and the appraised value of the termination fee, divided by . the sum of the number of shares held by ICCMIC stockholders (other than ICII and its subsidiaries) and the number of shares subject to ICCMIC stock options that have an exercise price of less than $11.50 per share. The merger consideration will not be reduced if the appraised value of the termination fee is greater than $35 million. See "The Merger Agreement - Merger Consideration." ICCMIC's management agreement with the manager is expected to expire on October 22, 1999. However, the parties have agreed that ICCMIC will not be required to pay the termination fee unless the merger agreement is terminated, in which event the termination fee will be due and payable at that time. In accordance with the procedures indicated in the merger agreement and the management agreement, the special committee (on behalf of ICCMIC) and the manager each selected an independent appraisal firm to conduct an appraisal of the value of the manager's termination fee. The special committee selected Stanger, while the manager selected Houlihan Lokey. Under the procedures indicated in the merger agreement and the management agreement, the appraised value of the termination fee is to be determined as follows: . If Stanger and Houlihan Lokey were to arrive at appraised values that are identical or that differ by an amount that does not exceed 20% of the higher of the two appraised values, the appraised value of the termination fee would equal the average of the two appraised values. . If, on the other hand, Stanger and Houlihan Lokey were to arrive at appraised values that differ by more than 20% of the higher of the two appraised values, then the two firms would jointly select a third, independent appraisal firm to conduct another appraisal (or, if they were unable to agree on a third appraisal firm within 45 days, either would be able to request that the American Arbitration Association select the third appraiser). In that case, the appraised value that would control for purposes of the merger agreement would be the value arrived at by the third appraiser, but that final appraised value could not be less than the lower of the two initial appraised values nor more than the higher of the two initial appraised values. 57 Each of Stanger and Houlihan Lokey has completed an appraisal of the value of the termination fee. Stanger arrived at an appraised value of the termination fee of $18 million. Houlihan Lokey arrived at an appraised value of the termination fee of $45 million. Each of these appraisals is qualified by certain assumptions, limitations and conditions described in Appendix C. Because the two appraised values differ by more than 20% of the higher of the two values, a third appraiser, Eastdil, has been jointly selected by Stanger and Houlihan Lokey. The appraised value arrived at by Eastdil will be the appraised value of the termination fee unless it is less than $18 million (in which case the appraised value of the termination fee will be $18 million), or more than $35 million (in which case the appraised value of the termination fee will be $35 million and there will be no adjustment to the merger consideration). We expect to receive Eastdil's appraisal report no later than November 1999. [To be updated to describe the third appraisal.] For a summary of the Stanger, Houlihan and Eastdil appraisals, please read Appendix C in its entirety. Benefits and Detriments to Nonaffiliated Stockholders ICII and ICCMIC believe that the proposed merger will allow stockholders other than ICII to realize the value of their investment in ICCMIC common stock in cash at a price higher than the highest trading price of ICCMIC's common stock in the year prior to the mailing of this proxy statement. This price represents a significant premium to the market price for ICCMIC's common stock immediately prior to the announcement of ICII's initial offer. The proposed merger would eliminate the risk to ICCMIC stockholders of a decline in the value of ICCMIC's common stock. The primary detriment of the proposed merger to ICCMIC stockholders other than ICII is that they will cease to have any ownership interest in ICCMIC and will cease to participate in the future earnings, cash flow or growth of ICCMIC or benefit from any increases in the value of ICCMIC's assets and common stock. In addition, stockholders other than ICII may recognize a taxable gain upon the completion of the proposed merger, depending upon the tax basis of their ICCMIC common stock. ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger Purpose. The purpose of the proposed merger is for ICII to acquire all of the outstanding common stock of ICCMIC not already owned by ICII, while providing ICCMIC stockholders other than ICII and its subsidiaries with the opportunity to liquidate their investment in ICCMIC for cash at a price representing a significant premium to the market price for ICCMIC common stock prior to the initial announcement of ICII's acquisition offer. ICII is proposing to acquire ICCMIC on the terms described herein because of its belief that the potential benefits, after taking into account the potential detriments, of the merger as discussed above are superior to the potential benefits ICCMIC stockholders, including ICII, might have received, and the benefit that ICII, as the owner of the manager, might have received, from the Commercial Mortgage REIT proposal or any of the other proposals described herein. Alternatives. Prior to reaching its decision to pursue the proposed merger, ICII considered various alternatives to entering into the merger agreement, including: . a two-step acquisition of ICCMIC, consisting of a first step tender offer and a second step merger; 58 . pursuing the joint proposal with the Commercial Mortgage REIT described under the caption "Special Factors: Background, Purpose and Effects of the Proposed Merger - Background of the Proposed Merger" and "- Negotiations with the Commercial Mortgage REIT"; and . continuing ICII's existing ownership interest in ICCMIC and approving the Commercial Mortgage REIT proposal. The primary benefit to ICII of the two-step acquisition alternative would have been the possibility of completing an acquisition of ICCMIC in a short time period and, possibly, avoiding the time and expense of seeking stockholder approval at a meeting of ICCMIC's stockholders. ICII ultimately decided against this alternative, however, primarily because it preferred to negotiate a transaction that the ICCMIC board would support as being fair to, and in the best interests of, ICCMIC's stockholders. ICII also believed that the two-step structure would have increased the total transaction costs of its acquisition of ICCMIC. The principal benefit that the joint proposal with the Commercial Mortgage REIT appeared to offer to ICII was the possibility of reducing ICII's overall transaction costs and of enabling ICII to acquire those assets in which it has the greatest investment interest and to obtain potential related tax benefits. It also would have enabled ICCMIC stockholders to exchange their ICCMIC shares for shares in the surviving entity, thereby preserving the possibility of their participating in its future results of operations. ICII and the Commercial Mortgage REIT were not ultimately able to reach agreement with the special committee on the terms of such a transaction, however, and it was abandoned. See "Special Factors: Background, Purpose and Effects of the Proposed Merger- Negotiations with the Commercial Mortgage REIT." ICII also considered maintaining ICII's current investment in ICCMIC and accepting the Commercial Mortgage REIT proposal. ICII decided against this alternative due to the potential benefits of the merger discussed below. Benefits and Detriments of the Proposed Merger to ICII. The primary benefits of the merger to ICII are as follows: . the re-acquisition of mortgage loans originated by SPB and the acquisition of a portfolio of other loans that are consistent with the loan origination and investment strategies of SPB will enhance SPB's portfolio of commercial mortgage loans; . the reduction of overall operational and administrative costs by eliminating the costs associated with the separate public ownership of ICCMIC, including the costs of investor relations, public reporting, mailings to shareholders, directors' and officers' liability insurance, directors' fees, administration of ICCMIC's treasury department, legal expenses and consultant fees; . the compensation received by ICII in the merger transaction, taken as a whole, which ICII believes fairly compensates it for the value of the management agreement that its subsidiary has with ICCMIC in a tax advantaged manner resulting from the fact that the 59 tax basis of ICCMIC's assets exceeds the merger price and related merger transaction costs; and . the increase in the resulting corporation's ability to retain capital by eliminating the need in the year 2000 to comply with the distribution requirements imposed by the federal tax law dividend requirements for REITs. The primary detriments of the completion of the merger to ICII are as follows: (i) the substantial amount of cash that will be required to complete the transaction, including both the merger consideration payable to ICCMIC stockholders and the associated transaction costs, including those of both ICII and ICCMIC, and (ii) the significant investment and other market risks that ICII will incur in acquiring from ICCMIC and ultimately disposing of those assets that are not consistent with ICII's long term business objectives. ICII's Analysis of the Proposed Merger ICII believes that the merger agreement and the proposed merger are fair to ICCMIC's stockholders, including those that are unaffiliated with ICII or its affiliates. In determining that the merger agreement and the proposed merger are fair to the ICCMIC stockholders, ICII considered the following material factors: . the fact that the minimum $11.50 per share cash price to be received by ICCMIC stockholders other than ICII and its subsidiaries represented a premium of approximately 16.5% to the closing price of ICCMIC's common stock on the Nasdaq Stock Market of $9.875 on May 12, 1999, the day before ICII made its initial $11.00 offer, and exceeds the highest closing price for ICCMIC's common stock since August, 1998; . the fact that the minimum $11.50 per share cash price exceeds the per share estimated net present value of the projected future cash flows of ICCMIC; . the estimated net present value of the liquidation of ICCMIC's assets of $12.57 per share as previously estimated by Prudential Securities (without any independent evaluation or appraisal), before deducting the termination fee payable upon termination or non-renewal of the management agreement; . the fact that ICII agreed to increase the per share merger consideration to the extent that the appraised value of the termination fee payable under the management agreement is determined to be less than $35 million, without any corresponding decrease in the merger consideration if the appraised value is determined to exceed $35 million; . ICCMIC's opportunity under the merger agreement, during the 60-day period following the engagement of the initial appraisers, to solicit alternative proposals that might be superior to the proposed merger, and during that period and thereafter, to terminate the merger agreement upon receiving and approving an alternative transaction superior to the proposed merger; and the fact that as of the 60 filing of this proxy statement ICII has been informed that neither ICCMIC nor the special committee has received an alternative transaction proposal deemed superior to the proposed merger; . ICII's agreement that, if the merger agreement is terminated (other than as a result of a breach of the merger agreement by ICCMIC), the manager would accept the lesser of the appraised value of the termination fee and $35 million in full satisfaction of the amount payable because of the termination or non-renewal of the management agreement; . ICII's review of the other potential mergers and strategic alternatives, including the contacts, discussions and analyses described in "-Background of the Proposed Merger" regarding possible mergers, acquisitions and business combinations involving ICCMIC; . the fact that ICII agreed to purchase approximately $3.9 million of mortgage loans previously acquired by ICCMIC from SPB (if not first repurchased by SPB); . current industry, economic and market conditions and trends in the real estate acquisition, mortgage and leasing markets generally, including the highly competitive nature of these markets and the uncertainty concerning the future success of these markets; and . the terms and conditions of the merger agreement, in addition to those noted above, including: . ICCMIC's right to continue to declare and pay regular quarterly dividends and a final dividend constituting the remainder of its taxable income, if any, for the year through the date of the merger not previously paid to ICCMIC stockholders, . the limited scope of the parties' representations, warranties and covenants, and . the limited number of conditions to the obligations of ICII to perform under the merger agreement. ICII also believes that the proposed merger is procedurally fair because: . the special committee that approved the proposed merger consisted exclusively of independent directors appointed and empowered to review, evaluate and negotiate the terms of any proposed extraordinary transaction between ICCMIC and ICII and to ensure fairness to ICCMIC's stockholders; . the special committee retained and was advised by independent legal counsel; . the special committee retained Prudential Securities as its independent financial advisor to assist it in evaluating the proposed merger, and received an opinion from Prudential Securities concluding that the merger consideration to be received by ICCMIC 61 stockholders is fair from a financial point of view, as described in "- Opinion of the Financial Advisor to the Special Committee" above; . the proposed merger requires stockholder approval of the merger agreement and the proposed merger by a majority of the outstanding shares of ICCMIC common stock entitled to vote at the special meeting that are not held by ICII and Messrs. Snavely and Villani; . the cash price of $11.50 per share is subject to increase, and the other terms and conditions of the merger agreement resulted from active arm's-length negotiations between the special committee and ICII; and . ICCMIC's opportunity under the merger agreement, during the 60-day period following the engagement of the initial appraisers, to solicit alternative proposals that might be superior to the proposed merger, and during that period and thereafter, to terminate the merger agreement upon receiving and approving an alternative transaction superior to the proposed merger. In light of the number and variety of factors ICII considered in connection with its evaluation of the proposed merger, and the fact that various directors of ICII may have attributed greater importance to some of these factors than others, ICII is unable to assign relative weights to the foregoing factors. Consequences of the Proposed Merger Surviving Corporation. If the proposed merger is completed, ICCMIC Acquisition Corp. will be merged with and into ICCMIC. ICCMIC will continue as the surviving corporation after the proposed merger as a wholly-owned subsidiary of ICII. Following the completion of the proposed merger, stockholders other than ICII will cease to participate in the future earnings, cash flow or growth of ICCMIC or benefit from any increases in the value of ICCMIC common stock or assets. Conversely, they will no longer bear the risk of any decreases in the value of ICCMIC`s common stock or assets. Delisting. Because all of ICCMIC's common stock that is outstanding immediately prior to the date of completion of the proposed merger will be canceled in exchange for payment of the cash merger consideration as a result of the proposed merger, the common stock will be delisted from the Nasdaq Stock Market. Dividends and Distributions. Dividends and other distributions by ICCMIC having a record date prior to the date of completion of the proposed merger will remain payable to ICCMIC's stockholders who held their shares on the record date. This applies even if the payment date is after the completion of the proposed merger, as in the case of the final dividend, which ICCMIC will declare prior to completion of the proposed merger and pay as promptly as possible after the proposed merger is completed. All other distributions by the surviving corporation after completion of the proposed merger will be paid to ICII and not to ICCMIC's current stockholders. Deregistration. ICCMIC's common stock is currently registered under the Exchange Act. ICII has stated its intention to terminate the registration of ICCMIC's common stock under the Exchange Act following the proposed merger. After deregistration, ICCMIC will be relieved of its obligation to comply with the requirements of the Exchange Act, including its obligations to comply with the following: 62 . the filing of periodic reports pursuant to Section 13 of the Exchange Act; . the proxy rules of Exchange Act Regulation 14A; . the short-swing trading profits provision of Exchange Act Section 16; and . with respect to future transactions involving ICCMIC, the "going private" provisions of Exchange Act Rule 13e-3. Directors and Officers. The directors and officers of ICCMIC Acquisition Corp. immediately prior to the proposed merger will be the directors and officers of the surviving company immediately after the proposed merger. Charter and Bylaws. The charter and bylaws of ICCMIC Acquisition Corp. in effect immediately prior to the proposed merger will be the charter and bylaws of the surviving company immediately after the proposed merger. Potential Asset Sales Prior to the Proposed Merger ICII intends to discuss with the board of directors of ICCMIC the sale or other disposition prior to completion of the merger of those ICCMIC assets that ICII believes to be desirable to sell as promptly as practicable. Sales or other dispositions proposed by ICII will only take place prior to completion of the merger if the ICCMIC board determines that the relevant assets will be sold or otherwise disposed of on terms that would be advantageous to ICCMIC as a separate ongoing entity in the event that the merger is not completed. Plans for ICCMIC after the Proposed Merger ICII intends to sell those assets of ICCMIC that do not conform with ICII's long term business objectives. ICII also expects to terminate ICCMIC's status as a REIT under the federal tax laws following completion of the merger. ICII does not currently have any other plans or proposals for extraordinary corporate transactions involving ICCMIC. ICII's plans with respect to ICCMIC may change in light of changes in market conditions and other considerations and ICII reserves the right to alter its plans at any time following the merger. Conduct of the Business of ICCMIC if the Proposed Merger is not Completed Since September of 1998, ICCMIC's investment activities have been suspended while ICCMIC has been exploring opportunities for mergers, acquisitions and other strategic transactions. If the proposed merger with ICCMIC Acquisition Corp. is not completed and no superior proposal is accepted, ICCMIC's board will at that time evaluate the strategic and other alternatives available to ICCMIC. ICCMIC's management agreement with the manager is expected to expire on October 22, 1999. ICCMIC's board of directors intends to hire 16 employees of the manager on a full-time salaried basis to manage ICCMIC's day-to-day operations. ICCMIC's board of directors believes that this internalization of management operations will result in significant cost savings to ICCMIC compared to the payments that ICCMIC would have made to the manager if the term of the management agreement were extended and if none of the other terms of the management agreement were changed. 63 Financing; Source of Funds ICII estimates that the total amount of funds required to pay the merger consideration to the ICCMIC stockholders other than ICII and its subsidiaries will be approximately $300 million. In addition, ICII and ICCMIC estimate that there will be approximately $[_____] in filing, legal, accounting and other fees and expenses payable by ICII and ICCMIC as described in more detail below under "Fees and Expenses." ICII has advised ICCMIC that ICII will obtain those funds from a combination of (i) cash and liquid assets held by ICII and its subsidiaries, (ii) cash and cash equivalents held by ICCMIC, excluding amounts that ICCMIC expects to pay as dividends in accordance with the merger agreement (ICCMIC had approximately $120 million of cash and cash equivalents as of September 30, 1999) and (iii) anticipated proceeds of sales or other dispositions of ICCMIC assets prior to or at the closing of the merger. To the extent, if any, that additional cash may be required to complete the merger, ICII will obtain those funds from borrowings or other financing arrangements with third parties. While ICII has had preliminary discussions regarding those financing arrangements, it currently believes that no third party financing arrangements will be necessary and it has not entered into any specific agreements or arrangements for that purpose. The merger is not subject to a financing contingency and ICII will be required, subject to satisfaction of all of the conditions to its obligations under the merger agreement, to complete the merger whether or not ICII enters into any third party financing arrangements or is able to arrange for sale of ICCMIC assets at or following the closing of the merger. No Appraisal Rights ICCMIC stockholders who vote against the merger agreement and the proposed merger, i.e., dissent, are not entitled to seek appraisal rights or other similar rights. If the merger agreement and the proposed merger are approved by the required votes, stockholders that vote against the merger agreement and the proposed merger, like stockholders who vote to approve the merger agreement and the proposed merger, will be bound by the terms of the merger agreement to the same extent as those who vote in favor of it. The Maryland General Corporation Law does not provide appraisal rights or any other similar remedy to stockholders of a corporation in connection with a merger if the corporation's shares are listed on a national securities exchange, such as the Nasdaq Stock Market, on the record date for determining stockholders entitled to vote on the proposed merger. All of the shares of ICCMIC common stock outstanding on the record date for determining stockholders entitled to vote on the merger agreement and the proposed merger were listed on the Nasdaq Stock Market. Material Tax Consequences The exchange of ICCMIC common stock for cash by a stockholder in the proposed merger will be a taxable transaction under the Code and will also be a taxable transaction under state and local and other tax laws. The following discussion addresses only those stockholders who hold their ICCMIC common stock as a capital asset, and does not address all of the United States federal income tax consequences that may be relevant to particular stockholders in light of their individual circumstances or to stockholders who are subject to special rules (including, without limitation, financial institutions, tax exempt organizations, insurance companies, dealers in securities or foreign currencies, foreign holders, persons who hold such shares as a hedge against currency risk or a constructive sale or conversion transaction, or stockholders who acquired their shares pursuant to the exercise of employee stock options or otherwise as compensation). 64 In general, a stockholder will recognize gain or loss equal to the difference between the tax basis of the stockholder's ICCMIC common stock and the amount of cash received in exchange therefor. Such gain or loss will be capital gain or loss if the ICCMIC common stock is a capital asset in the hands of the stockholder and will be long-term gain or loss if the stockholder has held the ICCMIC common stock for more than 12 months as of the effective time of the proposed merger. Any loss recognized by a stockholder who has held his or her ICCMIC common stock for six months or less (after applying certain holding period rules), however, will be treated as a long-term capital loss to the extent of distributions from ICCMIC required to be treated by such stockholder as long- term capital gain. If the ICCMIC common stock is treated as a "United States real property interest," then, subject to the following discussion, under the Foreign Investment in Real Property Tax Act of 1980, as amended ("FIRPTA"), a foreign stockholder would be subject to: . United States federal income tax at regular graduated rates on gain recognized on the disposition of ICCMIC common stock pursuant to the proposed merger, and . withholding in respect of this tax at a rate of 10% of the amount realized by the foreign stockholder in the proposed merger. A "foreign stockholder" generally is a person or entity that, for United States federal income tax purposes, is a nonresident alien individual, a foreign corporation, a foreign partnership or a foreign estate or trust. In general, however, the gain recognized on the disposition of ICCMIC common stock by a foreign stockholder would not be subject to this tax under FIRPTA if: . ICCMIC is a "domestically controlled REIT," which is defined generally under the Code as a REIT in which, at all times during the five-year period preceding the proposed merger (or the period of the REIT's existence, if shorter), less than 50% of the fair market value of the REIT's outstanding stock was held directly or indirectly by foreign stockholders; or . ICCMIC's common stock is regularly traded on an established securities market within the meaning of the Code, and the foreign stockholder does not own, actually or constructively under attribution rules provided in the Code, in excess of 5% of the fair market value of all common stock outstanding at any time during the shorter of the five-year period preceding the proposed merger or the foreign stockholder's holding period. Although it has made no investigation, ICCMIC has no reason to believe that it is not a "domestically controlled REIT." ICCMIC's common stock is regularly traded on an established securities market within the meaning of the Code. Foreign stockholders are urged to consult their tax advisors concerning the potential applicability of these provisions and the consequences of a sale or other disposition of their ICCMIC common stock in advance of the proposed merger or as part of the proposed merger. 65 Gain recognized that is not subject to FIRPTA will nevertheless be taxable to a foreign stockholder if: . the foreign stockholder's investment in ICCMIC common stock is effectively connected with a U.S. trade or business engaged in by such stockholder, in which case the foreign stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain; or . the foreign stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and certain other conditions apply, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. If the gain on the sale of ICCMIC common stock were subject to taxation under FIRPTA, the foreign stockholder would be subject to similar treatment as U.S. stockholders with respect to such gain (subject to applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals, and the possible application of the 30% branch profits tax in the case of non-U.S. corporations). To avoid withholding, non-foreign stockholders should certify their non- foreign status by completing the certification form that will be included with the letter of transmittal sent after the proposed merger. The exchange of ICCMIC common stock for cash by a stockholder will be reported to the Internal Revenue Service. "Backup" withholding at a rate of 31% will apply to payments made to a non-foreign stockholder (other than a corporation or any other exempt non-foreign stockholder) unless the non-foreign stockholder 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. A foreign stockholder will be exempt from backup withholding if the certification requirements described above are satisfied. Payment of the proceeds from the disposition of the ICCMIC common stock to or through the United States office of a broker is subject to information reporting and backup withholding unless the stockholder establishes an exemption from information reporting and backup withholding. Any amounts withheld from a stockholder under the withholding rules described above will be allowed as a refund or a credit against the stockholder's United States federal income tax liability, if the required information is furnished to the Internal Revenue Service on a timely basis. The federal income tax discussion set forth above is included for general information purposes only and is based upon present law. Due to the individual nature of tax consequences, stockholders are urged to consult their tax advisors as to the specific tax consequences to them of the proposed merger, including the effects of applicable state, local or other tax laws. Accounting Treatment The proposed merger will be accounted for by ICII as a purchase of an approximately 91.0% interest in ICCMIC under the "purchase" method of accounting in accordance with generally accepted accounting principles. 66 Under this accounting method, ICCMIC's historical results for the periods before the proposed merger will remain unchanged. On the date of the proposed merger, ICII will record ICCMIC's assets and liabilities on its books based on their estimated fair value when the proposed merger is completed. Pending Litigation ICCMIC, its directors and ICII have been named as defendants in a putative class action lawsuit filed on July 22, 1999 by Riviera-Enid, a Florida limited partnership, in the Superior Court of the State of California for Los Angeles County, California, docket number BC213902. The complaint alleges that the proposed merger constitutes a breach of fiduciary duty by the defendants because the merger price is alleged to be less than the liquidation value of ICCMIC's assets. The complaint also alleges that the defendants have acted to the detriment of ICCMIC's non-ICII stockholders in that: (i) they allegedly failed to solicit arm's-length bids to sell ICCMIC; (ii) the proposed price allegedly represents a low premium over the market price and is below the book value of ICCMIC's common stock; (iii) ICII allegedly had an advantage over other potential bidders as a result of the management agreement termination fee and (iv) the proposed merger allegedly does not "give fair valuation" to ICCMIC- owned property. The complaint also alleges that ICII will receive $4 million more than it otherwise would have received but for the proposed merger, in connection with a termination fee received on an unidentified mortgage loan secured by property in the United Kingdom. Finally, the complaint alleges that some of the directors have conflicts of interest because of their affiliation with ICII and that the proposed merger will benefit ICII at the expense of ICCMIC's other stockholders. The complaint seeks certification of a class of all stockholders of ICCMIC whose stock will be acquired in connection with the proposed merger and seeks injunctive relief that would, if granted, prevent the completion of the proposed merger. The complaint also seeks damages in an unspecified amount and other relief. No motion for preliminary injunction has been filed. The defendants believe that the material allegations of the complaint are without merit. INTERESTS OF CERTAIN PERSONS IN THE PROPOSED MERGER General You should be aware that directors and officers of ICCMIC may have interests in the proposed merger or relationships, including those described below, that are different from, or in addition to, your interests as a stockholder. The special committee and the board of directors were aware of these potential or actual conflicts of interest and considered them along with the other matters described under "- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger." See also "Relationships and Transactions Between ICII, ICCMIC and Affiliates." Overlapping Directors and Officers Mr. Snavely is a director of ICCMIC and a director and executive officer of ICII. Mr. Villani is a director of ICCMIC and a director and former executive officer of ICII. Mr. Snavely is the chairman of both companies. In addition, the executive officers of ICCMIC, Messrs. Karlan, Meltzer and Seifert, are executive officers of ICCMIC's manager, which is a subsidiary of ICII. Messrs. Snavely, Villani and Karlan are also directors of the manager and Mr. Karlan is also a director of ICCMIC. Messrs. Snavely and Villani, as a result of their respective positions with ICII and the manager, and Mr. Karlan, as a result of his position with the manager, owe fiduciary duties to the stockholders of 67 either ICII or the manager, as the case may be, in addition to the fiduciary duties they owe to the stockholders of ICCMIC. At times, they may be confronted by issues, including the proposed merger, that present them with potentially conflicting interests and obligations. Because of the conflicting fiduciary duties of these individuals, ICCMIC's board of directors empowered the special committee to represent the interests of ICCMIC stockholders in the review, evaluation and negotiation of the proposed merger. Due to their potential or actual conflicts, Messrs. Snavely, Villani and Karlan were not appointed as members of the special committee. Treatment of Stock Options Each of the directors and executive officers of ICCMIC, other than Messrs. Snavely and Villani, whose stock options were cancelled, owns outstanding options to purchase ICCMIC common stock that were issued pursuant to ICCMIC's 1997 Stock Option Plan, as amended (the "1997 Stock Option Plan"). Upon approval of the merger agreement and the proposed merger by ICCMIC's stockholders, all outstanding ICCMIC stock options will become immediately exercisable. Upon completion of the proposed merger, these stock options will either be: . converted into immediately exercisable options to purchase a number of shares of ICII common stock at an exercise price determined based on the fair value of the respective stock options, or determined under the formula required by the Internal Revenue Code for converting incentive stock options if the holder of an incentive stock options so elects; or . exchanged for cash based on: . for stock options whose exercise price is less than the merger price per share, the greater of (x) the difference between the exercise price and the merger consideration and (y) the fair value of the stock option; or . for stock options whose exercise price is greater than the merger price per share, $1.10 per share (which the parties have agreed is the fair value of such stock options). Conversion for New ICII Stock Options. The conversion ratio and exercise price of ICII stock options to be received in exchange for ICCMIC stock options will be determined so that the fair value of the ICCMIC stock options held before the proposed merger equals the fair value of the ICII stock options held after the proposed merger. ICCMIC and ICII will determine the fair value of in- the-money ICCMIC stock options using the Black-Scholes option pricing model. The Black-Scholes option pricing model is a commonly used formula that option traders and other option pricing experts use when attempting to price stock options. This model determines the value of an option based on six variables: . the current price of the common stock, . the exercise price for the stock option, . the risk-free interest rate, . the expected duration of the stock option, . the volatility of the common stock, and . the dividend policies of the issuer. ICCMIC and ICII have agreed that the Black-Scholes value of an ICCMIC stock option whose exercise price exceeds the merger price is $1.10 per share. 68 Incentive stock options will be converted into new ICII options under the formula prescribed by the Internal Revenue Code for converting incentive stock options if the holder of such incentive stock options fails to waive this method. That formula preserves the aggregate spread (the difference between the option exercise price and the fair market value of the shares subject to the option, determined immediately before and immediately after the conversion) of the options, which is not necessarily the Black-Scholes value of the options. The ICII stock options received in exchange for ICCMIC stock options will remain exercisable for one year following the completion of the proposed merger if the option holder does not become or remain an employee of ICII or the manager immediately after completion of the proposed merger. The ICII stock options will remain exercisable for one year following termination of employment with ICCMIC or the manager (or, after the effective time, ICII or a subsidiary) if the option holder is terminated without cause or pursuant to a constructive termination or voluntarily terminates his or her employment for good reason under an employment or severance agreement. Exchange for Cash. Alternatively, under the merger agreement, a holder of an in-the-money stock option can elect to exchange all or part of the stock option for cash equal to the greater of: . the difference between the per share merger consideration, i.e., $11.50 plus any increase resulting from the appraisal of the management agreement termination fee, and the exercise price of the stock option, and . the fair value of the stock option, using the Black Scholes option pricing model. All or any part of an out-of-the-money stock option can also be cashed out for $1.10 per share, which ICII and ICCMIC agree represents the fair value of those out-of-the-money stock options. The fair values of in-the-money ICCMIC stock options have not yet been determined. 69 The table below shows the number of ICCMIC stock options held by each of the ICCMIC directors and executive officers as of the date of this proxy statement and their respective exercise prices:
- ------------------------------------------------------------------------------------------------------------ Name Option Shares Exercise Price - ---- ------------- -------------- - ------------------------------------------------------------------------------------------------------------ Patric H. Hendershott 30,000 $15.00 15,000 $ 9.00 - ------------------------------------------------------------------------------------------------------------ Joseph A. Jaconi, Jr. 30,000 $15.00 45,000 $ 9.00 - ------------------------------------------------------------------------------------------------------------ Louis H. Masotti 30,000 $15.00 15,000 $ 9.00 - ------------------------------------------------------------------------------------------------------ Kenneth A. Munkacy 30,000 $15.00 15,000 $ 9.00 - ------------------------------------------------------------------------------------------------------ Mark S. Karlan 517,500 $15.00 258,750 $ 9.00 - ------------------------------------------------------------------------------------------------------ Michael Meltzer 40,000 $15.00 34,500 $ 9.00 - ------------------------------------------------------------------------------------------------------ Norbert M. Seifert 69,000 $15.00 34,500 $ 9.00 - ------------------------------------------------------------------------------------------------------ H. Wayne Snavely 0 N/A - ------------------------------------------------------------------------------------------------------ Kevin E. Villani 0 N/A - ------------------------------------------------------------------------------------------------------
Prior to, and in connection with, the signing of the merger agreement, ICCMIC's manager, Imperial Credit Commercial Asset Management Corp., along with Messrs. Snavely and Villani, cancelled all of their ICCMIC stock options. These stock options were cancelled for a nominal payment from ICCMIC. ICII has informed ICCMIC that, following the completion of the proposed merger, ICII will reimburse Messrs. Snavely and Villani for their cancelled stock options according to the option pricing formula, described above, provided in the merger agreement for exchange of ICCMIC stock options. The following table shows the number of these cancelled stock options and their respective exercise prices:
- ------------------------------------------------------------------------------------------------------ Name Option Shares Exercise Price - ---- ------------- -------------- - ------------------------------------------------------------------------------------------------------ H. Wayne Snavely 258,750 $15.00 129,375 $ 9.00 - ------------------------------------------------------------------------------------------------------ Kevin E. Villani 258,750 $15.00 129,375 $ 9.00 - ------------------------------------------------------------------------------------------------------ Imperial Credit Commercial Asset 1,691,250 $15.00 Management Corp. - ------------------------------------------------------------------------------------------------------
Agreements between Mark S. Karlan, ICII and the Manager Mr. Karlan, who is President, Chief Executive Officer and a member of the ICCMIC board, is also President, Chief Executive Officer and a member of the board of directors of Imperial Credit Commercial Asset Management Corp., ICCMIC's manager. Mr. Karlan entered into an employment agreement with the manager at the time of ICCMIC's initial public offering in October, 1997 which provided for Mr. Karlan's employment as president and chief executive officer of the manager for a term of five years. Among other things, the employment agreement gives Mr. Karlan the right to receive 15% of the total economic value of the manager upon certain events, including a buyout of the management agreement by ICCMIC or sale of the management agreement to a third party. 70 The manager and Mr. Karlan entered into a supplemental letter agreement dated July 6, 1999 to clarify certain provisions of Mr. Karlan's employment agreement in light of the prospect of the ICII merger proposal. In the supplemental letter agreement, Mr. Karlan and the manager have agreed that if the ICII merger proposal is completed, or if there is a payment to the manager of a termination fee pursuant to a termination or buyout of the management agreement then the manager will satisfy its contractual obligation to pay 15% of the total economic value of the manager to Mr. Karlan by a single cash lump sum payment equal to 15% of the appraised value of the management agreement termination fee (subject to a maximum valuation of $35 million), reduced by certain appraisal costs. The supplemental letter agreement also provides that, in the event that Mr. Karlan's employment with the manager is terminated before the expiration of his five year employment term in 2002, other than by the manager for cause, the manager will pay Mr. Karlan liquidated damages in a single cash lump sum equal to the greater of (x) the sum of his base salary (at the rate in effect on July 6, 1999) and bonus (as earned in respect of the calendar year 1998) multiplied by the remainder of his five year employment agreement term and (y) the severance benefits to which Mr. Karlan would be entitled under the employment retention plan with ICII and the manager. Indemnification of Directors and Officers In the merger agreement, ICII and the surviving corporation agreed that for six years after the completion of the proposed merger they will honor all existing rights of indemnification or exculpation, whether under ICCMIC's bylaws or charter, an agreement or otherwise, currently provided to directors, officers, employees and agents of ICCMIC and its subsidiaries and the manager. ICII and the surviving corporation have also jointly agreed to indemnify all current directors and officers of ICCMIC, any of its subsidiaries and the manager against all liabilities relating to acts or omissions taken in their corporate capacities before completion of the proposed merger. Additionally, ICII shall, or shall cause the surviving corporation to, maintain directors' and officers' liability insurance for all persons covered by ICCMIC's current insurance for six years after the completion of the proposed merger. Directors' and officers' liability insurance is a standard form of corporate insurance and covers the acts or omissions of these persons in their capacities as directors and officers occurring prior to the proposed merger. The coverage of this insurance will be equivalent to existing coverage. However, if the annual cost of that insurance would exceed 300% of the annual cost of the current insurance coverage, ICII and the surviving corporation will only be required to obtain the maximum coverage that can be obtained for that 300% amount. ICII/Manager Employment Retention Plan Messrs. Karlan, Meltzer and Seifert, who are officers (and, in the case of Mr. Karlan, a director) of ICCMIC, are also officers (and, in the case of Mr. Karlan, a director) of the manager and participants in the "Imperial Credit Industries, Inc. and Imperial Credit Commercial Asset Management Corp. Employment Retention Plan," which was executed as of January 27, 1999. The retention plan provides benefits to a participant if his or her employment with ICII, the manager or ICCMIC is terminated following a change in control of ICII, the manager or ICCMIC by his or her employer without cause, or by the participant with good reason. "Good reason" for resignation means any reduction in salary below the higher of the rate in effect on the date of the change in control or the rate in effect on the termination date; reduction of a participant's bonus below his or her average bonus over the last two full fiscal years before the change in control; a material diminution of the participant's duties, titles or responsibilities; a diminution in the participant's coverage by incentive compensation programs, welfare and pension plans; relocation of the participant's principal place of business by more than 25 miles, after the change in control, without his or her consent; or failure of ICII or the manager to cause a successor to assume and perform the retention plan. In addition, if a participant's employment with ICCMIC or the manager is 71 terminated prior to a "change in control" at the request or suggestion of an entity acquiring ownership and control of ICCMIC or the manager, the participant will be deemed to have incurred a termination immediately following the change in control so as to be entitled to benefits under the plan. Mr. Karlan's supplemental letter agreement (see "- Agreements Between Mark S. Karlan, ICII and the Manager") states that the proposed merger will be deemed a "change in control" for purposes of the retention plan. In addition, it is expected that ICII, which will acquire ownership of ICCMIC upon completion of the proposed merger, will request or suggest, upon ICCMIC's anticipated internalization of management on October 22, 1999, that employees of the manager terminate their employment with the manager and become employees of ICCMIC. Accordingly, employees of the manager who cease to be employees of the manager and become employees of ICCMIC upon ICCMIC's internalization of management will become entitled to benefits under the retention plan, payable upon the completion of the proposed merger. Benefits under the retention plan consist, generally, of a lump sum cash payment of a percentage of annual base salary and bonuses for the calendar year 1998. The percentages for the participants who are directors or officers of ICCMIC are: 300% for Mr. Karlan, 250% for Mr. Meltzer and 200% for Mr. Seifert. The participant is also entitled to continuation of medical and other welfare benefits for two years following his or her termination date, and the immediate acceleration and payment of deferred compensation under ICII's deferred compensation plan, any accrued but unused vacation pay and any accrued but unpaid bonus. No mitigation of damages is required. Mr. Karlan's payments under the retention plan would be reduced by the amount of any payment he receives from similar benefits under his employment agreement as clarified by his supplemental letter agreement. Payments under the retention plan are limited to the amount (generally, three times average compensation) that can be made without subjecting the participant to an excise tax under the "golden parachute" provisions of Section 4999 of the Code. THE MERGER AGREEMENT The following is a brief summary of the material provisions of the merger agreement and may not contain all of the information that you would consider to be important. The summary is qualified in its entirety by reference to the merger agreement, which is attached as Appendix A to this proxy statement. The Proposed Merger The merger agreement provides for the merger of ICCMIC Acquisition Corp. with and into ICCMIC. ICCMIC will continue as the surviving corporation following completion of the proposed merger as a wholly-owned subsidiary of ICII. ICCMIC's stockholders other than ICII and its subsidiaries will receive solely cash in exchange for their ICCMIC shares and none will continue as shareholders of the surviving corporation. Effective Time The proposed merger will be effective when articles of merger have been filed and accepted for record by the State Department of Assessments and Taxation of Maryland or at such other time as is agreed to by ICCMIC and ICII. The articles of merger will be filed as soon as practicable after the ICCMIC stockholders approve the merger agreement and the proposed merger by the required votes and the other conditions to the completion of the proposed merger have been satisfied or waived. See "- Conditions." 72 Merger Consideration In the proposed merger, each outstanding share of ICCMIC common stock, other than shares of common stock held by ICII and its subsidiaries, will be converted into the right to receive $11.50 in cash from ICII, subject to increase as described below. The management agreement provides that ICCMIC must pay to the manager a termination fee if ICCMIC terminates or does not renew the management agreement at any time on or after October 22, 1999. In addition, the merger agreement requires that appraisal firms be hired to appraise the value of the fee payable on termination of the management agreement. In the proposed merger, if the appraised value is less than $35 million, then the $11.50 per share cash payment for each share of ICCMIC common stock will be increased by an amount of cash equal to the quotient of: . the difference between $35 million and the appraised value of the termination fee, divided by . the sum of the number of shares held by ICCMIC stockholders other than ICII and its subsidiaries and the number of shares subject to ICCMIC stock options that have an exercise price of less than $11.50 per share. The merger consideration will not be reduced if the appraised value of the termination fee is greater than $35 million. For a more detailed description of the process by which the termination fee is being appraised, see "Special Factors: Background, Purpose and Effects of the Proposed Merger - Management Agreement; Appraisal." The merger consideration was determined as the result of arm's-length negotiations between the special committee and ICII. See "Special Factors: Background, Purpose and Effects of the Proposed Merger - Background of the Proposed Merger," "- ICII's Purpose for Pursuing the Proposed Merger; Structure of the Proposed Merger," "- Recommendation of the Special Committee and the Board of Directors; Reasons for the Proposed Merger" and "- Opinion of the Financial Advisor to the Special Committee." Cancellation of ICCMIC Common Stock Any shares of ICCMIC common stock held by persons other than ICII and its subsidiaries will automatically be canceled and converted into the right to receive the merger consideration. Any shares of ICCMIC common stock held by ICII or its subsidiaries will also automatically be canceled and retired in the proposed merger and will cease to exist. No cash payment will be made in respect of these shares in the proposed merger. ICCMIC and its subsidiaries own no shares of ICCMIC common stock. 73 Payment Procedures ICII or ICCMIC will appoint a paying agent that will pay the merger consideration in exchange for certificates representing ICCMIC shares. ICII or ICCMIC Acquisition Corp. will deposit sufficient cash with the paying agent in order to permit the payment of the merger consideration. Promptly after the completion of the proposed merger, the paying agent will send ICCMIC stockholders (other than ICII and its subsidiaries) a letter of transmittal and instructions explaining how to send their stock certificates to the paying agent. The paying agent will mail checks for the appropriate merger consideration to ICCMIC stockholders promptly following the paying agent's receipt and processing of their ICCMIC stock certificates and properly completed transmittal documents. After the closing of the merger, each certificate that previously represented shares of ICCMIC common stock will represent only the right to receive the merger consideration and any dividends permitted by the merger agreement. No interest will be paid on the merger consideration or the dividend amounts. Stockholders should not send their common stock certificates now. They should send them only pursuant to instructions set forth in the letters of transmittal to be mailed to stockholders as soon as practicable after the effective time of the proposed merger. In all cases, the merger consideration will be provided only in accordance with the procedures set forth in this proxy statement, the merger agreement and the letters of transmittal. ICCMIC and ICII strongly recommend that certificates representing common stock and letters of transmittal be transmitted only by registered United States mail, return receipt requested, appropriately insured. Any stockholder whose certificates are lost will be required, at the holder's expense, to furnish a lost certificate affidavit and bond acceptable in form and substance to the paying agent. Any merger consideration held by the paying agent that remains unclaimed by stockholders for 180 days after the effective time of the proposed merger will be delivered to the surviving corporation, and, subject to escheat laws, any stockholders who have not theretofore made an exchange must thereafter look only to the surviving corporation for payment of their claim for the merger consideration. ICII will pay all charges and expenses of the paying agent in connection with the proposed merger and the payment and issuance of the merger consideration. Any questions concerning exchange and payment procedures and requests for letters of transmittal may be addressed to the paying agent. Transfer of Common Stock No transfer of common stock will be recorded on the stock transfer books of ICCMIC, or otherwise recognized, after the effective time of the proposed merger. If, at or after the proposed merger, certificates of ICCMIC common stock are presented, they will be canceled and exchanged for the right to receive the merger consideration, as provided in "- Payment Procedures. " Stock Option and Other Plans The effect of the merger on ICCMIC's outstanding employee stock options is described under "Interests of Certain Persons in the Proposed Merger - Treatment of Stock Options." 74 Directors and Officers The merger agreement provides that the directors and officers of ICCMIC Acquisition Corp. immediately before the completion of the proposed merger will be the directors and officers of the surviving corporation. Solicitation Period and Superior Proposals The merger agreement provided ICCMIC with a 60-day solicitation period, during which it was allowed to: . encourage, solicit, initiate, participate in or provide non-public information to facilitate discussions or negotiations with third parties concerning an alternative transaction involving the sale or other disposition of all or substantially all of the assets or equity securities of ICCMIC and its subsidiaries, or any tender offer or exchange offer for, or resulting in issuance of, 50% or more of the outstanding equity securities of ICCMIC; and . enter into an agreement respecting fees and expenses in connection with an alternative or competing transaction. The solicitation period began on August 13, 1999 and expired at 12:01 a.m. on October 13, 1999 with no superior proposal having been received. See "Special Factors: Background, Purpose and Effects of the Proposed Merger - 60-Day Market Check." Since the solicitation period has expired, ICCMIC now may not, directly or indirectly, solicit or initiate discussions or negotiations concerning an alternative or competing transaction and may not otherwise engage in the foregoing activities, except in connection with an unsolicited superior proposal (which for this purpose, means any proposal that, in the good faith judgment of the ICCMIC board of directors, is more favorable to ICCMIC stockholders than the ICII merger proposal and is reasonably capable of being consummated). However, nothing in the merger agreement prevents either the ICCMIC board of directors or the special committee from: . taking, and disclosing to ICCMIC stockholders, a position complying with Rule 14e-2(a) or Rule 14d-9 of the Exchange Act regarding a competing transaction; . making any disclosure to ICCMIC stockholders, if, in the good faith judgment of the ICCMIC board of directors or the special committee, after receiving advice of outside legal counsel, failure to disclose would be reasonably likely to constitute a breach of its fiduciary duties to ICCMIC or ICCMIC stockholders under applicable law; . issuing a press release or publicly disclosing the terms of the merger agreement in accordance with the provisions of the merger agreement; or . taking any action which, in the good faith judgment of the ICCMIC board of directors or the special committee, after receiving advice of outside legal counsel, is required by a court order. 75 ICII Standstill Agreement Except with respect to the proposed merger or any "qualifying alternative transaction," which we describe more fully below, ICII, together with its affiliates, has agreed to be subject to restrictions on its ability to engage in transactions with, and take actions in respect of, ICCMIC and its securities. In particular, among other things, ICII may not do any of the following: . acquire any ICCMIC equity securities other than the shares of ICCMIC common stock it owned prior to July 22, 1999; . except as contemplated by the merger agreement, acquire ownership of any of the assets or businesses of ICCMIC or any securities issued by ICCMIC, or any rights or options to do so; . solicit proxies to vote or communicate with, or seek to advise or influence any person or entity with respect to the voting of, any voting securities of ICCMIC, or become a participant in any election contest with respect to ICCMIC; . make any proposal for the acquisition of ICCMIC or any of ICCMIC's assets or securities or for any extraordinary transaction involving ICCMIC; . initiate, propose or otherwise solicit ICCMIC stockholders for the approval of one or more stockholder proposals with respect to ICCMIC or the ICCMIC board of directors, or seek the removal of any member of the ICCMIC board of directors; . participate in a group with respect to any ICCMIC voting securities; . otherwise seek to control or influence ICCMIC's management, ICCMIC's board of directors or ICCMIC's policies, except as permitted or required by the management agreement or by such person's status as an ICCMIC director or officer; . disclose any intention or plan inconsistent with any of the above or assist or encourage or finance any other person in connection with any of the above; or . request a waiver of any of the above. If ICCMIC terminates the merger agreement in favor of a superior proposal which provides for payment of non-cash consideration to ICCMIC stockholders in exchange for their shares, then the above standstill restrictions will not prevent ICII from proposing a qualifying alternative transaction. A "qualifying alternative transaction" means any transaction: . by which ICII acquires or seeks to acquire all of the shares of ICCMIC common stock for a cash payment of not less than $11.50 per share plus any amount of increase in the merger consideration from the appraisal of the management agreement termination fee, adjusted to take into account any extraordinary cash distribution made by ICCMIC following termination of the merger agreement or any issuance or repurchase by ICCMIC of ICCMIC capital stock, and . which includes other terms and conditions substantially similar to the terms and conditions of the merger agreement. 76 The price requirement described in the first bullet of the above definition of "qualifying alternative transaction" does not apply if the amount of any break-up fee payable by ICCMIC to a third party regarding a superior proposal with the third party exceeds $6 million. The merger agreement contains additional restrictions on ICII if the proposed qualifying alternative transaction is a tender or exchange offer. ICCMIC's stockholders rights plan and charter substantially restrict ICII's ability to consummate a qualifying alternative transaction unless the ICCMIC board ultimately consents to such a transaction. SPB Loans The merger agreement required ICII to purchase from ICCMIC 16 SPB mortgage loans having an aggregate outstanding principal balance of approximately $3.9 million if those loans were not repurchased by SPB. The repurchase was required to be at the prices provided for in the agreements under which ICCMIC originally acquired the loans from SPB and was to be completed by the later of 60 days from the signing of the merger agreement or 5 days after the termination of the merger agreement. See "Relationships and Transactions Between ICII, ICCMIC and Affiliates - Other Contractual Relationships Between ICII and its Affiliates and ICCMIC." All of the loans have been repurchased. Representations and Warranties The merger agreement contains representations and warranties made by ICCMIC to ICII, including representations and warranties relating to: . the due organization, corporate power and valid existence of ICCMIC and its subsidiaries and similar corporate matters; . the capitalization of ICCMIC and its subsidiaries; . the authorization, execution and delivery of the merger agreement by ICCMIC; . the accuracy of ICCMIC's SEC reports and financial statements; . required consents, approvals, permits and authorizations of regulatory entities relating to the merger agreement; . the receipt by the special committee of a fairness opinion from Prudential Securities; . brokers and finders fees with respect to the proposed merger; . the accuracy of the information provided by ICCMIC for inclusion in this proxy statement and in the Schedule 13E-3 prepared by ICII with regard to the proposed merger; 77 . the inapplicability of the ICCMIC stockholders rights plan to the proposed merger; and . compliance with applicable laws. The merger agreement also contains representations and warranties made by ICII and ICCMIC Acquisition Corp. to ICCMIC, including representations and warranties relating to: . the due organization, corporate power and valid existence of ICII and its subsidiaries and similar corporate matters; . the authorization, execution and delivery of the merger agreement by ICII; . the accuracy of ICII's SEC reports and financial statements; . required consents, approvals, permits and authorizations of regulatory entities relating to the merger agreement; . brokers and finders fees with respect to the proposed merger; . ICII's ownership of ICCMIC common stock; . the accuracy of the information provided by ICII and ICCMIC Acquisition Corp. for inclusion in this proxy statement and in the Schedule 13E-3 prepared by ICII with regard to the proposed merger; . ICII's access to funds sufficient to complete the proposed merger; and . the purposes for which ICCMIC Acquisition Corp. was formed. The representations and warranties made by each of the parties to the merger agreement will expire upon completion of the proposed merger. Covenants; Conduct of Business Pending the Proposed Merger Conduct of Business. ICCMIC and its subsidiaries have agreed to conduct their operations from July 22, 1999 through the completion of the proposed merger in the ordinary course of business, consistent with past practice, except as otherwise contemplated in the merger agreement. In addition, ICCMIC has agreed that, except as provided in the merger agreement or with the prior written consent of ICII, ICCMIC will not, and will not permit any of its subsidiaries to: 78 . amend its charter or bylaws; . issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any securities of ICCMIC or any of its subsidiaries except as required by any existing employee benefit plans; . split, combine or reclassify any stock, or declare, set aside, or pay any dividend or any other distribution, except for: . regular quarterly dividends not exceeding 105% of its taxable income; . any distributions not exceeding 105% of its taxable income that may be necessary to maintain REIT status; and . a final dividend for the taxable year ending as of the completion of the proposed merger not exceeding 100% of its taxable income for such taxable year, less the amount of all prior dividends paid in respect of that taxable year; . subject to specified exceptions, acquire, sell, lease, license or otherwise dispose of material assets or enter into any material contract outside of the ordinary course of business; . except as required by a change in law or in generally accepted accounting principles, change any of its accounting principles or practices; . merge, consolidate or make any corporate acquisitions; . subject to specified exceptions, pay, discharge or satisfy any claims, liabilities or obligations, other than in the ordinary course of business in accordance with past practice; . settle or compromise any claim, suit or other litigation or matter in an arbitration proceeding for an amount in excess of $100,000 (less insurance proceeds to which ICCMIC or any of its subsidiaries is entitled), or otherwise on terms that would be material to ICCMIC and its subsidiaries; . create or assume with respect to any of its assets any mortgage, lien, or similar encumbrance of any kind that would reasonably be expected to be material to ICCMIC and its subsidiaries; 79 . subject to specified exceptions, make any loan, advance or capital contribution exceeding $500,000; or . take or omit to take any action that would terminate ICCMIC's status as a REIT. Reasonable Best Efforts. Each of the parties to the merger agreement has agreed to use its reasonable best efforts to complete the proposed merger as soon as practicable after the stockholder vote with respect to the merger agreement and the proposed merger. Notices. In the merger agreement, each party has agreed to give prompt notice to the other of: . any event that would be likely to cause any representation or warranty made by it in the merger agreement to become untrue in any material respect; . the material failure by it to comply with or satisfy any covenant, condition or agreement required to be complied with or satisfied by it under the merger agreement; . any notice of a default or potential default under any material contract; . any notice from a third party alleging that its consent is necessary in connection with the proposed merger; and . any change, event or circumstance that has had or would have a material adverse effect on ICCMIC or ICII. The merger agreement further provides that ICCMIC and ICII will provide to each other copies of all reports filed with the SEC after the date of the merger agreement. Special Meeting; Disclosure. ICCMIC and ICII have agreed in the merger agreement to prepare and file with the SEC this proxy statement and a Rule 13e-3 Transaction Statement on Schedule 13E-3, and to use all reasonable best efforts to cause this proxy statement (including the information contained in the Schedule 13E-3) to be disseminated to stockholders. The merger agreement further provides that ICCMIC will afford ICII and its representatives reasonable access to its and its subsidiaries' business, properties and personnel. The merger agreement provides that ICCMIC's board of directors will: . call and convene the special meeting for the purpose of obtaining the required stockholder approval as soon as reasonably practicable following expiration of the 60-day solicitation period described in this proxy statement, and . subject to the ICCMIC directors' fiduciary duties and their rights to solicit and deal with "superior proposals," recommend to the stockholders that they approve the merger agreement. See "- Solicitation Period and Superior Proposals." 80 Exemption from "Excess Share" Provision of ICCMIC's Charter. ICCMIC's charter provides that, subject to specified exceptions, no person may own, or be deemed to own, more than 9.9% of the outstanding shares of ICCMIC common stock. In the merger agreement, ICCMIC's board of directors agreed to exempt the transactions contemplated by the merger agreement from this excess share provision if the conditions specified in ICCMIC's charter are satisfied. In addition, the parties agreed that any application of the excess share provision to the proposed merger would not constitute a breach of the merger agreement. Indemnification and Insurance. ICII and ICCMIC Acquisition Corp. have agreed that all rights to indemnification that the directors, officers, employees and agents of ICCMIC currently possess with respect to actions or omissions occurring prior to the completion of the proposed merger will continue for six years after the completion of the proposed merger. In addition, all rights to indemnification in respect of any claim asserted or made within that six-year period will continue until the disposition of the claim. After the completion of the proposed merger, ICII and the surviving corporation jointly and severally will indemnify, hold harmless and defend all current and former directors and officers of the manager and/or ICCMIC and any of their subsidiaries against all losses, claims, damages, liabilities, judgments, costs or expenses arising out of or pertaining to acts or omissions (or alleged acts or omissions) by them in their capacities as directors or officers. That indemnification is mandatory rather than permissive to the extent permitted by Maryland law. Immediately upon completion of the proposed merger, ICII and the surviving corporation will jointly and severally assume ICCMIC's obligations under any indemnification agreements entered into by ICCMIC for the benefit of its directors and officers. ICII has agreed to maintain policies of directors' and officers' liability and fiduciary insurance in effect for not less than six years after the completion of the proposed merger, on terms no less favorable than ICCMIC's current policies. This obligation is subject to the exception that ICII is not required to pay premiums for this insurance exceeding 300% of the current aggregate annual premium paid by ICCMIC as of the date of the merger agreement. If the premiums for this insurance coverage are greater than 300% of the aggregate premium paid by ICCMIC, ICII must purchase an insurance policy with the greatest coverage available for 300% of the aggregate annual premium. Conditions The obligations of ICCMIC, ICII and ICCMIC Acquisition Corp. to complete the proposed merger are subject to the satisfaction or waiver at or prior to the effective time of the proposed merger of the following conditions: . the approval of the merger agreement and the proposed merger by the holders of a majority of the total number of outstanding shares, as well as by a majority of the ICCMIC shares entitled to vote at the special meeting (other than shares held by ICII and Messrs. Snavely and Villani); and . the absence of any statute, rule, regulation, executive order, decree, rule or injunction making the proposed merger illegal or prohibiting its completion. The obligations of ICII and ICCMIC Acquisition Corp. to complete the proposed merger are further subject to the satisfaction or waiver of the following additional conditions: 81 . the representations and warranties of ICCMIC in the merger agreement or in any other document delivered pursuant to the merger agreement must be true and correct in all material respects as of the effective time of the proposed merger; . ICCMIC must have performed its obligations under the merger agreement in all material respects; and . the "excess share" provision of ICCMIC's charter will have been waived. The obligation of ICCMIC to complete the proposed merger is subject to the satisfaction or waiver of the following additional conditions: . the representations and warranties of ICII and ICCMIC Acquisition Corp. in the merger agreement or in any other document delivered pursuant to the merger agreement must be true and correct in all material respects as of the effective time of the proposed merger; . ICII and ICCMIC Acquisition Corp. will have performed their obligations under the merger agreement in all material respects; and . the opinions and agreements necessary for waiver of the "excess share" provision of ICCMIC's charter will have been received. Termination; Withdrawal of Recommendations The merger agreement may be terminated, and the proposed merger abandoned, at any time prior to the effective time, whether before or after approval by the stockholders: . by mutual written consent of ICII and ICCMIC; . by either ICII or ICCMIC if: . any regulatory body has issued an order or taken any other action permanently restraining, enjoining or otherwise prohibiting the proposed merger and the order or other action has become final and nonappealable; . the representations and warranties made by the other party in the merger agreement were materially untrue when made or later become materially untrue; . the other party breaches in any material respect any of its obligations under the merger agreement, and fails to cure the breach within 20 days; . the proposed merger has not been completed by January 31, 2000; or 82 . the requisite approval of ICCMIC stockholders is not obtained at the special meeting or any adjournment or postponement thereof; . by ICII if: . prior to the effective time of the proposed merger, ICCMIC's board of directors approves or recommends, or resolves to approve or recommend, a superior proposal (in which case ICII must vote, tender or exchange its shares of ICCMIC common stock in favor of the superior proposal if the superior proposal is an all cash proposal); or . prior to the effective time of the proposed merger, ICCMIC's full board of directors withdraws or modifies its approval or recommendation of the ICII merger proposal in a manner adverse to ICII; and . by ICCMIC if, prior to the effective time of the proposed merger, ICCMIC's board of directors approves or recommends a superior proposal (in which case, as stated above, ICII must vote, tender or exchange its shares in favor of the superior proposal, provided it is an all cash proposal). As a general matter, however, neither party may terminate the merger agreement if it has failed to use its reasonable best efforts to carry out the proposed merger. Termination Fees and Expenses ICII and ICCMIC have agreed that all expenses incurred in connection with the merger agreement and the proposed merger are to be paid by the party that incurs them. Nonetheless, if ICCMIC's board of directors recommends a superior proposal and the merger agreement is terminated as a result, ICCMIC must pay all of ICII's actual expenses (not including investment banking expenses other than the investment bankers' out-of-pocket expenses, and not including expenses relating to ICII's financing arrangements), up to a maximum of $2 million. In addition, if the merger agreement is deemed void or voidable under Maryland law pursuant to Maryland's "business combinations" statute, ICII must pay ICCMIC's actual expenses in connection with the merger agreement and the proposed merger. The merger agreement provides that if the merger agreement terminates (other than as a result of a breach by ICCMIC of the merger agreement), the management agreement between ICCMIC and the manager will also terminate, in which case ICCMIC must pay to the manager a termination fee equal to the lesser of $35 million and the appraised value of the termination fee. For a detailed discussion of the appraisal of the manager's termination fee, see "Special Factors: Background, Purpose and Effects of the Proposed Merger - Management Agreement; Appraisal." (ICCMIC's management agreement with the manager is expected to expire on October 22, 1999. However, the parties have agreed that ICCMIC will not be required to pay the termination fee unless the merger agreement is terminated, in which event the termination fee will be due and payable at that time). Amendment and Waiver The merger agreement may be amended at any time before or after approval of the merger agreement and the proposed merger by the stockholders of ICCMIC. After stockholder approval, however, no amendment may be made that requires further approval by the stockholders of ICCMIC under applicable law without obtaining that further approval. In general, after stockholder approval, a merger agreement may not be amended in a manner that materially adversely affects stockholders without 83 their prior approval. No such amendment is currently contemplated by ICCMIC or ICII. If such an amendment is made, ICCMIC will resolicit proxies and obtain the approval of stockholders prior to completing the proposed merger. The merger agreement may not be amended except by an instrument in writing signed on behalf of each of the parties thereto. At any time prior to the effective time of the proposed merger, each of the parties to the merger agreement may: . extend the time for the performance of any of the obligations or other acts of the other parties; . waive any inaccuracies in the representations and warranties of the other parties contained in the merger agreement or in any document delivered pursuant to the merger agreement; and . waive compliance by the other parties of any of the agreements or conditions contained in the merger agreement. Any agreement on the part of a party to the merger agreement to any extension or waiver will be valid only if set forth in a written instrument signed on behalf of such party and expressly referring to the merger agreement. FEES AND EXPENSES The estimated aggregate costs and fees of ICCMIC and ICII in connection with the merger agreement and the proposed merger are as follows:
To Be To Be Paid By Paid By ICCMIC ICII -------- -------- Investment Banking Fees and Expenses.................... Filing Fees............................................. Legal Fees and Expenses................................. Bank Fees and Services.................................. Board of Directors Fees and Expenses.................... Accounting Fees and Advisory Services................... Appraisal Fees.......................................... Printing, Mailing and Vote Solicitation Fees............ Miscellaneous Fees...................................... ___________ __________ Total........................................
The merger agreement provides that each party is to pay the fees and expenses incurred by it, except under certain circumstances. See "The Merger Agreement - Termination Fees and Expenses." 84 REGULATORY REQUIREMENTS Except for the filing of articles of merger with the State Department of Assessments and Taxation of Maryland after the approval of the merger agreement and the proposed merger by ICCMIC's stockholders, and compliance with federal and state securities laws, neither ICCMIC nor ICII is aware of any material United States federal or state or foreign governmental regulatory requirement that must be complied with, or approval that must be obtained, in connection with the proposed merger. ICCMIC and ICII believe that the proposed closing of the merger will not violate any antitrust laws and also that the merger may be completed without notification being given or information being furnished to the Federal Trade Commission or the Antitrust Division of the Department of Justice pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976. At any time before or after the completion of the proposed merger, however, either the FTC or the Antitrust Division could take any action under the antitrust laws as it deems necessary or desirable in the public interest. Other persons could also take action under the antitrust laws, including an attempt to enjoin the proposed merger. Accordingly, there can be no assurance, however, that a challenge to the proposed merger on antitrust grounds will not be made or, if a challenge is made, what the result will be. 85 SELECTED HISTORICAL FINANCIAL DATA OF ICCMIC The following table presents selected historical financial data and other operating information for ICCMIC as of and for each of the periods indicated. We derived the financial data in the table from ICCMIC's consolidated financial statements. In the case of the column headed "1997", the data relate to ICCMIC's initial short period of operations from the date of completion of its initial public offering on October 22, 1997 until December 31, 1997. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included or incorporated by reference in this proxy statement. See "Where You Can Find More Information." (Dollars in thousands, except per share data)
For the six months For the year ended For the short period ended June 30 December 31, ended December 31, 1999 1998 1998 1997 ---- ---- ------------------ -------------------- Statement of Earnings Data: Interest Income............................................ $30,993 $21,382 $49,737 $6,467 Real Property Rental Income................................ 6,994 993 7,684 -- ------- ------- ------- ------ Total Income............................................. 37,987 22,375 57,421 6,467 ------- ------- ------- ------ Operating Expenses: Management fees............................................ 3,704 2,565 6,319 940 Interest expense........................................... 9,753 1,034 11,165 -- Provision for loan losses.................................. 4,633 100 6,300 -- Write-down of securities available- for-sale................................................ -- -- 4,554 -- Depreciation of real property.............................. 1,582 242 1,755 -- Real property operating expenses........................... 1,601 214 1,872 -- Due diligence expenses..................................... 1,957 524 1,659 487 Stock options issued to manager and its employees........................................... -- -- 97 2,550 Other...................................................... 673 670 1,456 331 ------- ------- ------- ------ Total Expenses.......................................... 23,903 5,349 35,177 4,308 ------- ------- ------- ------ Net Earnings............................................ $14,084 $17,026 $22,244 $2,159 ======= ======= ======= ====== Earnings per share - Basic and diluted....................... $0.49 $0.49 $0.68 $ 0.06 Ratio of earnings to fixed charges(1)........................ 2.44 to 1 17.18 to 1 2.98 to 1 -- Cash dividends declared per share............................ $0.60 $0.52 $1.18 $ 0.13
86
As of As of As of December 31, December 31, June 30, 1999 1998 1997 ----------------- ------------------- ------------------- Balance Sheet Data: Total invested assets........................................ $579,631 $721,982 $331,330 Total assets................................................. 703,870 757,174 495,137 Total outstanding borrowings................................. 285,332 331,132 -- Total liabilities............................................ 300,768 348,365 15,435 Total stockholders' equity................................... 403,102 408,809 479,702 Ratio of debt to total capitalization........................ 41% 45% -- Book value per share......................................... $14.14 $14.34 $ 13.90
____________________________ (1) For the purpose of calculating the ratios of earnings to fixed charges, earnings consist of net earnings before income taxes, extraordinary items and certain fixed charges. Fixed charges consist of interest expense, amortization of deferred financing costs and that portion of rental expense representative of the interest factor in leases. COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION ICCMIC's common stock is listed on the Nasdaq Stock Market under the symbol "ICMI." As of September 30, 1999, there were approximately 44 record holders and 3,000 beneficial holders of ICCMIC's common stock. Market Prices The following table shows, for the periods indicated, the high and low sale prices for ICCMIC common stock as reported by the Nasdaq Stock Market.
High Low ------------- ---------------- 1997: Fourth quarter (commencing October 17, 1997)................................ $19.125 $14.230 1998: First quarter............................ $16.750 $14.125 Second quarter........................... $16.500 $12.875 Third quarter............................ $13.063 $ 8.563 Fourth quarter........................... $10.375 $ 6.500 1999 First quarter............................ $10.875 $ 8.313 Second quarter........................... $11.500 $ 8.500 Third quarter............................ $11.250 $10.500 Fourth quarter (through October 20, 1999) $11.000 $10.438
On May 12, 1999, the last full trading day prior to ICII's public announcement of its initial proposal, and on July 21, 1999, the last full trading day prior to the public announcement of the merger agreement, the closing sale prices of ICCMIC common stock reported on the Nasdaq Stock Market were $9.875 and $10.75 per share, respectively. On ___________, 1999, the most recent practicable date prior 87 to the printing of this proxy statement, the closing price of ICCMIC common stock reported on the Nasdaq Stock Market was $______. Stockholders should obtain current market quotations for ICCMIC common stock prior to making any decision with respect to the proposed merger. Dividend Policy To maintain its qualification as a REIT, ICCMIC is required to pay dividends to stockholders equal to at least 95% of its taxable income, which may not necessarily equal its net earnings, as calculated in accordance with generally accepted accounting principles. Calculation of taxable income is determined without regard to the deduction for dividends paid and excludes any net capital gains. To satisfy this requirement, ICCMIC declares regular quarterly dividends. The merger agreement permits ICCMIC to declare and pay regular quarterly dividends in an amount not to exceed 105% of its quarterly taxable income, if any, and we expect to do so for each calendar quarter prior to the one in which the proposed merger occurs. The merger agreement also permits ICCMIC to declare a final dividend, the record date of which will be the business day immediately prior to the completion of the proposed merger. This final dividend may not exceed 100% of ICCMIC's taxable income, if any, for its taxable year up to the date of the proposed merger, reduced by the amount of any dividends already paid during the year. We expect to declare the final dividend, if any, shortly before completion of the proposed merger. The final dividend, if declared, will be paid as soon as practicable after the completion of the proposed merger. Distributions to stockholders are generally taxable as ordinary income, but a portion of such distributions may be capital gains or may constitute a tax- free return of capital. ICCMIC furnishes an annual statement to each of its stockholders of record listing the distributions ICCMIC has paid during the preceding year and their characterization as ordinary income, capital gain or return of capital. The following table lists the cash dividends declared by ICCMIC for 1997, 1998 and 1999 to date.
Amount Per Share Record Date Payment date --------- ----------- ------------ 1997 - Initial period of operations........................... $0.13 12/31/97 1/16/98 ===== 1998: First quarter............................................... $0.24 3/31/98 4/14/98 Second quarter.............................................. $0.28 7/9/98 7/23/98 Third quarter............................................... $0.33 9/30/98 10/14/98 Fourth quarter.............................................. $0.33 12/31/98 1/21/99 ----- Year..................................................... $1.18 ===== 1999: First quarter............................................... $0.30 3/31/99 4/15/99 Second quarter.............................................. $0.30 6/30/99 7/15/99 Third quarter............................................... $0.22 10/8/99 10/15/99
The dividends for 1997 and 1998 presented in the above table were all characterized for tax purposes as ordinary income. 88 The declaration of future dividends, if any, will depend upon business conditions, the earnings and financial position of ICCMIC, ICCMIC's plans with respect to operating and capital expenditures, tax requirements and such other matters as ICCMIC's board of directors determines to be relevant. RELATIONSHIPS AND TRANSACTIONS BETWEEN ICII, ICCMIC AND AFFILIATES Relationships with the Manager General. Until October 22, 1999, ICCMIC's day-to-day operations will continue to be conducted by its manager, Imperial Credit Commercial Asset Management Corp., subject to the supervision of ICCMIC's board of directors. The manager is a wholly-owned subsidiary of ICII. ICCMIC currently does not employ any salaried personnel. Rather, it relies on the facilities, personnel and resources of the manager to conduct its operations. ICCMIC anticipates that ICCMIC's management agreement with the manager will expire as of October 22, 1999. ICCMIC's board of directors intends to hire 16 employees of the manager on a full-time salaried basis to manage ICCMIC's day- to-day operations following the expiration of the management agreement. Those employees would be expected at such time to be terminated from their positions with the manager. Directors and Executive Officers of the Manager. The directors and executive officers of the manager are as follows:
Name Age Position - ---- ---- -------- H. Wayne Snavely 58 Chairman of the Board of Directors Kevin E. Villani 51 Vice Chairman of the Board of Directors Mark S. Karlan 41 President, Chief Executive Officer and Director Michael Meltzer 53 Chief Financial Officer and Treasurer Norbert M. Seifert 43 General Counsel, Senior Vice President and Secretary
Each of these persons also serves as a director and/or executive officer of ICCMIC. Biographical information on ICCMIC's directors and officers can be found in ICCMIC's Annual Report on Form 10-K for the year ended December 31, 1998, as amended, which is incorporated by reference in this proxy statement. Management Agreement Fees. Under the management agreement, the manager receives a base management fee calculated as a percentage of ICCMIC's average invested assets for each calendar quarter. The base management fee percentage decreases as the amount of assets being managed increases, in accordance with the following schedule: . 1% per year for the first $1 billion of average invested assets, . 0.75% per year for the next $250 million of average invested assets, and . 0.50% per year for all average invested assets above $1.25 billion. For these purposes, "average invested assets" means the daily average of the aggregate book value of ICCMIC's assets, including the assets of all of its subsidiaries, before reserves for depreciation, bad debts or similar non-cash items. 89 In addition to its base management fee, the manager is entitled to receive a quarterly incentive fee if its performance target is met. The performance target requires that ICCMIC's funds from operations, on a per share basis, exceed a target rate of return equal to 4% above the 10-year U.S. treasury rate. The following table shows the fees that the manager has earned to date. An incentive fee was earned by, and paid to, the manager for the second quarter of 1999. (Dollars in thousands)
Base Incentive Total ------------------ ------------------ ------------------ Management Fee Management Fee Management Fee ------------------ ------------------ ------------------ Period ended December 31, 1997............ $ 940 -- $ 940 Year ended December 31, 1998.............. $6,319 -- $6,319 January 1, 1999 through June 30, 1999..... $3,663 $41 $3,704
Termination Fee. The merger agreement provides that if the merger agreement terminates (other than as a result of a breach of the merger agreement by ICCMIC), the management agreement between ICCMIC and the manager will also terminate (if it has not already been terminated), in which case ICCMIC must pay to the manager a termination fee equal to the lesser of $35 million and the appraised amount of the termination fee provided for in the management agreement. For a detailed discussion of the amount payable in connection with the termination or non-renewal of the management agreement, see "Special Factors: Background, Purpose and Effects of the Proposed Merger - Management Agreement; Appraisal." Other Contractual Relationships Between ICII and its Affiliates and ICCMIC ICII and its affiliates, including SPB, are in the business of originating mortgage loans and interests in commercial mortgage-backed securities. SPB has entered into an agreement that grants ICCMIC, as long as the management agreement is in effect, the first right to purchase not less than $150 million annually of mortgage loans originated by SPB that are typical of those originated by SPB. In 1997 and 1998, ICCMIC purchased 1,049 multifamily and commercial mortgage loans from SPB for a price of approximately $400 million. The mortgage loans purchased had an aggregate principal balance of approximately $388 million and had original terms to maturity of not more than 360 months. SPB represented that each mortgage loan was secured by a mortgage or deed of trust on real property, including: . multifamily homes, . retail properties, . office properties, . industrial properties, 90 . mobile homes, . mixed use properties, including mixed commercial uses and mixed commercial and residential uses, and . other commercial real property. SPB has performed the primary servicing of these and other SPB originated mortgage loans on behalf of ICCMIC. SPB stopped being the primary servicer of almost all of these loans in July 1999, when ICCMIC transferred the primary servicing to Banc One Mortgage Capital Markets, LLC (now ORIX Real Estate Capital Markets). In 1997, ICCMIC purchased certain CMBS interests for $55 million from ICII and SPB. In 1997 and 1998, ICCMIC also purchased from FMAC, another of ICII's affiliates, 97 mortgage loans originated by FMAC for a price of $101 million, which approximately equaled the aggregate principal amount of those loans. At the time of those purchases, FMAC granted ICCMIC the right to resell those loans to FMAC on demand. FMAC has repurchased all of those mortgage loans. The repurchase by FMAC resulted in a gain to ICCMIC of $818,000. In 1997 and 1998, ICCMIC also acquired from FMAC approximately $6 million of asset-backed securities. Those securities are backed by mortgage loans originated or acquired by FMAC. Since September 1998, ICCMIC has not purchased any loans or other assets from ICII, SPB, FMAC or any of their affiliates. During 1999, SPB repurchased from ICCMIC certain multifamily and commercial real estate loans with an aggregate principal balance of $45.5 million. ICCMIC is presently negotiating with ICII to resolve certain claims that ICCMIC may have against SPB, ICII or both in connection with the repurchased loans and other loans that ICCMIC previously purchased from SPB. ICII has informed ICCMIC that it believes ICCMIC's claims, which aggregate to approximately $1.8 million, are largely without merit. Additional information concerning ICCMIC's transactions with ICII and its affiliates is contained in ICCMIC's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended, which is incorporated by reference in this document. Purchases and Sales of Common Stock by ICII and its Affiliates On the date of completion of ICCMIC's initial public offering on October 22, 1997, ICII purchased 2,970,000 shares of ICCMIC common stock at a price equal to the initial public offering price, net of underwriting discounts and commissions, or $13.95 per share. In connection with this purchase, Friedman Billings, the lead underwriter for ICCMIC's initial public offering, required ICII to enter into a lock-up agreement. The lock-up agreement required ICII to retain its shares of ICCMIC common stock for two years after the initial public offering. If ICCMIC terminates the management agreement, ICII may dispose of its shares at any time thereafter. On December 11, 1997, ICII purchased an additional 100,000 shares of ICCMIC common stock in an open market transaction at a price of $15.00 per share. ICII's stock purchases and ICCMIC's subsequent repurchase of 6,000,000 shares of its common stock resulted in ICII's direct ownership of 10.8% of the total shares of common stock of ICCMIC. ICII subsequently reduced its direct ownership to 9.0% through a sale of 500,000 shares at a per share price of $10.875 on June 24, 1999. 91 On October 16, 1997, ICCMIC granted a non-qualified option for 1,691,250 shares of ICCMIC common stock to the manager pursuant to the 1997 Stock Option Plan. The stock option had an exercise price of $15.00 per share and would have expired on October 16, 2007. The manager's stock option was canceled on July 22, 1999, prior to the signing of the merger agreement, for nominal payment from ICCMIC. Prior to execution of the merger agreement, Messrs. Snavely and Villani agreed to the cancellation of their respective ICCMIC stock options for nominal payment from ICCMIC. ICII has informed ICCMIC that, following the completion of the proposed merger, ICII will reimburse Messrs. Snavely and Villani for their cancelled stock options according to the option pricing formula, described above, provided in the merger agreement for exchange of ICCMIC stock options. On August 18, 1999, Mr. Snavely sold 100,000 shares of ICCMIC common stock at a price of $10.6875 per share. ICII has not made any purchases or sales of ICCMIC common stock during the past 60 days. Additional information (including information about transactions between ICCMIC and ICII) is set forth in ICCMIC's Annual Report on Form 10-K for the year ended December 31, 1998, as amended, which is incorporated by reference in this proxy statement. MANAGEMENT OF ICCMIC Information about the management of ICCMIC is set forth in Part III of ICCMIC's Annual Report on Form 10-K for the year ended December 31, 1998, as amended, which is incorporated by reference in this proxy statement. All directors and officers of ICCMIC are citizens of the United States. MANAGEMENT OF ICII AND ICCMIC ACQUISITION CORP. Management of ICII The name, principal business address, title and present and five-year historical principal occupation or employment of each of the directors and executive officers of ICII are set forth below. If no business address is given, the director's or officer's business address is 23550 Hawthorne Blvd., Suite 110, Torrance, CA 90503. If no dates are indicated with respect to a position, the individual has served in that capacity for at least the past five years. All of the persons listed below are citizens of the United States of America. 92
Present Principal Occupation or Employment Material Positions Held During the Past Name and Current Business Address Five Years and Business Addresses Thereof - --------------------------------- ------------------------------------------- H. Wayne Snavely Chairman of the Board and Chief Executive Officer of ICII since December 1991 and President since February 1996. Chairman of the Board of ICCMIC since its inception in July 1997. Chairman of the Board of FMAC, 2029 Century Park East, Suite 1190, Los Angeles, CA 90067, since November 1997. Brad S. Plantiko Executive Vice President and Chief Financial Officer of ICII since July 1998. From July 1994 until July 1998, Mr. Plantiko was a partner at KPMG LLP, 725 South Figueroa Street, Los Angeles, CA. A Director of FMAC since November 1998. Kevin E. Villani Executive Vice President, Finance of ICII from July 1998 until October 1999, a Director of ICII since 1997 and Chief Financial Officer of ICII from September 1995 to July 1998. Vice Chairman of the Board of ICCMIC since its inception in July 1997. Mr. Villani joined the University of Southern California, Los Angeles, CA as the Wells Fargo Visiting Professor of Finance and from 1993 to 1996 was Associate Professor of Clinical Finance and Real Estate. Irwin L. Gubman General Counsel and Secretary of ICII since October 1996. Mr. Gubman was a Partner at Coudert Brothers, 4 Embarcadero Center, Suite 3300, San Francisco, CA 94111, from January 1992 to September 1996. Paul B. Lasiter Senior Vice President and Controller of ICII since December 1992. John G. Getzelman President of SPB, 12300 Wilshire Boulevard, Los Angeles, California 90025, since December 1998. President, Community Bank of Pasadena, 505 East Colorado Blvd., Pasadena, CA, from July 1992 to December 1998.
93 Steven J. Shugerman Director of ICII since December 1991. President of SPB from June 1987 to November 1998. Robert S. Muehlenbeck Director of ICII since December 1991. Executive Vice President of Imperial Bank, 9920 South La Cienega Blvd., Inglewood, CA 90301, from July 1994 to October 1998. Perry A. Lerner Director of ICII since May 1992. Director of FMAC since November 1997 Principal in Crown Capital Group, Inc., 660 Madison Avenue, 15th Floor, New York, NY 10021 since 1996. Mr. Lerner was a Partner at O'Melveny & Myers, 153 East 53rd Street, 54th Floor, New York, NY 10022 from 1984 to 1996.
Management of ICCMIC Acquisition Corp. The name, business address, title and present and five-year historical principal occupation or employment of each of the executive officers of ICCMIC Acquisition Corp. are discussed in this paragraph. Messrs. Snavely and Villani (for whom such information is presented above under "ICII") are the sole directors and respectively president and treasurer, and Irwin L. Gubman (for whom such information is also presented above under "ICII") is the secretary of ICCMIC Acquisition Corp. The business address of each executive officer is 23550 Hawthorne Blvd., Suite 110, Torrance, CA 90503. Each of Messrs. Snavely, Villani and Gubman is a citizen of the United States of America. 94 SECURITIES OWNERSHIP The following table sets forth certain information known to ICCMIC with respect to beneficial ownership of ICCMIC common stock as of October 20, 1999 by (1) each person known to ICCMIC to beneficially own more than five percent of its common stock, (2) each director of ICCMIC, (3) each executive officer of ICCMIC, (4) all the directors and executive officers of ICCMIC as a group and (5) each director and executive director of ICII. Unless otherwise indicated in the footnotes to the table, the beneficial owners named have, to the knowledge of ICCMIC, sole voting and investment power with respect to the shares beneficially owned, subject to community property laws where applicable.
Percentage ------------------------ Number of Shares Of Shares ---------------------- ------------------------ Name of Beneficial Owner Beneficially Owned Beneficially Owned/1/ - ------------------------- ---------------------- ------------------------ Merrill Lynch Asset Management(2)............. 3,265,897 11.5% Imperial Credit Industries, Inc............... 2,570,000 9.0% ITLA Capital Corp(3).......................... 1,426,000 5.0% Mark S. Karlan(4)............................. 461,250 1.6% Norbert M. Seifert(5)......................... 114,500 * Kevin E. Villani.............................. 76,684 * Joseph A. Jaconi, Jr.(6)...................... 50,000 * H. Wayne Snavely.............................. 43,369 * Kenneth A. Munkacy(7)......................... 28,600 * Michael Meltzer(8)............................ 27,283 * Louis H. Masotti(7)........................... 26,000 * Patric H. Hendershott(7)...................... 25,000 * All ICCMIC directors and executive officers as a group (9 persons)............... 852,686 2.9% Brad S. Plantiko.............................. 6,400 * Irwin L. Gubman............................... 3,500 * Stephen J. Shugerman.......................... 5,000 * Perry A. Lerner............................... 1,000 *
_________________ *less than 1% (1) Based on 28,500,000 shares of common stock issued and outstanding as of June 30, 1999. (2) According to a Schedule 13G dated February 4, 1999, Merrill Lynch & Co., Inc. ("ML"), on behalf of Merrill Lynch Asset Management Group ("MLAM"), has shared voting and dispositive power over such shares but disclaims beneficial ownership pursuant to Section 13d-4 of the Exchange Act. Merrill Lynch Global Allocation Fund, Inc. ("MLG") has shared voting and dispositive power and beneficial ownership with respect to 3,042,500 of such shares. The address of ML on behalf of MLAM is World Financial Center, North Tower, 250 Vesey Street, New York, NY, 10381. The address of MLG is 800 Scudders Mill Road, Plainsboro, NJ 08536. (3) According to a Schedule 13D dated June 3, 1999, ITLA Capital Corp. has sole voting and dispositive power with respect to such shares. (4) Includes 431,250 shares that may be acquired upon exercise of stock options exercisable currently and within 60 days hereof. (5) Includes 43,000 shares held jointly by Mr. Seifert and his spouse, 5,800 shares held in the name of their children for which the parents have voting and investment power, and 8,200 shares held by Mr. Seifert individually. Includes 57,500 shares that may be acquired upon exercise of stock options exercisable currently and within 60 days hereof. 95 (6) Includes 35,000 shares that may be acquired upon exercise of stock options exercisable currently and within 60 days hereof. (7) Includes 25,000 shares that may be acquired upon exercise of stock options exercisable currently and within 60 days hereof. (8) Includes 850 shares held by Mr. Meltzer's spouse for which he disclaims beneficial ownership, and includes 24,833 shares that may be acquired upon exercise of stock options exercisable currently and within 60 days hereof. See "Relationships and Transactions Between ICCMIC, ICII and Affiliates - Purchases and Sales of Common Stock by ICII and its Affiliates". Except as set forth in this proxy statement, none of ICII, ICCMIC Acquisition Corp. or any other person controlling ICII or ICCMIC Acquisition Corp. nor, to the best of any of their knowledge, any director or executive officer of ICII or ICCMIC Acquisition Corp., beneficially owns any ICCMIC common stock. Additional information with respect to the securities ownership of ICCMIC is set forth in Part III of ICCMIC's Annual Report on Form 10-K for the year ended December 31, 1998, as amended, which is incorporated by reference in this proxy statement. PROPOSALS BY STOCKHOLDERS OF ICCMIC If the proposed merger is completed, there will be no public stockholders of ICCMIC and no public participation in any future meetings of ICCMIC stockholders. If the proposed merger is not completed, ICCMIC intends to hold its next annual meeting of stockholders in June, 2000. In that case, ICCMIC's stockholders would continue to be entitled to attend and participate in ICCMIC's stockholder meetings. ICCMIC's advance notice bylaw provides that any proposals by stockholders intended to be presented at the 2000 annual meeting and submitted outside the processes of Rule 14a-8 must be delivered to ICCMIC no earlier than March 20, 2000 and no later than April 19, 2000. If the date of the annual meeting is advanced by more than 30 days or delayed by more than 60-days from the anniversary date of the previous annual meeting, proposals must be delivered to ICCMIC no earlier than the 90th day prior to the annual meeting and no later than the later of the 60th day prior to the annual meeting and the 10th day following the public announcement of the date of the annual meeting by ICCMIC. In order for a stockholder to bring other business before a stockholder meeting, timely notice must be received by ICCMIC within the time limits described above. Such notice must include a description of the proposed business, the reasons therefor, and other specific matters. In each case, the notice must be given to the Secretary of ICCMIC at ICCMIC's principal address. If you would like a copy of ICCMIC's bylaws, we will furnish one without charge upon written request to the Secretary at the address under "Where You Can Find More Information." SEC rules establish standards as to which stockholder proposals are required to be included in a proxy statement for an annual meeting. ICCMIC will only consider proposals meeting the requirements of applicable SEC rules. 96 INDEPENDENT AUDITORS The consolidated balance sheets of ICCMIC as of December 31, 1998 and 1997 and the related consolidated statements of earnings, changes in stockholders' equity and comprehensive income and cash flows for the year ended December 31, 1998 and the period from July 31, 1997 (the date of ICCMIC's inception) through December 31, 1997 have been incorporated by reference into this proxy statement in reliance upon the report of KPMG LLP, independent certified public accountants. We expect that representatives of KPMG LLP will be present at the special meeting, both to respond to appropriate questions of stockholders and to make a statement, if they so desire. WHERE YOU CAN FIND MORE INFORMATION As required by law, ICCMIC files reports, proxy statements and other information with the SEC. Because the proposed merger is a "going private" transaction, ICII and ICCMIC Acquisition Corp. have filed a Rule 13e-3 Transaction Statement on Schedule 13E-3 with respect to the proposed merger. The Schedule 13E-3 and such reports, proxy statements and other information contain additional information about ICCMIC. You can inspect and copy these materials at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the SEC: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. For further information concerning the SEC's public reference rooms, you may call the SEC at 1-800-SEC-0330. Some of this information may also be accessed via the World Wide Web through the SEC's Internet address at http://www.sec.gov. ICCMIC common stock is listed on the Nasdaq Stock Market, and materials may be inspected at their offices at 1735 K Street NW, Washington D.C. 20006. The SEC allows ICCMIC to "incorporate by reference" information into this proxy statement. This means that ICCMIC can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this proxy statement, and later information filed with the SEC will update and supercede the information in this proxy statement. ICCMIC incorporates by reference each document it files pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this proxy statement and prior to the special meeting. ICCMIC also incorporates by reference into this proxy statement the following documents filed by it with the SEC (File No. 000-23089) pursuant to the Exchange Act: . ICCMIC's Annual Report on Form 10-K for the year ended December 31, 1998, as amended; . ICCMIC's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999 and June 30, 1999; and . ICCMIC's Current Reports on Form 8-K, filed on February 11, 1999, March 11, 1999, March 23, 1999, April 30, 1999, May 13, 1999, June 22, 1999, July 7, 1999, July 23, 1999, August 17, 1999 and September 29, 1999. 97 All subsequent documents filed by us with the SEC pursuant to Sections13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this proxy statement and prior to the date of the special meeting shall be deemed to be incorporated by reference into this proxy statement and to be a part of it from the date of filing of those documents. You should rely only on the information contained in (or incorporated by reference into) this proxy statement. ICCMIC has not authorized anyone to give any information different from the information contained in (or incorporated by reference into) this proxy statement. This proxy statement is dated ___________, 1999. You should not assume that the information contained in this proxy statement is accurate as of any later date, and the mailing of this proxy statement to stockholders shall not create any implication to the contrary. Documents incorporated by reference are available from ICCMIC without charge, excluding all exhibits (unless ICCMIC has specifically incorporated by reference an exhibit into this proxy statement). You may obtain documents incorporated by reference by requesting them in writing or by telephone as follows: Imperial Credit Commercial Mortgage Investment Corp. 11601 Wilshire Blvd. Suite 2080 Los Angeles, California 90025 Attention: Michael Meltzer, Chief Financial Officer and Treasurer Telephone: (310) 231-1280 If you would like to request documents from us, please do so by _________, 1999 in order to ensure timely receipt before the special meeting. By Order of the Board of Directors, Secretary ___________, 1999 98 APPENDIX A MERGER AGREEMENT DATED AS OF JULY 22, 1999 BY AND AMONG IMPERIAL CREDIT INDUSTRIES, INC. ICCMIC ACQUISITION CORP. AND IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP. TABLE OF CONTENTS
Page ---- ARTICLE I THE MERGER.................................................................................................. 2 Section 1.1 The Merger............................................................................. 2 Section 1.2 Effective Time......................................................................... 2 Section 1.3 Closing of the Merger.................................................................. 2 Section 1.4 Effects of the Merger.................................................................. 2 Section 1.5 Charter and Bylaws; Amendments of Governing Documents of Surviving Corporation Subsidiaries........................................ 2 Section 1.6 Board and Officers of the Surviving Corporation........................................ 3 Section 1.7 Conversion of Shares, Cancellation of Shares........................................... 3 Section 1.8 Appraisal of the Management Contract Termination Fee.................................................................................... 3 Section 1.9 Payment for Shares..................................................................... 5 Section 1.10 Stock Option and Other Plans........................................................... 6 Section 1.11 Stockholders' Meeting; SEC Materials................................................... 9 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................................... 11 Section 2.1 Organization and Qualification of the Company.......................................... 11 Section 2.2 Corporate Authorization................................................................ 11 Section 2.3 SEC Reports; Financial Statements...................................................... 12 Section 2.4 Consents and Approvals; No Violations.................................................. 12 Section 2.5 Opinion of Financial Advisor........................................................... 12 Section 2.6 Brokers................................................................................ 13 Section 2.7 Information............................................................................ 13 Section 2.9 Rights Agreement; Charter.............................................................. 13 Section 2.10 Capitalization of the Company and Its Subsidiaries..................................... 13 Section 2.11 No Defaults............................................................................ 14 ARTICLE III REPRESENTATIONS AND WARRANTIES OF ICII AND MERGER SUB....................................................... 14 Section 3.1 Organization and Qualification of ICII and Merger Sub.................................................................................... 14 Section 3.2 Corporate Authorization................................................................ 15 Section 3.3 SEC Reports; Financial Statements...................................................... 15 Section 3.4 Consents and Approvals; No Violations.................................................. 15 Section 3.5 Brokers................................................................................ 16
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Section 3.6 Ownership of Company Capital Stock..................................................... 16 Section 3.7 Information............................................................................ 16 Section 3.8 Financing.............................................................................. 16 Section 3.9 Conduct of Business of Merger Sub...................................................... 17 ARTICLE IV COVENANTS................................................................................................... 17 Section 4.1 Conduct of Business of the Company..................................................... 17 Section 4.2 Other Actions.......................................................................... 19 Section 4.3 Solicitation........................................................................... 19 Section 4.4 Additional Agreements; Reasonable Best Efforts......................................... 21 Section 4.5 Consents............................................................................... 21 Section 4.6 Public Announcements................................................................... 21 Section 4.7 Indemnification; Directors' and Officers' Insurance.................................... 22 Section 4.8 Notification of Certain Matters........................................................ 24 Section 4.9 SEC and Other Filings.................................................................. 24 Section 4.10 Stockholder Litigation................................................................. 25 Section 4.11 SPB Loans.............................................................................. 25 Section 4.12 Final Company Dividend................................................................. 25 Section 4.13 Employee Matters....................................................................... 25 Section 4.14 Standstill............................................................................. 25 Section 4.15 Transfer and Gains Taxes............................................................... 27 Section 4.16 Access to Information.................................................................. 28 Section 4.17 Excess Share Provision................................................................. 28 Section 4.18 State Takeover Statutes................................................................ 29 ARTICLE V CONDITIONS TO CONSUMMATION OF THE MERGER.................................................................... 29 Section 5.1 Conditions to Each Party's Obligations to Effect the Merger................................................................................. 29 Section 5.2 Conditions to the Obligations of the Company........................................... 30 Section 5.3 Conditions to the Obligations of ICII and Merger Sub.................................................................................... 30 Section 5.4 Frustration of Closing Conditions...................................................... 31 ARTICLE VI TERMINATION; AMENDMENT; WAIVER.............................................................................. 31 Section 6.1 Termination............................................................................ 31 Section 6.2 Effect of Termination.................................................................. 32 Section 6.3 Expenses............................................................................... 32 Section 6.4 Amendment.............................................................................. 33 Section 6.5 Extension; Waiver...................................................................... 33
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ARTICLE VII MISCELLANEOUS............................................................................................... 33 Section 7.1 Non-survival of Representations and Warranties......................................... 33 Section 7.2 Entire Agreement; Assignment........................................................... 33 Section 7.3 Notices................................................................................ 33 Section 7.4 Governing Law.......................................................................... 35 Section 7.5 Descriptive Headings; Schedules, Interpretation........................................ 35 Section 7.6 Parties in Interest.................................................................... 36 Section 7.7 Severability........................................................................... 36 Section 7.8 Consent to Jurisdiction................................................................ 36 Section 7.9 Enforcement............................................................................ 37 Section 7.10 Counterparts........................................................................... 37
-iii- TABLE OF DEFINED TERMS
Cross Reference Term in Agreement Page Actions...................................... Section 4.7(a)......................... 22 Adjusted Company Option...................... Section 1.10(a)........................ 6 Affiliate.................................... Section 1.10(f)........................ 8 Agreement.................................... Preamble............................... 1 Appraiser.................................... Section 1.8............................ 3 Appraised Value.............................. Section 1.8(a)......................... 4 Articles of Merger........................... Section 1.2............................ 2 Certificates................................. Sections 1.7(b)........................ 3 Closing...................................... Section 1.3............................ 2 Closing Date................................. Section 1.3............................ 2 Code......................................... Section 1.10(a)........................ 6 Company...................................... Preamble............................... 1 Company Board................................ Recitals............................... 1 Company Charter.............................. Section 2.8............................ 13 Company Disclosure Schedule.................. Section 2.4............................ 12 Company Material Adverse Effect.............. Section 2.1(b)......................... 11 Company SEC Reports.......................... Section 2.3............................ 12 Company Securities........................... Section 2.9 13 Company Stockholders......................... Recitals............................... 1 Company Stock Option......................... Section 1.10(a)........................ 6 Company Stock Option Plan.................... Section 1.10(a)........................ 6 Competing Transaction........................ Section 4.3(c)......................... 20 Confidentiality Agreement.................... Section 4.16(b)........................ 28 Control...................................... Section 7.5(b)......................... 35 Controlled by................................ Section 7.5(b)......................... 35 Effective Time............................... Section 1.2............................ 2 Exemption.................................... Section 4.17........................... 28 Exchange Act................................. Section 1.10(e)........................ 8 Final Company Dividend....................... Section 4.12........................... 25 Financial Advisor............................ Recitals............................... 1 FBR.......................................... Section 3.5............................ 16 GAAP......................................... Section 2.3............................ 12 ICII......................................... Preamble............................... 1 ICII Common Stock............................ Section 1.10(a)........................ 6 ICII Material Adverse Effect................. Section 3.1(b)......................... 14 ICII SEC Reports............................. Section 3.3............................ 15 ICII Shares.................................. Recitals............................... 1 Indemnified Party............................ Section 4.7(a)......................... 22 Individual Ownership Limit................... Section 4.17........................... 28 Knowledge.................................... Section 7.5(b)......................... 36
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Liens........................................ Section 4.1(i)......................... 18 Management Agreement......................... Section 1.8(a)......................... 3 Management Contract Amount................... Section 1.8(a)......................... 3 Manager...................................... Section 1.8(a)......................... 3 Maryland Department.......................... Section 1.2............................ 2 Merger....................................... Recitals............................... 1 Merger Consideration......................... Recitals............................... 1 Merger Sub................................... Preamble............................... 1 Merger Sub Common Stock...................... Section 1.7(c )........................ 3 MGCL......................................... Recitals............................... 1 Opinion...................................... Section 4.17........................... 28 Other Filings................................ Section 2.7............................ 13 Paying Agent................................. Section 1.9(a)......................... 5 Payment Fund................................. Section 1.9(a)......................... 5 Person....................................... Section 7.5(b)......................... 35 Proxy Statement.............................. Section 1.11(a)........................ 9 Qualifying Alternative Transaction........... Section 4.14(b)........................ 26 Regulatory Entity............................ Section 2.4............................ 12 REIT......................................... Section 4.1(c)......................... 17 Rights Agreement............................. Section2.8............................. 13 S-8.......................................... Section 1.10(f)........................ 8 Schedule 13D................................. Section 4.14(a)........................ 26 Schedule 13E-3............................... Section 1.11(d)........................ 10 SEC.......................................... Section 1.10(e)........................ 8 Securities Act............................... Section 1.10(f)........................ 8 Shares....................................... Recitals............................... 1 Solicitation Period.......................... Section 4.3(a)......................... 19 SPB.......................................... Section 4.11........................... 25 SPB Loans.................................... Section 4.11........................... 25 Special Committee............................ Recitals............................... 1 Special Meeting.............................. Section 1.11(a)........................ 9 Superior Proposal............................ Section 4.3(c)......................... 21 Surviving Corporation........................ Recitals............................... 1 Surviving Corporation Common Stock........... Section 1.7(c)......................... 3 Transfer and Gains Taxes.................... Section 4.15........................... 27 Under Common Control With.................... Section 7.5(b)......................... 35
-v- MERGER AGREEMENT THIS MERGER AGREEMENT, dated as of July 22, 1999 (this "Agreement"), --------- by and among Imperial Credit Commercial Mortgage Investment Corp., a Maryland corporation (the "Company"), Imperial Credit Industries, Inc., a California ------- corporation ("ICII"), and ICCMIC Acquisition Corp., a Maryland corporation and ---- wholly owned subsidiary of ICII ("Merger Sub"). ---------- WHEREAS, ICII and certain of its subsidiaries and affiliates as set forth on Schedule I beneficially own 2,790,053 shares (the "ICII Shares") of the ---------- ----------- common stock, par value $0.0001 per share, of the Company (the "Shares"); ------ WHEREAS, it is proposed that Merger Sub will merge with and into the Company (the "Merger"), with the Company continuing as the surviving corporation ------ (the "Surviving Corporation"), in accordance with the Maryland General --------------------- Corporation Law ("MGCL"), pursuant to which Merger each issued and outstanding ---- Share other than Shares held by ICII and its subsidiaries will be converted into the right to receive $11.50 per Share in cash, subject to adjustment as provided herein (as so adjusted, the "Merger Consideration"), upon the terms and subject -------------------- to the conditions provided herein; WHEREAS, a special committee (the "Special Committee") comprised of ----------------- the four independent directors of the Board of Directors of the Company (the "Company Board") has received the written opinion of Prudential Securities - -------------- Incorporated (the "Financial Advisor") that, based on, and subject to, the ----------------- various assumptions and qualifications set forth in such opinion, as of the date of such opinion, the Merger Consideration to be received by the holders of Shares (other than ICII and its subsidiaries and affiliates listed on Schedule I) pursuant to the Merger is fair to such holders from a financial point of view; WHEREAS, the Special Committee has determined that it is in the best interests of the stockholders of the Company (the "Company Stockholders") to -------------------- approve this Agreement and, subject to the provisions hereof, the Merger, and has voted to recommend to the Company Board that the Company Board recommend that the Company Stockholders approve this Agreement and, subject to the provisions hereof, the Merger; and WHEREAS, the Company Board has determined that it is in the best interests of the Company Stockholders to approve this Agreement and, subject to the provisions hereof, the Merger, has declared the Merger advisable, and has voted to approve the Merger upon the terms and subject to the conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, intending to be legally bound hereby, the Company, ICII and Merger Sub hereby agree as follows: ARTICLE I THE MERGER Section 1.1 The Merger. At the Effective Time (as defined in Section ---------- 1.2) and upon the terms and subject to the conditions of this Agreement and in accordance with the MGCL, Merger Sub shall be merged with and into the Company in the Merger. Following the Merger, the Company shall continue as the Surviving Corporation and the separate corporate existence of Merger Sub shall cease. Section 1.2 Effective Time. Subject to the terms and conditions set -------------- forth in this Agreement, as soon as practicable on the Closing Date (as defined in Section 1.3), the Company and Merger Sub will cause articles of merger (the "Articles of Merger") with respect to the Merger to be executed and filed with ------------------ the State Department of Assessments and Taxation of Maryland (the "Maryland -------- Department") pursuant to the MGCL. The Merger shall become effective at such - ---------- time on or after October 1, 1999 as the Articles of Merger have been duly filed with and accepted for record by the Maryland Department or at such subsequent time as is agreed between the parties and specified in the Articles of Merger, and such time is hereinafter referred to as the "Effective Time." -------------- Section 1.3 Closing of the Merger. Subject to the satisfaction or --------------------- waiver of all of the conditions contained in Article V, but in no event prior to the expiration of the Solicitation Period (as defined in Section 4.3(a)), the closing of the Merger (the "Closing") will take place at a time and on a date to ------- be specified by the parties, which shall be no later than the second business day after satisfaction or waiver of all of the conditions set forth in Article V (the "Closing Date"), at the offices of Wachtell, Lipton, Rosen & Katz, 51 West ------------ 52/nd/ Street, New York, New York 10019, unless another time, date or place is agreed to in writing by the parties hereto. Section 1.4 Effects of the Merger. From and after the Effective --------------------- Time, the Merger shall have the effects set forth in Section 3-114 of the MGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises, of a public or private nature, of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. Section 1.5 Charter and Bylaws; Amendments of Governing Documents of -------------------------------------------------------- Surviving Corporation Subsidiaries. - ---------------------------------- (a) The charter of the Surviving Corporation shall be amended and restated as of the Effective Time so as to conform in all material respects with the terms of the charter of Merger Sub. (b) The bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. -2- Section 1.6 Board and Officers of the Surviving Corporation. ----------------------------------------------- (a) The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation following the Merger, each to hold office until the earlier of such person's resignation or removal or until a successor is duly elected and qualified, as the case may be. (b) The officers of Merger Sub immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation following the Merger, each to hold office until the earlier of such person's resignation or removal or until a successor is duly elected and qualified, as the case may be. Section 1.7 Conversion of Shares, Cancellation of Shares. -------------------------------------------- (a) At the Effective Time, each Share issued and outstanding immediately prior to the Effective Time (other than Shares held by ICII or the Company or any subsidiary of ICII or the Company, which Shares, by virtue of the Merger and without any action on the part of the holder thereof, shall be cancelled and retired and shall cease to exist with no payment being made with respect thereto) shall be converted into the right to receive the Merger Consideration. (b) At the Effective Time, the holders of such certificates previously evidencing the Shares outstanding immediately prior to the Effective Time (the "Certificates") shall cease to have any rights with respect to such Shares other ------------ than the right to receive the Merger Consideration for each such Share or as otherwise provided herein or by law (including the right to receive dividends permitted hereby). Such Shares shall, by virtue of the Merger and without any action on the part of Merger Sub, the Company or the holder thereof, be cancelled, retired and cease to exist, and no payment shall be made with respect thereto except as provided for herein. (c) At the Effective Time, each share of common stock, par value $0.0001 per share, of Merger Sub ("Merger Sub Common Stock") issued and ----------------------- outstanding immediately prior to the Effective Time shall be converted into an equal number of fully paid and nonassessable shares of common stock of the Surviving Corporation, par value $0.0001 per share ("Surviving Corporation --------------------- Common Stock"). - ------------ Section 1.8 Appraisal of the Management Contract Termination Fee. ---------------------------------------------------- (a) ICII and the Company shall cause one of the appraisal firms listed on Schedule II (or, in the event they cannot agree on a mutually acceptable firm ----------- from such list, they shall appoint one or more independent, nationally recognized appraisal firms in accordance with the procedures set forth in Section 15 of the Management Agreement (as defined below)) (the "Appraiser"), to --------- determine, by an independent appraisal, the amount (the "Management Contract ------------------- Amount") that would be payable to Imperial Credit Commercial Asset Management - ------ Corp. (the "Manager") pursuant to Section 15 of the Management Agreement, dated ------- as of October 22, 1997 by and among the Company and the Manager (the "Management ---------- Agreement") if the Management Agreement were not renewed by the Company and - --------- expired on October 22, 1999. The Ap- -3- praiser shall complete the determination of the Management Contract Amount within 30 days of the date of this Agreement. The amount of the Management Contract Amount as determined by the Appraiser shall be referred to as the "Appraised Value". The Appraiser shall be instructed to fix the Appraised --------------- Value at a single dollar amount; provided, however, that in the event the Appraiser cannot for any reason provide a single dollar amount for the Appraised Value, despite the specific request of ICII and the Company, the Appraiser shall provide a range of values for the Appraised Value not greater than $5 million, in which case the Appraised Value shall be deemed to equal the average of the maximum and minimum dollar amounts of such range. ICII and the Company agree to share equally the fees and expenses of the Appraiser. (b) The Merger Consideration in respect of each Share shall be increased by an amount, if greater than zero, equal to the quotient of (i) the amount by which $35 million exceeds the Appraised Value, divided by (ii) the sum of (x) the number of issued and outstanding Shares as of the date hereof entitled to receive the Merger Consideration and (y) the aggregate number of Shares issuable pursuant to Company Stock Options having an exercise price less than $11.50 per share. The Merger Consideration shall not be reduced in the event the Appraised Value is greater than $35 million. ICII and Merger Sub shall, not later than the next business day after the determination of the Appraised Value, make a public announcement as to the determination thereof, and, if applicable, amend the Schedule 13E-3 (as defined in Section 1.11) to reflect the adjustment, if any, of the Merger Consideration contemplated and required hereby. (c) The Company and ICII agree, and ICII shall cause the Manager to agree, that, in the event this Agreement is terminated, other than as a result of a breach by the Company, the Management Agreement shall be terminated on the earlier of the consummation of any Superior Proposal (as defined in Section 4.3), October 22, 1999, or such earlier date as the Company may request, and, thereafter, the Management Agreement shall be of no further force and effect, other than with respect to the payment of accrued but unpaid amounts then due thereunder. Anything to the contrary herein or in the Management Agreement notwithstanding, as a result of the termination of the Management Agreement as contemplated by the foregoing sentence, the Manager shall be entitled to receive, following the termination of this Agreement and the Management Agreement, a payment from the Company of the lesser of (i) $35 million and (ii) the Appraised Value, which payment shall constitute payment in full of any obligations that exist or may hereafter arise pursuant to the Management Agreement, other than with respect to the payment of accrued but unpaid amounts then due thereunder. In no event shall the Company be held responsible to ICII, the Manager or any of their respective affiliates for damages (whether actual, punitive, consequential or otherwise) resulting from the termination of the Management Agreement as contemplated by this Section. ICII shall cause the Manager to take any such further action as the Company may reasonably require to evidence the agreements contemplated by this Section and ICII shall hold the Company and any successor-in-interest to the Company and their respective affiliates harmless from and against any and all claims arising from any assertion by the Manager as to any different or greater entitlement pursuant to the Management Agreement. -4- Section 1.9 Payment for Shares. ------------------ (a) From and after the Effective Time, such bank or trust company as shall be mutually acceptable to ICII and the Company, shall act as paying agent (the "Paying Agent") in effecting the payment of the aggregate Merger ------------ Consideration in respect of Certificates that, prior to the Effective Time, represented Shares entitled to payment of the Merger Consideration pursuant to Section 1.7(a). As of the Effective Time, ICII and Merger Sub shall, jointly and severally, for the benefit of the Company Stockholders, deposit with the Paying Agent for payment in accordance with this Article I, by the Paying Agent, the aggregate Merger Consideration for all of the Shares entitled to payment of the Merger Consideration pursuant to Section 1.7(a) (the "Payment Fund"). ------------ (b) Promptly after the Effective Time, the Paying Agent shall mail to each holder of Certificates entitled to payment of the Merger Consideration pursuant to Section 1.7(a), a form of letter of transmittal which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent and instructions for use in surrendering such Certificates and receiving the aggregate Merger Consideration in respect thereof. Upon the surrender of each such Certificate, the Paying Agent shall pay the holder of such Certificate, by check or by wire transfer of immediately available funds, in consideration therefor, the Merger Consideration multiplied by the number of Shares formerly represented by such Certificate, and such Certificate shall be cancelled. Until so surrendered, each such Certificate entitled to payment of the Merger Consideration pursuant to Section 1.7(a) shall represent solely the right to receive the aggregate Merger Consideration relating thereto (and the right to receive dividends permitted hereby). No interest shall be paid or accrued on the Merger Consideration. If the Merger Consideration (or any portion thereof) is to be delivered to any person other than the person in whose name the Certificate formerly representing Shares surrendered therefor is registered, it shall be a condition to such right to receive such Merger Consideration that the Certificate so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the person surrendering such Shares shall pay to the Paying Agent any transfer or other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered, or shall establish to the satisfaction of the Paying Agent that such tax has been paid or is not applicable. (c) Promptly following the date which is 180 days after the Effective Time (or such later date as the Surviving Corporation shall request), the Paying Agent shall deliver to the Surviving Corporation any undistributed portion of the Payment Fund and any other documents in its possession relating to the Merger, and the Paying Agent's duties shall thereupon terminate. Thereafter, each holder of a Certificate formerly representing Shares may surrender such Certificate to the Surviving Corporation and (subject to applicable abandoned property, escheat and similar laws) receive in consideration therefor the aggregate Merger Consideration relating thereto, without any interest or dividends thereon. (d) In the event that any Certificate shall have been lost, stolen or destroyed, the Paying Agent shall pay or issue (as applicable) in exchange therefor, upon the making of an affidavit of that fact and, if the Surviving Corporation so requires, the delivery of a reasonably -5- suitable bond or indemnity by the holder thereof, such Merger Consideration as may be required pursuant to this Agreement. (e) After the Effective Time, there shall be no transfers on the stock transfer books of the Surviving Corporation of any Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates formerly representing Shares are presented to the Surviving Corporation or the Paying Agent, they shall be surrendered and cancelled in return for the payment of the Merger Consideration relating thereto, as provided in this Section, subject to applicable law. (f) None of the Company, ICII, Merger Sub, the Paying Agent or the Surviving Corporation shall be liable to any holder of Shares for cash from the Payment Fund delivered to a public official as required pursuant to any applicable abandoned property, escheat or similar law. (g) The provisions in this Section are intended to be for the benefit of, and shall be enforceable by, each holder of Certificates previously evidencing the Shares outstanding immediately prior to the Merger entitled to payment of the Merger Consideration pursuant to Section 1.7(a) (it being expressly agreed that such persons shall be the third party beneficiaries of this Section). Section 1.10 Stock Option and Other Plans. ---------------------------- (a) As of the Effective Time, (i) each outstanding option to purchase Shares (each, a "Company Stock Option") issued pursuant to the Company's 1997 -------------------- Stock Option Plan, as amended (the "Company Stock Option Plan"), shall be ------------------------- converted into an immediately exercisable option (each, an "Adjusted Company ---------------- Option") to purchase a number of shares of common stock, no par value, of ICII - ------ ("ICII Common Stock"), at an exercise price as shall be determined in accordance ----------------- with the provisions hereof so that the Fair Value (as defined below) of each such Company Stock Option equals the Fair Value of the Adjusted Company Options to purchase ICII Common Stock into which such Company Stock Option is converted, and all references in each such Company Stock Option (including the plans and agreements under which they were issued) to the Company shall be deemed to refer to ICII, where appropriate; provided, however, that the adjustments provided in this paragraph with respect to any options which are "incentive stock options" (as defined in Section 422 of the Internal Revenue Code of 1986, as amended, (the "Code"), shall be effected in a manner consistent with the requirements of ---- Section 424(a) of the Code, unless the option holder, in his or her sole discretion, waives such requirement, and (ii) ICII shall assume the obligations of the Company under the Company Stock Option Plan. Approval of the Merger Agreement by the Company Stockholders shall constitute a "Change of Control" (as defined in the Company Stock Option Plan) and as a result each Company Stock Option shall vest and become exercisable in full on the date of such Change of Control. The other terms of each Adjusted Company Option, and the plans or agreements under which they were issued, in each case as amended in accordance herewith, shall continue to apply in accordance with their terms. The date of grant of each Adjusted Company Option shall be the date on which the corresponding Company Stock Option was granted. For the purposes hereof, the "Fair -6- Value" of the Company Stock Options and of the Adjusted Company Options to purchase ICII Common Stock into which the Company Stock Options are converted shall be determined in the manner set forth on Schedule III and utilizing the Black-Scholes option pricing model incorporating historical data available on the Bloomberg system and reflecting, among other things, the relative current price, strike price, the risk-free rate, expected duration, volatility and dividend policies of each of ICII and the Company and of the Company Stock Options and the Adjusted Company Options into which they will be converted, based on the principle of preserving for the holders of the Company Stock Options the current value and upside potential of the Company Stock Options, as well as the level of the Merger Consideration (including any adjustment pursuant to Section 1.8(b) in respect of the Appraised Value of the Management Agreement). The Company and ICII shall work together during the 30-day period following the date hereof to determine the precise methodology to be used in determining Fair Value and with respect to the conversion of the Company Stock Options into the Adjusted Company Options. In the event they are unable to agree within such 30-day period, their respective positions on the subject shall be submitted to the Appraiser, and the Appraiser shall be directed to select one of the positions or any other intermediate position. (b) Each holder of Company Stock Options may, prior to or within 90 days following the later of the Effective Time or the date of the notices set forth in paragraph (d) below, elect to receive, in lieu of all or a portion of such holder's Adjusted Company Options as provided in Section 1.10(a), the following: (i) with respect to all or a portion of each Company Stock Option which has an option exercise price less than the Merger Consideration, a cash payment from ICII equal to the product of (A) the amount by which the Merger Consideration amount exceeds the exercise price of such Company Stock Option and (B) the number of shares issuable upon exercise of such Company Stock Option or portion thereof, as applicable, and/or (ii) with respect to all or a portion of each Company Stock Option (including those referred to in clause (i) above in lieu of the payment contemplated by clause (i)), a cash payment from ICII equal to the Fair Value of such option or portion thereof, as applicable, determined in accordance with Section 1.10(a). All cash payments shall be subject to any applicable withholding taxes and shall be made as promptly as practicable upon ICII's receipt of such holder's election pursuant to this paragraph. (c) ICII and the Company agree that the Company Stock Option Plan shall be amended (or the Company Board or the Compensation Committee of the Company Board shall take other appropriate actions), such amendment to be effective as of the Effective Time, (i) to provide that, with respect to any particular holder of Company Stock Options, unless such option holder shall remain or become an employee of ICII or the Manager immediately after the Effective Time, the employee shall be considered to have had a Voluntary Termination of Affiliation (as defined in the Company Stock Option Plan) and, as a result, such holder's Company Stock Options shall remain exercisable by such holder for a period of one year from the Effective Time, and (ii) to reflect the transactions contemplated hereby, including the conversion of Shares held or to be awarded or paid pursuant to such benefit plans, programs or the Company Stock Option Plan into shares of ICII Common Stock (or fractions thereof) on a basis consistent with the transactions contemplated by this Agreement. The parties agree that any "voluntary" termination of employment by an employee of the Company or the Manager pursuant to a constructive termina- -7- tion or a termination for good reason in an employment or severance agreement shall be treated as a Voluntary Termination of Affiliation for which the employee's Adjusted Company Options shall remain exercisable for a period of at least one year following such termination. (d) Prior to or as soon as practicable after the Effective Time, ICII shall deliver to the holders of Company Stock Options appropriate notices setting forth such holders' rights pursuant to the Company Stock Option Plan and the agreements evidencing the grants of such Company Stock Options and informing such holders that such Company Stock Options and the related agreements shall be assumed by ICII at the Effective Time and that such Company Stock Options shall continue in effect on the same terms and conditions as in effect immediately prior to the Effective Time (subject to the adjustments required by this Section after giving effect to the Merger). (e) ICII and the Company shall take all such steps as may be required or reasonably requested to cause the transactions contemplated by this Section and any other dispositions of Company equity securities (including derivative securities) or acquisitions of ICII equity securities (including derivative securities) in connection with this Agreement by each individual who (a) is a director or officer of the Company or (b) at the Effective Time, will become a director or officer of ICII, to be exempt under Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and ------------ regulations promulgated thereunder, such steps to be taken in accordance with the No-Action Letter dated January 12, 1999, issued by the Securities and Exchange Commission (the "SEC") to Skadden, Arps, Slate, Meagher & Flom LLP, or as may otherwise be reasonably requested by the Company. (f) ICII shall (i) prior to the Effective Time, reserve for issuance the maximum number of shares of ICII Common Stock that may become subject to the Adjusted Company Options referred to in this Section and (ii) issue or cause to be issued the appropriate number of shares of ICII Common Stock (or fractions thereof) pursuant to the terms of the Adjusted Company Options upon the exercise thereof. No later than the Effective Time, ICII shall prepare and file with the SEC one or more registration statements on Form S-8 (or on any other appropriate form) (the "S-8") registering the number of shares of ICII Common Stock --- necessary to fulfill ICII's obligations under this Section. ICII shall also file a supplemental listing application with the Nasdaq Stock Market in respect of such shares and use its reasonable best efforts to cause such shares to be approved for listing on the Nasdaq Stock Market, subject to official notice of issuance prior to the Effective Time. Such registration statement shall be kept effective (and the current status of the prospectus required thereby shall be maintained) for at least as long as until the later of (i) the last date on which any Adjusted Company Options remain outstanding, or (ii) the last date on which shares of ICII Common Stock issued on exercise of Adjusted Company Options are held by an affiliate, as defined by Rule 144 of the General Rules and Regulations (an "Affiliate") under the Securities Act of 1933, as amended --------- (the "Securities Act") of ICII and any of such shares of ICII Common Stock cannot be otherwise sold immediately pursuant to Rule 144. (g) The provisions of this Section are intended to be for the benefit of, and shall be enforceable by, each holder of Company Stock Options or Adjusted Company Options -8- and such Affiliate of ICII holding shares of ICII Common Stock issued on exercise of Adjusted Company Options (it being expressly agreed that such persons shall be the third party beneficiaries of this Section). Section 1.11 Stockholders' Meeting; SEC Materials. ------------------------------------ (a) The Company, acting through the Company Board, shall, in accordance with applicable law and the Company's Charter and By-laws, and provided that this Agreement shall not have been terminated as contemplated by Section 4.3: (i) duly call, give notice of, convene and hold a special meeting of its stockholders (the "Special Meeting"), which meeting --------------- shall be held as soon as reasonably practicable following the expiration of the Solicitation Period for the purpose of considering and taking action upon this Agreement, but in no event prior to October 1, 1999; (ii) together with ICII, prepare and file with the SEC a preliminary proxy statement relating to this Agreement in form and substance reasonably satisfactory to ICII and the Company, and, together with ICII, use their reasonable efforts (x) to obtain and furnish the information required to be included by the SEC in the Proxy Statement (as defined below) and, after consultation with each other, to respond promptly to any comments made by the SEC or its staff with respect to the preliminary proxy statement and cause a definitive proxy statement (the "Proxy Statement"), which the parties --------------- agree shall comply as to form in all material respects with all applicable requirements of law, to be mailed to the Company Stockholders and (y) subject to the fiduciary duties of the Company Board under applicable law and subject to the provisions of Section 4.3, to obtain the necessary approval of this Agreement by the Company Stockholders representing a majority of the outstanding Shares entitled to vote at the Special Meeting (other than the ICII Shares); and (iii) subject to the fiduciary obligations of the Company Board and the Special Committee under applicable law and subject to the provisions of Section 4.3, include in the Proxy Statement the recommendation of the Company Board and the Special Committee that the Company Stockholders vote in favor of the approval of this Agreement. (b) ICII shall, and shall cause the other holders of ICII Shares to, vote (whether in person or by proxy) for the approval of this Agreement at the Special Meeting or any adjournment or postponement thereof. (c) Whenever any event occurs which is required to be set forth in an amendment or supplement to the Proxy Statement, ICII or the Company, as the case may be, shall promptly inform the other of such occurrences and cooperate in filing with the SEC and/or mailing to the Company Stockholders such amendment or supplement. Each of the parties agree that the information provided by it for inclusion in the Proxy Statement and each amendment or -9- supplement thereto, at the time of mailing thereof and at the time of the Special Meeting, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If, at any time prior to the Effective Time, any information pertaining to one of the parties or, to such party's knowledge, any of its affiliates or its officers or directors, contained in or omitted from the Proxy Statement makes statements contained therein materially false or misleading, such party shall promptly so advise the other parties and provide such other parties with the information necessary to make the statements contained therein not false or misleading. In the event of such advice being given pursuant to the preceding sentence, the Company and ICII shall cooperate to promptly file with the SEC (after reasonable opportunity to ICII and the Company to review and comment thereon) any required amendments or supplements to the Proxy Statement and, to the extent required by law, disseminate such amendments or supplements to the Company Stockholders. No filings of the Proxy Statement (or any amendments or supplements thereto) shall be made without the prior approval of both ICII and the Company (which consent shall not be unreasonably withheld, conditioned or delayed). (d) Simultaneously with the filing of the preliminary proxy statement contemplated by Section 1.11(a)(ii), ICII shall file with the the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3, including the exhibits thereto (together with all amendments and supplements thereto, the "Schedule 13E-3") -------------- with respect to the Merger and the other transactions contemplated hereby. The Schedule 13E-3 shall include the information required to be included by the SEC in a Rule 13e-3 Transaction Statement. ICII shall cause the information contained in the Schedule 13E-3 to be disseminated to Company Stockholders as and to the extent required by applicable law. ICII, Merger Sub and the Company agree to correct promptly any information provided by any of them for use in the Schedule 13E-3 which shall have become materially incorrect or misleading, and ICII and Merger Sub further agree to take all steps necessary to cause the Schedule 13E-3 as so corrected to be filed with the SEC and to be disseminated to Company Stockholders as and to the extent required by applicable law. The Company, the Special Committee and their respective counsel shall be given a reasonable opportunity to review and comment on the Schedule 13E-3 and any amendments thereto prior to the filing thereof with the SEC or dissemination thereof to the Company Stockholders. ICII and Merger Sub shall promptly inform the Company, the Special Committee and their respective counsel of any comments, whether oral or written that ICII or Merger Sub may receive from the SEC or its staff with respect to the Schedule 13E-3 promptly after the receipt thereof and shall promptly provide the Company, the Special Committee and their respective counsel with copies of any such written comments. ICII and Merger Sub shall provide the Company and the Special Committee, and their respective counsel, with a reasonable opportunity to participate in all communications with the SEC and its staff, including any meetings and telephone conferences, relating to the Schedule 13E-3 or the Merger. -10- ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to ICII and Merger Sub as follows: Section 2.1 Organization and Qualification of the Company. --------------------------------------------- (a) The Company and each of its subsidiaries is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized and has all requisite corporate or other power, as the case may be, and authority to own, lease and operate its properties and to carry on its businesses as now being conducted. (b) Each of the Company and its subsidiaries is duly qualified or licensed and in good standing (with respect to jurisdictions which recognize such concept) to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not have a Company Material Adverse Effect. The term "Company Material Adverse ------------------------ Effect" means any change or effect that individually or in the aggregate is or - ------ would reasonably be expected to be materially adverse to (i) the business, properties, assets, results of operations or financial condition of the Company and its subsidiaries, taken as a whole, other than any change or effect arising out of (x) a decline or deterioration in the economy in general or the real estate or capital markets in which the Company and its subsidiaries operate, or (y) this Agreement or the transactions contemplated hereby or the announcement thereof or (ii) the ability of the Company to consummate the transactions contemplated hereby without material delay. Section 2.2 Corporate Authorization. The Company has all necessary ----------------------- corporate power and authority to execute and deliver this Agreement and, subject, in the case of the Merger, to approval by the Company Stockholders, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Company Board and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions contemplated hereby (other than, with respect to the Merger, the approval and adoption of this Agreement by Company Stockholders representing a majority of the outstanding Shares entitled to vote at the Special Meeting (other than the ICII Shares)). This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery hereof by each of ICII and Merger Sub, constitutes the valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). -11- Section 2.3 SEC Reports; Financial Statements. The Company has filed --------------------------------- all required forms, reports and documents with the SEC since January 1, 1998 (the "Company SEC Reports"). As of their respective dates and giving effect to ------------------- any amendments thereto, each of the Company SEC Reports complied as to form in all material respects with all applicable requirements of the Securities Act or the Exchange Act, as the case may be, each as in effect on the dates such forms, reports and documents were filed. None of the Company SEC Reports contained, when filed, any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of the Company included in the Company SEC Reports complied as to form, as of their respective dates of filing with the SEC, in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto and fairly present, in conformity with United States generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the ---- relevant periods (except as may be indicated in the notes thereto and, except in the case of unaudited quarterly statements, as permitted by Form 10-Q of the SEC), the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and changes in financial position and cash flows for the periods then ended (subject, in the case of unaudited interim financial statements, to normal year-end adjustments). Section 2.4 Consents and Approvals; No Violations. Except as set ------------------------------------- forth in Section 2.4 of the Company's Disclosure Schedule (the "Company ------- Disclosure Schedule") and except for such filings, permits, authorizations, - ------------------- consents and approvals as may be required under, and other applicable requirements of, the Securities Act, the Exchange Act, the rules and regulations of the Nasdaq Stock Market, state takeover laws, state securities or "blue sky" laws and the filing and recordation of the Articles of Merger as required by the MGCL and such other filings, permits, authorizations, consents and approvals the failure of which to be obtained or made would not, in the aggregate, reasonably be expected to have a Company Material Adverse Effect, no filing or registration with or notice to, and no permit, authorization, consent or approval of, any court or tribunal of competent jurisdiction in any jurisdiction or any foreign, federal, state or municipal governmental, regulatory or other administrative agency, department, commission, board, bureau, political subdivision or other authority or instrumentality including the National Association of Securities Dealers, Inc. and the SEC (each a "Regulatory Entity") is necessary in ----------------- connection with the execution and delivery by the Company of this Agreement or the consummation by the Company of the transactions contemplated hereby. Section 2.5 Opinion of Financial Advisor. The Financial Advisor has ---------------------------- delivered to the Special Committee its written opinion, dated the date of this Agreement, to the effect that, based on, and subject to the various assumptions and qualifications set forth in such opinion, as of the date of such opinion, the Merger Consideration to be received by the Company Stockholders (other than ICII and Merger Sub and any other holders of ICII Shares listed on Schedule I) is fair to such Company Stockholders from a financial point of view, a signed copy of which opinion has been delivered to the Special Committee, and such opinion has not been withdrawn or modified. -12- Section 2.6 Brokers. Other than the Financial Advisor, no broker, ------- finder, investment banker or other intermediary is entitled to any brokerage, finder's or other similar fee or commission or expense reimbursement in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of the Company or any of its affiliates. Section 2.7 Information. None of the information supplied or to be ----------- supplied by the Company in writing specifically for inclusion or incorporation by reference in (i) the Proxy Statement, (ii) the Schedule 13E-3, or (iii) any other document to be filed with the SEC or any other Regulatory Entity prior to the Effective Time (the "Other Filings") will, at the respective times filed ------------- with the SEC or other Regulatory Entity and, in addition, in the case of the Proxy Statement and the Schedule 13E-3, at the date it or any amendment or supplement is mailed to the stockholders, at the time of the Special Meeting and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. Section 2.8 Rights Agreement; Charter. The Company has taken or will ------------------------- take all action necessary to exempt the Merger from the provisions of the Rights Agreement, dated as of September 21, 1998, between the Company and U.S. Stock Transfer Corporation (the "Rights Agreement") and to provide for expiration of ---------------- the Rights thereunder at the time immediately prior to the Effective Time. The Company will not exercise any rights or ability it may have under the Rights Agreement or its charter (the "Company Charter") to nullify or delay the --------------- consummation of the Merger. Section 2.9 Capitalization of the Company and Its Subsidiaries. As -------------------------------------------------- of the date hereof, the authorized capital stock of the Company consists of 500,000,000 shares of capital stock, of which: (i) 496,500,000 are classified as Common Stock, par value $0.0001 per share, 28,500,000 shares are issued and outstanding, and (ii) 3,500,000 are classified as Series A Junior Participating Preferred Stock, par value $0.0001 per share, none of which shares are issued or outstanding. The Series A Junior Participating Preferred Stock has been reserved for issuance upon the exercise of the preferred share purchase rights in accordance with the Rights Agreement. As of the date hereof, there are outstanding Company Stock Options in respect of 1,437,250 Shares at the exercise prices set forth in Section 2.9(a) of the Company Disclosure Schedule. Except as set forth above or as set forth in Section 2.9(a) of the Company Disclosure Schedule, there are outstanding (i) no shares of capital stock or other voting securities of the Company, (ii) no securities of the Company or its subsidiaries convertible into or exchangeable or exercisable for shares of capital stock or voting securities of the Company, (iii) no options, calls or other rights (including warrants or other contractual rights, including contingent rights) to acquire from the Company or its subsidiaries, and no obligations of the Company or its subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, any capital stock, voting securities or securities convertible into or exchangeable or exercisable for capital stock or voting securities of the Company and (iv) no equity equivalents, interests in the ownership or earnings of the Company or its subsidiaries or other similar rights (including stock appreciation rights) (collectively, "Company Securities"). Except for the ------------------ Company Stock Option Plan or as set forth -13- in Section 2.9(a) of the Company Disclosure Schedule, there are no outstanding obligations of the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any Company Securities or any capital stock, voting securities or other ownership interests in any subsidiary of the Company. Section 2.10 No Defaults. As of the date hereof, none of the Company ----------- or any of its subsidiaries is in default or violation (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of (i) its charter or bylaws (or similar governing documents), (ii) any note, bond, mortgage, collateralized mortgage obligation, reverse repurchase agreement, indenture, letter of credit, warehouse line of credit, other evidence of indebtedness, franchise, permit, guarantee, lease, license, contract, agreement or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which any of them or any of their respective properties or assets is bound, or (iii) any order, writ, injunction, decree, law, statute, rule or regulation applicable to the Company, its subsidiaries or any of their respective properties or assets, except in the cases referred to in the preceding clauses (ii) and (iii) for violations, breaches or defaults that would not have a Company Material Adverse Effect. ARTICLE III REPRESENTATIONS AND WARRANTIES OF ICII AND MERGER SUB ICII and Merger Sub, jointly and severally, hereby represent and warrant to the Company as follows: Section 3.1 Organization and Qualification of ICII and Merger Sub. ----------------------------------------------------- (a) ICII and each of its subsidiaries is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized and has all requisite corporate or other power, as the case may be, and authority to own, lease and operate its properties and to carry on its businesses as now being conducted. (b) Each of ICII and its subsidiaries is duly qualified or licensed and in good standing (with respect to jurisdictions which recognize such concept) to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not have an ICII Material Adverse Effect. The term "ICII Material Adverse Effect" means ---------------------------- any change or effect that individually or in the aggregate is or would reasonably be expected to be materially adverse to (i) the business, properties, assets, results of operations or financial condition of ICII and its subsidiaries, taken as a whole, other than any change or effect arising out of (x) a decline or deterioration in the economy in general or the real estate or capital markets in which ICII and its subsidiaries operate, or (y) this Agreement or the transactions contemplated hereby or the announcement thereof or (ii) the ability of ICII or Merger Sub to consummate the transactions contemplated hereby without material delay. -14- Section 3.2 Corporate Authorization. Each of ICII and Merger Sub has ----------------------- all necessary corporate power and authority to execute and deliver this Agreement, and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the board of directors of each of ICII and Merger Sub and by ICII as sole stockholder of Merger Sub and no other corporate proceedings on the part of either of them is necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by ICII and Merger Sub and, assuming the due authorization, execution and delivery hereof by the Company, constitutes the valid, legal and binding agreement of each of ICII and Merger Sub, enforceable against each of them in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). Section 3.3 SEC Reports; Financial Statements. ICII has filed all --------------------------------- required forms, reports and documents with the SEC since January 1, 1998 (the "ICII SEC Reports"). As of their respective dates and giving effect to any ---------------- amendments thereto, each of the ICII SEC Reports complied as to form in all material respects with all applicable requirements of the Securities Act or the Exchange Act, as the case may be, each as in effect on the dates such forms, reports and documents were filed. None of the ICII SEC Reports, including any financial statements, contained, when filed, any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of ICII included in the ICII SEC Reports complied as to form, as of their respective dates of filing with the SEC, in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto and fairly present, in conformity with GAAP applied on a consistent basis throughout the relevant periods (except as may be indicated in the notes thereto and, except in the case of unaudited quarterly statements, as permitted by Form 10-Q of the SEC), the consolidated financial position of ICII and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and changes in financial position and cash flows for the periods then ended (subject, in the case of unaudited interim financial statements, to normal year-end adjustments). Section 3.4 Consents and Approvals; No Violations. ------------------------------------- (a) Except as set forth in Section 3.4 of the ICII Disclosure Schedule and except for such filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Securities Act, the Exchange Act, the rules and regulations of the Nasdaq Stock Market, state takeover laws, state securities or "blue sky" laws and the filing and recordation of the Articles of Merger as required by the MGCL, filings to maintain the good standing of the Surviving Corporation and such other filings, permits, authorizations, consents and approvals the failure of which to be obtained or made would not, in the aggregate, reasonably be expected to have an ICII Material Adverse Effect, no filing or registration with or notice to, and no permit, authorization, consent or approval of, any Regulatory Entity is necessary -15- in connection with the execution and delivery by ICII or Merger Sub of this Agreement or the consummation by ICII or Merger Sub of the transactions contemplated hereby. (b) Upon consummation of the transactions contemplated hereby, each of ICII and the Surviving Corporation (i) will not become insolvent, (ii) will not be left with unreasonably small capital, (iii) will not have incurred debts beyond its ability to pay all of its debts as they mature, and (iv) will not have its capital impaired. Section 3.5 Brokers. Other than Friedman, Billings, Ramsey & Co., ------- Inc. ("FBR"), no broker, finder, investment banker or other intermediary is --- entitled to any brokerage, finder's or other similar fee or commission or expense reimbursement in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of ICII, Merger Sub or any of their affiliates (other than the Company). In the event this Agreement is terminated in accordance with Section 6.1, no broker, finder, investment banker or other intermediary is or will be entitled to any brokerage, finder's or other similar fee or commission or expense reimbursement in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of ICII, Merger Sub or any of their affiliates (other than the Company), except that FBR shall be entitled to reimbursement from ICII for its reasonable out-of-pocket expenses incurred in connection with the negotiation and preparation of this Agreement. Section 3.6 Ownership of Company Capital Stock. Except for the ICII ---------------------------------- Shares and except as listed on Section 3.6 of the ICII Disclosure Schedule, neither ICII nor, to its knowledge, any of its subsidiaries or affiliates (other than the Company), (i) beneficially owns (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, or (ii) is party to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of, in each case, shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company. Section 3.7 Information. None of the information supplied or to be ----------- supplied by ICII and Merger Sub in writing specifically for inclusion in (i) the Schedule 13E-3, (ii) the Proxy Statement, or (iii) the Other Filings will, at the respective times filed with the SEC or such other Regulatory Entity and, in addition, in the case of the Schedule 13E-3 and the Proxy Statement, at the date it or any amendment or supplement is mailed to the stockholders, at the time of the Special Meeting and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. Section 3.8 Financing. ICII has available, and shall provide Merger --------- Sub with, all of the funds necessary to consummate the Merger and the transactions contemplated hereby in accordance with the terms hereof. In no event shall the receipt or availability of any funds or financing by ICII or any affiliate or any other financing or other transaction be a condition to any of ICII's obligations hereunder or to the consummation of the Merger. -16- Section 3.9 Conduct of Business of Merger Sub. Merger Sub was formed --------------------------------- solely for the purpose of engaging in the transactions contemplated hereby, has engaged in no other business activities and has conducted its operations only as contemplated hereby. ARTICLE IV COVENANTS Section 4.1 Conduct of Business of the Company. Except as expressly ---------------------------------- contemplated by this Agreement or as set forth in Section 4.1 of the Company Disclosure Schedule, during the period from the date hereof to the Effective Time, the Company will, and will cause each of its subsidiaries to, conduct its operations only in the ordinary course of business consistent with past practice, seek to preserve intact its current business organizations, seek to keep available the service of its current officers and seek to preserve its relationships with customers, suppliers and others having business dealings with them. Without limiting the generality of the foregoing, and except as otherwise expressly provided in this Agreement or as set forth in Section 4.1 of the Company Disclosure Schedule, after the date hereof and prior to the earlier of the (i) Effective Time or (ii) termination of this Agreement, the Company will not and will cause its subsidiaries not to, without the prior written consent of ICII, such consent not to be unreasonably withheld, conditioned or delayed: (a) amend its charter or bylaws or the articles or other similar governing instrument of any of its subsidiaries; (b) except pursuant to the Rights Agreement, authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) any stock of any class or any other securities or equity equivalents (including any stock options or stock appreciation rights), except for the issuance of Shares (and the associated rights) upon the exercise of Company Stock Options outstanding at the date of this Agreement under the Company Stock Option Plan, in accordance with the terms of such Company Stock Option Plan and Company Stock Options as in effect on the date hereof; (c) split, combine or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock (other than (i) regular quarterly dividends not in excess of 105% of its taxable income for each quarter or (ii) distributions not in excess of 105% of its taxable income for the applicable period as may be necessary to maintain the Company's status as a real estate investment trust for federal income tax purposes ("REIT")), make any other actual, constructive or deemed distribution ---- in respect of any shares of its capital stock or otherwise make any payments to Company Stockholders in their capacity as such or redeem or otherwise acquire any of its securities or any securities of any of its subsidiaries; provided, however, that notwithstanding the foregoing, the Company shall be permitted to declare and pay the Final Company Dividend (as defined in Section 4.12) in accordance with Section 4.12; -17- (d) acquire, sell, lease, license or dispose of any assets, or enter into any material contract outside the ordinary course of business consistent with past practice; (e) except as may be required as a result of a change in law or in GAAP, change any of the accounting principles or practices used by it and maintain its books and records other than in accordance with GAAP consistently applied; (f) acquire, whether by merger, consolidation or acquisition of stock or assets or otherwise, any corporation, partnership or other business organization or division thereof; (g) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business consistent with past practice or in accordance with their terms, of claims, liabilities or obligations reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or the notes thereto) of the Company and its subsidiaries included in the Company SEC Reports or arising in the ordinary course of business since the date thereof or reflecting debt between the Company and its wholly owned subsidiaries or between its wholly owned subsidiaries or which are not otherwise material to the business of the Company or its subsidiaries; (h) settle or compromise, or agree to settle or compromise, any claim, suit or other litigation or matter in an arbitration proceeding for an amount in excess of $100,000 (after taking into account any insurance proceeds to which the Company or any of its subsidiaries receives), or otherwise on terms which would constitute a Company Material Adverse Effect; (i) create or assume with respect to any asset of the Company (including any security), any mortgage, lien, pledge, charge, security interest, assignment of leases, revenues, rents and/or profits, fixture, filing or other encumbrance of any kind in respect of such asset (the "Liens") other than Liens ----- which would not have, or reasonably be expected to have, a Company Material Adverse Effect; (j) make any loans, advances or capital contributions in excess of $500,000 to, or investments in, any other Person, other than (i) pursuant to previous commitments listed in Section 4.1 of the Company Disclosure Schedule or in Company SEC Reports filed prior to the date hereof, and (ii) loans, advances and capital contributions to wholly owned subsidiaries of the Company; (k) take any action, or omit to take any action, which action or omission would terminate the Company's continuing status as a REIT; and (l) take, or agree in writing or otherwise to take, (i) any of the actions described in Sections 4.1(a) through 4.1(k) to the extent that such actions would be prohibited thereby, except to the extent such actions would not have, or reasonably be expected to have, a Company Material Adverse Effect, or (ii) any action which would result in any of the material conditions to the Merger set forth herein not being satisfied. -18- Notwithstanding anything to the contrary herein, Section 4.1 shall not be deemed violated by any action taken by the Company as a result of any action by an officer of the Company that is not specifically approved by the Special Committee. Section 4.2 Other Actions. Each of the Company, on the one hand, and ------------- ICII and Merger Sub, on the other hand, shall not, and shall use commercially reasonable efforts to cause their respective subsidiaries and affiliates not to, take any action that would result in (i) any representations and warranties of such party (without giving effect to any "knowledge" qualification) set forth in this Agreement that are qualified as to materiality becoming untrue, (ii) any of such representations and warranties (without giving effect to any "knowledge" qualification) that are not so qualified becoming untrue in any material respect, or (iii) any of the conditions to the Merger set forth in Article V not being satisfied. Section 4.3 Solicitation. ------------ (a) For a period of 60 days following the later of (x) the date of this Agreement or (y) the date on which the Appraiser is engaged (the "Solicitation Period"): ------------------- (i) Nothing contained in this Agreement shall prohibit the Company or any third party or any of the affiliates, officers, directors, employees, representatives or agents of the Company, directly or indirectly, from encouraging, soliciting, participating in, initiating discussions or negotiations with, providing any information or offering access to the properties, books or records of the Company, or entering into any agreement respecting fees and expenses or similar matters with any Person or group concerning any Competing Transaction (as defined below), and it is contemplated and expected that the Company and such persons will do so for the purpose of determining if any Competing Transaction constituting a Superior Proposal is available to the Company. (ii) Notwithstanding anything to the contrary herein, after consultation with and based upon the advice of both an outside legal counsel and an independent financial adviser, the Company Board may enter into an agreement with respect to, or approve or recommend, a Superior Proposal; provided, however, that the Company shall concurrently with entering into such an agreement terminate this Agreement and pay, or cause to be paid, to ICII the expenses required by Section 6.3. (b) Following the expiration of the Solicitation Period: (i) The Company shall not (whether directly or indirectly through advisors, agents or other intermediaries) and shall use its reasonable efforts to cause its officers, directors, employees, affiliates, agents and representatives, not to directly or indirectly encourage, solicit, participate in or initiate discussions or negotiations with, or provide any information or offer access to the properties, books or records of the Company, to any Person or group (other than ICII or any designees of ICII) concerning any Competing Transaction. Notwithstanding the fore- -19- going, the Company may furnish information and access, in each case only in response to an unsolicited written proposal that constitutes a Superior Proposal (provided that the Company shall use its reasonable efforts to enter into a confidentiality agreement with such third party) and participate in discussions and negotiate with the Person or group making such Superior Proposal. The Company shall provide a copy of such written proposal (which shall identify the party making such proposal) and any amendments thereto to ICII promptly upon receipt thereof and, thereafter, shall keep ICII promptly advised of material developments with respect thereto; provided, however, that, nothing contained in this Section 4.3(b) shall prevent the Company, the Company Board or the Special Committee from (i) taking, and disclosing to the Company's stockholders, a position complying with Rule 14e-2(a) or Rule 14d-9 promulgated under the Exchange Act with respect to a Competing Transaction, (ii) making any disclosure to its stockholders, if, in the good faith judgment of the Company Board or the Special Committee, after receiving advice of outside legal counsel, failure to disclose would be reasonably likely to constitute a breach of its fiduciary duties to the Company or its stockholders under applicable law (including a duty of candor) or otherwise be a violation of any applicable law, (iii) issuing a press release or publicly disclosing the terms of this Agreement in accordance with Section 4.6, or (iv) taking any action which, in the good faith judgment of the Company Board or the Special Committee, after receiving advice of outside legal counsel, is required pursuant to an order entered by a court of competent jurisdiction. (ii) Except as set forth in this Section, neither the Company Board nor any committee thereof shall approve or recommend, or cause the Company to enter into any agreement or letter of intent with respect to, any Competing Transaction. Notwithstanding the foregoing, prior to the Effective Time, after consultation with and based upon the advice of both an outside legal counsel and an independent financial adviser, the Special Committee may recommend and the Company Board may authorize and cause the Company to enter into an agreement with respect to, or approve or recommend, a Superior Proposal; provided, however, that the Company shall concurrently with entering into such an agreement terminate this Agreement and pay, or cause to be paid, to ICII the expenses required by Section 6.3. (c) For purposes of this Agreement: (i) "Competing Transaction" shall mean any of the following with --------------------- respect to the Company or any subsidiary thereof (other than the transactions contemplated by this Agreement (including all schedules and exhibits attached hereto or referred to herein)): any merger, consolidation, share exchange, business combination or similar transaction, or any sale, exchange, mortgage, pledge, transfer or other disposition of all or substantially all of the assets or equity securities of the Company and its subsidiaries taken as a whole, in a single transaction or series of related transactions; any tender offer or exchange offer for 50% or more of the -20- outstanding shares of beneficial interest of the Company or any transaction resulting in the issuance of shares representing 50% or more of the outstanding shares of beneficial interest of the Company, or the filing of a registration statement under the Securities Act in connection therewith. (ii) "Superior Proposal" shall mean any bona fide proposal ----------------- relating to a Competing Transaction which is on terms which the Company Board determines in its good faith judgment (after consulting with an independent financial advisor of nationally recognized reputation) (i) to be more favorable to the Company Stockholders than the Merger and (ii) is reasonably capable of being consummated. Section 4.4 Additional Agreements; Reasonable Best Efforts. Subject ---------------------------------------------- to the terms and conditions herein provided, each of the parties hereto agrees to use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including (i) contesting any legal proceeding challenging the Merger and (ii) the execution of any additional instruments, including the Articles of Merger, necessary to consummate the transactions contemplated hereby. Subject to the terms and conditions of this Agreement, each party hereto agrees to use reasonable best efforts to cause the Effective Time to occur as soon as practicable after the stockholder vote with respect to the Merger. In case at any time after the Effective Time any further action is necessary to carry out the purposes of this Agreement, the proper officers and directors of each party hereto shall take all such necessary action. Section 4.5 Consents. Without in any way limiting Section 4.4, ICII, -------- Merger Sub and the Company each will use its reasonable best efforts to obtain consents, approvals or waivers of all third parties and Regulatory Entities necessary, proper or advisable for the consummation of the transactions contemplated by this Agreement; provided that, nothing contained herein shall require either party to dispose of any business, properties or assets or cease engaging in any business which, individually or in the aggregate, would reasonably be expected to have a material adverse effect on the business, assets, results of operations or financial condition of the Surviving Corporation and its subsidiaries, taken as a whole, after giving effect to the Merger. Section 4.6 Public Announcements. ICII, Merger Sub and the Company -------------------- will consult with each other and give each other reasonable advance notice before issuing any press release or otherwise making any public statements with respect to the transactions contemplated hereby, including the Merger (but excluding any press release or announcement by the Company relating to any Competing Transaction or Superior Proposal). Each party hereto shall incorporate in the press release or other public statement such information as shall reasonably be requested to be included therein by the other party hereto. Notwithstanding the foregoing, either party hereto may, without the prior consent of the other party, issue any press release or make any public an- -21- nouncement that may be required by law or the rules or requirements of the Nasdaq Stock Market, if it has used its reasonable best efforts to consult with the other party but has been unable to do so in a timely manner, and the Company may issue any press release or make any public announcement as it may desire with respect to any Competing Transaction or Superior Proposal. The parties agree that the initial press release to be issued with respect to the Merger shall be in the form heretofore agreed to by the parties. Section 4.7 Indemnification; Directors' and Officers' Insurance. --------------------------------------------------- (a) ICII and Merger Sub agree that all rights to indemnification or exculpation (whether contained in the charter, by-laws or other similar governing instruments, or in any indemnification agreements, each as in effect as of the date hereof, or otherwise available) now existing in favor of the directors, officers, employees and agents (and their respective heirs, representatives, successors and assigns) of the Manager and/or the Company and its subsidiaries (each an "Indemnified Party") with respect to actions or ----------------- omissions occurring prior to the Effective Time shall survive the Merger and shall continue in full force and effect for a period of six years from the Effective Time; provided, however, that, all rights to indemnification in respect of any claim asserted or made within such period shall continue until the disposition of such claim. In addition to the foregoing, from and after the Effective Time, ICII and the Surviving Corporation, jointly and severally, shall indemnify, hold harmless and defend each person who is a current or former officer or director of the Manager and/or the Company or any of its subsidiaries against all losses, claims, damages, liabilities, judgments, costs or expenses (including attorneys' fees) arising out of or pertaining to acts or omissions (or alleged acts or omissions) by them in their capacities as such (collectively, "Actions"), which Actions occurred at or prior to the Effective ------- Time. To the maximum extent permitted by the MGCL, the indemnification and related rights hereunder shall be mandatory rather than permissive and ICII and/or the Surviving Corporation shall promptly advance expenses in connection with such indemnification to the fullest extent permitted under applicable law, provided that, to the extent required by law, the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification. Notwithstanding anything to the contrary herein, immediately upon consummation of the Merger, ICII and the Surviving Corporation shall (and ICII agrees to cause the Surviving Corporation to), jointly and severally, expressly assume the obligations of the Company under any indemnification agreements entered into by the Company for the benefit of its directors and officers. (b) ICII shall cause the Surviving Corporation to maintain in effect for not less than six years from the Effective Time policies of directors' and officers' liability and fiduciary insurance, which may be in the form of tail coverage under the Company's current policies of such insurance (if and to the extent that such tail coverage is available and provides insurance coverage that meets all of the requirements of this Section), on terms with respect to coverage and amount no less favorable than those of such policy or policies in effect on the date hereof pursuant to which the Company's directors and officers currently are insured with respect to claims arising from facts or events occurring prior to the Effective Time to the extent required to cover the types of actions and omissions with respect to which the Company's directors and officers are currently insured; provided, that in no event shall ICII or the Surviving Corporation be required to pay aggregate annual premiums for insurance under this paragraph (b) in excess of 300% of the aggregate annual premium paid by the Company as of the date of this Agreement for such purpose; provided, further, that if the premium for such coverage exceeds such amount, -22- ICII shall, or shall cause the Surviving Corporation to, purchase a policy with the greatest coverage available for such 300% of the aggregate annual premium. In the event that any person is or would have been entitled to coverage under a directors' and officers' liability and fiduciary insurance policy pursuant to this Section and such policy has lapsed, not been purchased, terminated, been repudiated or is otherwise in breach or default or affords lesser coverage than is required under this Section as a result of the Surviving Corporation's failure to maintain and fulfill its obligations pursuant to this Section or for any other reason, ICII shall pay to such persons such amounts and provide any other coverage or benefits as such person would have received pursuant to such policy. (c) Any Indemnified Party wishing to claim indemnification under paragraph (a) of this Section, upon actually learning of any such Action, shall promptly notify ICII thereof; provided, however, that any failure of an Indemnified Party to promptly so notify ICII shall not excuse ICII or the Surviving Corporation from any of its obligations hereunder except to the extent of any actual harm suffered by ICII or the Surviving Corporation as a result of such delay. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) ICII and the Surviving Corporation shall have the right, from and after the Effective Time, to assume the defense thereof if the relief sought therein is solely monetary (and provided that ICII or the Surviving Corporation, jointly and severally, admit and covenant in writing their liability to indemnify and hold the Indemnified Party harmless from and against any losses, damages, expenses and liabilities arising out of such matter), (ii) the Indemnified Party (or Parties, if more than one) shall have the right to engage separate counsel to represent its or their interests, and ICII and the Surviving Corporation shall, jointly and severally, bear the reasonable expenses of such counsel (such counsel or counsels, as the case may be, to coordinate with counsel for ICII in order to avoid unreasonable duplication of legal expenses among ICII and the Indemnified Parties); provided, however, that ICII and the Surviving Corporation shall, jointly and severally, be obligated to bear the expenses of only one such separate counsel unless there exists or may exist one or more legal defenses available to an Indemnified Party that are not available to, or the assertion of which would be adverse to the interest of, one or more of the other Indemnified Parties (it being further understood and agreed that if and to the extent one or more of the Independent Directors of the Company (as such term is defined in the Company's charter) are Indemnified Parties with respect to any particular Action, ICII and the Surviving Corporation shall, jointly and severally, be obligated to bear the expenses of one counsel for the Independent Directors with no other representation in the matter, and shall be so obligated with respect to individual counsel for any Independent Director in the event there exists or may exist one or more legal defenses available to such Independent Director that are not available to, or the assertion of which would be adverse to the interest of, one or more of the other Independent Directors), (iii) the Indemnified Parties will reasonably cooperate in the defense of any such matter, (iv) ICII and the Surviving Corporation shall not be liable for any settlement effected without ICII's prior written consent (which consent shall not be unreasonably withheld, conditioned or delayed), and (v) neither ICII, nor the Surviving Corporation, nor any of their affiliates shall consent to a settlement of, or the entry of any judgment arising from, any such matter, without the prior written consent of each Indemnified Party that is a party to such matter, unless the Indemnified Party is the beneficiary of a full and complete release from any losses, damages, expenses -23- and liabilities arising out of such claim or Action by the person or persons bringing such claim or Action, in form and substance reasonably satisfactory to the Indemnified Party. (d) Notwithstanding any other provisions hereof, the obligations of ICII and the Surviving Corporation shall be binding upon the successors and assigns of each of them. In the event ICII or the Surviving Corporation or any of their successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or any substantial portion of its properties and assets to any Person, then, and in each such case, proper provision shall be made so that the successors and assigns of such party assume the obligations set forth in this Section. (e) The obligations of the Surviving Corporation hereunder shall be the joint and several obligations of ICII and the Surviving Corporation and their respective successors and assigns, whether or not expressly provided in this Section. (f) The provisions in this Section (i) are intended to be for the benefit of, and shall be enforceable by, each person entitled to indemnification hereunder, and each such person's heirs, representatives and successors or assigns (it being expressly agreed that such persons shall be the third party beneficiaries of this Section) and (ii) are in addition to, and not in substitution for, any other rights to indemnification or contribution that any such person may have by contract or otherwise. Section 4.8 Notification of Certain Matters. The Company shall give ------------------------------- prompt notice to ICII, and ICII shall give prompt notice to the Company, of (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any of its representations or warranties contained in this Agreement to be untrue or inaccurate in any material respect at or prior to the Effective Time, (ii) any material failure by it to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, (iii) any notice of, or other communication relating to, a default or event which, with notice or lapse of time or both, would become a default, if received by it or any of its subsidiaries subsequent to the date of this Agreement and prior to the Effective Time, under any contract material to the financial condition, properties, assets, businesses or results of operations of it and its subsidiaries taken as a whole to which it or any of its subsidiaries is a party or is subject, (iv) any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement (but notice to ICII or the Company, as the case may be, shall be required only if the absence of such consent would have an ICII Material Adverse Effect or Company Material Adverse Effect, as the case may be), or (v) any Company Material Adverse Effect or ICII Material Adverse Effect, as the case may be; provided, however, that the delivery of any notice pursuant to this Section shall not cure such breach or non-compliance or limit or otherwise affect the remedies available hereunder to the party receiving such notice. Section 4.9 SEC and Other Filings. The Company and ICII each shall --------------------- provide the other and its counsel with copies of all filings made by it or any of its subsidiaries with the -24- SEC after the date hereof and the Company and ICII each shall provide the other and its counsel with copies of all filings made by it with any other Regulatory Entity in connection with this Agreement and the transactions contemplated hereby. Section 4.10 Stockholder Litigation. Each of ICII and the Company ---------------------- shall give the other the reasonable opportunity to participate in the defense of any stockholder litigation against ICII, Merger Sub or the Company, as applicable, and/or their respective officers and directors relating to the transactions contemplated hereby. Section 4.11 SPB Loans. ICII shall repurchase (unless Southern --------- Pacific Bank ("SPB") has previously repurchased) the 16 real estate mortgage --- loans previously sold by SPB to the Company that (i) had an aggregate principal balance of $3,911,864.85 as of June 30, 1999, (ii) were described in that certain notice from the Company to SPB, dated May 21, 1999, and (iii) have not been repurchased by SPB from the Company as of the date hereof (collectively, the "SPB Loans"; provided that, in those instances in which a foreclosure sale --------- of the real property underlying one or more SPB Loans has already occurred, all references in this Agreement to SPB Loans shall be deemed to be references to such real property, and in those instances, ICII shall purchase such real property from the Company in lieu of purchasing such mortgage loans), by the later of (x) 60 days from the date of this Agreement or (y) 5 days after the termination of this Agreement, at a price per SPB Loan as provided for in the relevant Agreement for Purchase and Sale of Real Estate Loans between the Company and SPB pursuant to which such SPB Loan was acquired by the Company. Section 4.12 Final Company Dividend. The Company shall declare a ---------------------- cash dividend (the "Final Company Dividend") to the Company Stockholders, the ---------------------- record date for which shall be the close of business on the last business day prior to the Effective Time, in an amount not in excess of (x) 100% of the Company's taxable income for the taxable year through the Effective Time reduced by (y) the amount of all prior dividends paid in respect of the Company's taxable year ending as of the Effective Time, to be paid to Company Stockholders as promptly as practicable after the Effective Time. Section 4.13 Employee Matters. ICII shall cause the Manager to fully ---------------- honor and pay all existing employment and severance arrangements with respect to its employees. The provisions of this Section are intended to be for the benefit of, and shall be enforceable by, each employee of the Manager (it being expressly agreed that each such person shall be a third party beneficiary of this Section). Section 4.14 Standstill. ---------- (a) Except with respect to the Merger or any Qualifying Alternative Transaction (including, in either case, any of the matters permitted by this Agreement in connection with the negotiation, approval or consummation of the Merger), ICII (including its affiliates, each of its and their directors, officers, employees, agents and representatives, and any "group", within the meaning of Section 13(d)(3) of the Exchange Act, in which it, any of its affiliates, or any of its or their directors, officers, employees, agents or representatives, is a member) shall not directly or indirectly: (i) acquire beneficial ownership or control of any equity securities of the -25- Company, other than the ICII Shares owned prior to the date of this Agreement; (ii) other than certain mortgage loans (or underlying real property) that may be resold to SPB and/or Franchise Mortgage Acceptance Corp., in any manner acquire or agree, attempt, seek or propose to acquire (or make any request for permission with respect thereto), by purchase, merger, through the acquisition of control of another person, by joining a partnership, limited partnership, syndicate or other group, or otherwise, ownership (including, but not limited to, beneficial ownership as defined in Rule 13d-3 under the Exchange Act) of any of the assets or businesses of the Company or any securities issued by the Company, or any rights or options to acquire such ownership (including from a third party); (iii) make, or in any way cause or participate in, any "solicitation" of "proxies" to vote (as such terms are defined in Regulation 14A under the Exchange Act), or communicate with, seek to advise, encourage or influence any person or entity, in any manner, with respect to the voting of, any voting securities of the Company, or become a "participant" in any "election contest" (as such terms are defined or used in Rule 14a-11 promulgated under the Exchange Act) with respect to the Company, or execute any written consent with respect to the Company; (iv) make or cause to be made or reasserted any proposal for the acquisition of the Company or any assets or securities thereof or for any extraordinary transaction involving the Company, including any merger, or other business combination, restructuring, recapitalization, liquidation or similar transaction; (v) initiate, propose or otherwise solicit stockholders for the approval of one or more stockholder proposals with respect to the Company or induce or attempt to induce any other person to initiate any stockholder proposal, or seek election to or seek to place a representative on the Board of Directors of the Company (other than existing members of the Company Board on the date hereof) or seek the removal of any member of the Company Board; (vi) form, join or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) with respect to any voting securities of the Company; (vii) otherwise act, alone or in concert with others, to seek to control or influence the management, the Company Board or the policies of the Company (except as permitted or required by the Management Agreement or by such person's status as a director or officer of the Company); (viii) disclose any intention, plan or arrangement, or make any public announcement inconsistent with the foregoing; (ix) advise, assist or encourage or finance (or assist or arrange financing to or for) any other person in connection with any of the foregoing; (x) enter into any discussions, negotiations, arrangements or understandings with any other person in connection with any of the foregoing; or (xi) request a waiver of any of the foregoing. In the event ICII shall determine to do any of the foregoing with respect to a Qualifying Alternative Transaction, it shall promptly amend its Schedule 13D filed with respect to the (a) Except with respect to the Merger or any Qualifying Alternative Transaction (including, in either case, any of the matters permitted by this Agreement in connection with the negotiation, approval or consummation of the Merger), ICII (including its affiliates, each of its and their directors, officers, employees, agents and representatives, and any "group", within the meaning of Section 13(d)(3) of the Exchange Act, in which it, any of its affiliates, or any of its or their directors, officers, employees, agents or representatives, is a member) shall not directly or indirectly: (i) acquire beneficial ownership or control of any equity securities of the Shares (the "Schedule 13D") to reflect such change. ------------ (b) A "Qualifying Alternative Transaction" shall refer to any ---------------------------------- transaction (i) by which ICII, alone or with others, acquires or seeks to acquire all of the Shares for cash consideration to the holders of Shares (payable in U.S. dollars) at a price that is not less than the Merger Consideration (except that such price may be adjusted to take account of any extraordinary distribution made by the Company following the termination of the Merger Agreement, or any issuance or repurchase by the Company of interests or instruments convertible or exchangeable into or for capital stock of the Company following the termination of the Merger Agreement) (provided, however, that the amount of any break-up fee agreed to be paid by the Company to a third party pursuant to an agreement relating to a Superior Proposal with such third party shall -26- not exceed $6 million); (ii) proposed after the Merger Agreement is terminated by ICII solely in response to a definitive Superior Proposal for which the consideration to be paid thereunder does not consist entirely of cash or cash equivalent securities or instruments; and (iii) (x) not subject to any conditions to consummation not contained in this Agreement with respect to the Merger and (y) in connection with which ICII shall undertake and remain subject to (A) all the terms and conditions of this Agreement that are for benefit of any third party (whether or not such party is a third party beneficiary hereof) as contemplated herein and (B) all of the terms and conditions of this Agreement set forth on Schedule IV, and the consummation of any Qualifying Alternative Transaction by ICII shall constitute an agreement by ICII to abide by the terms hereof referred to in this clause (y), mutatis mutandis. (c) If such Qualifying Alternative Transaction is effected by tender offer (i) such offer shall have a non-waivable minimum condition that ICII shall not accept for payment any tendered Shares, unless there are validly tendered and not properly withdrawn prior to the expiration date for such offer, that number of Shares representing a majority of the total number of issued and outstanding Shares, other than the ICII Shares, and (ii) if such offer is consummated, ICII shall effect a second-step merger in which Company Stockholders not tendering in such offer shall receive the same per share consideration as they would have received had they tendered in the tender offer. ICII shall, in accordance with Section 1.11, promptly amend its Schedule 13E-3 and its Schedule 13D to reflect the terms of any Qualifying Alternative Transaction it may propose. (d) ICII covenants and agrees that it shall not (i) with respect to any Qualifying Alternative Transaction to be effected by tender offer or by the purchase of any Shares, permit the tender of any Shares to become irrevocable or purchase any Shares tendered or offered to be sold in connection with such Qualifying Alternative Transaction, or (ii) with respect to any Qualifying Alternative Transaction to be effected in any other manner, obtain the required approval of the Company Stockholders for such Qualifying Alternative Transaction, consummate such Qualifying Alternative Transaction or make the consummation of such Qualifying Alternative Transaction otherwise not subject to further approval by Company Stockholders, in either case before two business days following the date of the meeting of the Company Stockholders called for the purpose of approving a Superior Proposal, with the purpose and effect that the Company Stockholders shall in fact have the opportunity to accept and benefit from such Superior Proposal should they so desire, without any timing advantage being afforded to such Qualifying Alternative Transaction. Section 4.15 Transfer and Gains Taxes. The Company and ICII shall ------------------------ cooperate in the preparation, execution and filing of any returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added, stock transfer or stamp taxes, any transfer, recording, registration or other fees or any similar taxes which may become payable in connection with the Merger (together with any related interests, penalties or additions to tax, "Transfer and Gains Taxes"). ------------------------ The Surviving Corporation shall pay, and not deduct or withhold, any Transfer and Gains Taxes from any amounts payable to the former holders of the Company's Shares. -27- Section 4.16 Access to Information. --------------------- (a) Between the date hereof and the Effective Time, the Company, upon reasonable notice and during the Company's ordinary business hours, (i) will not prevent ICII and its authorized representatives from having reasonable access to the employees of the Manager, and to the offices and other facilities and the books and records of the Company and its subsidiaries, (ii) will permit ICII and its authorized representatives to make such inspections as ICII and its authorized representatives may, from time to time, reasonably request and will cause the Company's officers and those of its subsidiaries, and their respective accountants and outside legal counsel, to furnish ICII and its authorized representatives with such financial and operating data and other information with respect to the business, properties and personnel of the Company and its subsidiaries as ICII and its authorized representatives may from time to time reasonably request, provided that no investigation pursuant to this Section 4.16(a) shall affect or be deemed to modify any of the representations or warranties made by the Company. (b) ICII agrees that all information received from the Company or the Manager as contemplated by this Section shall be deemed received pursuant to the Confidentiality Agreement, dated as of June 22, 1999, between the parties (the "Confidentiality Agreement"), and that ICII shall, and shall cause its ------------------------- subsidiaries, affiliates and their respective directors, officers, employees, agents and representatives to, comply with the provisions of the Confidentiality Agreement with respect to such information, and the provisions of the Confidentiality Agreement are hereby incorporated by reference with the same effect as if fully set forth herein. Section 4.17 Excess Share Provision. The parties agree that the ---------------------- provisions of Article VII of the Company Charter may apply to the transactions contemplated by this Agreement. Therefore, prior to the Effective Time, the Board of Directors of the Company shall, pursuant to the second sentence of Section 7.1.7 of the Company Charter and subject to and conditioned upon receipt of the items contemplated by clauses (i), (ii) and (iii) below, exempt the transactions contemplated hereby, including the Merger (the "Exemption"), from --------- the restrictions set forth in Section 7.1.2(a) of the Company Charter. In furtherance of the foregoing, prior to the Effective Time, ICII shall cooperate with the Company in obtaining, or shall cause to be delivered to the Company's Board of Directors, as applicable, the following: (i) an opinion of Piper & Marbury L.L.P. (the "Opinion") to the ------- effect that the restrictions contained in Section 7.1.2(b), Section 7.1.2(c) and/or Section 7.1.2(d) of the Company Charter will not be violated by the consummation of the transactions contemplated by this Agreement, (ii) such representations and undertakings contemplated by Section 7.1.7 of the Company Charter and such representations and warranties appropriate for the tax opinion certificate to be delivered to support the legal opinion described in clause (i), in each case including the representations and undertakings set forth in Exhibit A --------- to this Agreement, as are reasonably necessary to ascertain that no individual's "Beneficial Ownership" or "Constructive Ownership" of shares of "Equity Stock" will violate the "Ownership Limit" (as each of those -28- terms is defined in Section 7.1.1 of the Company Charter; such Ownership Limit being referred to herein as the "Individual ---------- Ownership Limit"), and --------------- (iii) the written agreement of ICII that any violation or attempted violation of the Individual Ownership Limit will result in the Shares acquired pursuant to this Agreement being transferred to a trust contemplated by Section 7.1.3 of the Company Charter to the extent necessary to avoid such violation. The parties agree that application of Article VII of the Company Charter to the Merger shall not be deemed to constitute a breach of any representation, warranty, covenant or agreement contained in this Agreement, nor the failure to satisfy any condition to the consummation of the transactions contemplated hereby (except as provided in Section 5.2(c), with respect to the Company, and Section 5.3(c), with respect to ICII). Section 4.18 State Takeover Statutes. The Company will use its ----------------------- reasonable efforts to take all permissible actions it believes necessary to exempt the Merger from the operation of any applicable "fair price," "moratorium," "business combination," "control share acquisition" or any other applicable anti-takeover statute enacted under the state or federal laws of the United States or any similar statute or regulation. The Company will not exercise any rights it may have under applicable anti-takeover statutes to nullify or delay this Agreement or the consummation of the transactions contemplated hereby. ARTICLE V CONDITIONS TO CONSUMMATION OF THE MERGER Section 5.1 Conditions to Each Party's Obligations to Effect the ---------------------------------------------------- Merger. The respective obligations of ICII, Merger Sub and the Company to - ------ effect the transactions contemplated hereby are subject to the satisfaction or waiver at or prior to the Effective Time of the following conditions: (a) this Agreement and the transactions contemplated hereby shall have been approved at the Special Meeting held after October 1, 1999 (i) by Company Stockholders in accordance with the Company Charter and (ii) by Company Stockholders representing a majority of the outstanding Shares entitled to vote at the Special Meeting (other than the ICII Shares); and (b) no existing or future statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or enforced by any Regulatory Entity which has the effect of making the consummation of the Merger illegal or prevents or prohibits consummation of the Merger. Each party agrees that, in the event that any such statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or enforced, such party shall use its reasonable best efforts to cause such statute, rule, regulation, executive order, decree, ruling or injunction to be complied with, lifted or vacated. -29- Section 5.2 Conditions to the Obligations of the Company. The -------------------------------------------- obligation of the Company to effect the Merger and the transactions contemplated hereby is subject to the satisfaction or waiver at or prior to the Effective Time of the following conditions: (a) The representations and warranties of ICII and Merger Sub contained in this Agreement or in any other document delivered pursuant hereto shall be true and correct at and as of the Effective Time with the same effect as if made at and as of the Effective Time (except to the extent expressly made as of an earlier date, in which case, as of such date), except where the failure of such representations and warranties to be true and correct (without giving effect to any supplement to the ICII Disclosure Schedule after the date hereof or any materiality or material adverse effect qualifier) does not constitute an ICII Material Adverse Effect and at the Closing ICII and Merger Sub shall have delivered to the Company a certificate signed by their respective Chief Executive Officers to that effect; (b) Each of the obligations of ICII and Merger Sub to be performed at or before the Effective Time pursuant to the terms of this Agreement shall have been duly performed at or before the Effective Time, except for such non- performances as would not, in the aggregate, either have an ICII Material Adverse Effect or prevent or prohibit consummation of the Merger, and at the Closing ICII and Merger Sub shall have delivered to the Company a certificate signed by their respective Chief Executive Officers to that effect; and (c) The deliveries contemplated by clauses (i), (ii) and (iii) of Section 4.17 shall have been made. Section 5.3 Conditions to the Obligations of ICII and Merger Sub. ---------------------------------------------------- The obligation of ICII and Merger Sub to effect the Merger and the transactions contemplated hereby is subject to the satisfaction or waiver at or prior to the Effective Time of the following conditions: (a) the representations and warranties of the Company contained in this Agreement or in any other document delivered pursuant hereto shall be true and correct at and as of the Effective Time with the same effect as if made at and as of the Effective Time (except to the extent expressly made as of an earlier date, in which case, as of such date), except where the failure of such representations and warranties to be true and correct (without giving effect to any supplement to the Company Disclosure Schedule after the date hereof or any materiality or material adverse effect qualifier) does not have and would not have a Company Material Adverse Effect and at the Closing the Company shall have delivered to ICII a certificate signed by its Chief Executive Officer to that effect; (b) each of the obligations of the Company to be performed at or before the Effective Time pursuant to the terms of this Agreement shall have been duly performed at or before the Effective Time, except for such non- performances as would not, in the aggregate, have a Company Material Adverse Effect or prevent or prohibit consummation of the Merger, and at the Closing the Company shall have delivered to ICII a certificate signed by its Chief Executive Officer to that effect; and -30- (c) The Exemption shall have been granted; provided, however, that -------- ------- neither ICII nor Merger Sub may rely on the failure of this condition if any of the deliveries contemplated by clauses (ii) and (iii) of Section 4.17 required to be delivered by ICII have not been made (or if the delivery contemplated by clause (i) of Section 4.17 has not been made as a result of the failure of such deliveries). Section 5.4 Frustration of Closing Conditions. Neither ICII, Merger --------------------------------- Sub nor the Company may rely on the failure of any condition set forth in Sections 5.1 through 5.3 to be satisfied if such failure was caused by such party's failure to use reasonable best efforts to consummate the Merger and the transactions contemplated hereby, as required by and subject to Section 4.4. ARTICLE VI TERMINATION; AMENDMENT; WAIVER Section 6.1 Termination. This Agreement may be terminated and the ----------- Merger and the transactions contemplated hereby may be abandoned at any time prior to the Effective Time, whether before or after the Company Stockholders approve the Merger: (a) by mutual written consent of ICII and the Company; (b) by ICII or the Company if (i) any Regulatory Entity shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the acceptance for payment of, or payment for Shares and such order, decree, ruling or other action is or shall have become final and nonappealable; provided that no party may terminate this Agreement pursuant to this paragraph if such party has failed to fulfill its obligations under Section 5.1(b) of this Agreement; (ii) the Merger has not been consummated prior to January 31, 2000; or (iii) the approval of this Agreement by the Company Stockholders as provided in Section 5.1(a) shall not have been obtained at the Special Meeting or any adjournment or postponement thereof; (c) by the Company if, prior to the Effective Time, the Company Board approves or recommends another offer or an agreement to effect a proposal made by a third party to effect a Superior Proposal in accordance with Section 4.3; (d) by ICII if, prior to the Effective Time, the full Company Board (i) shall have withdrawn or modified in a manner adverse to ICII or Merger Sub its approval or recommendation of this Agreement or the Merger, (ii) shall have approved or recommended another offer or an agreement to effect a proposal made by a third party (other than an affiliate of ICII) to effect a Superior Proposal, or (iii) shall have resolved to effect any of the foregoing; (e) by the Company if prior to the consummation of the Merger (i)(A) any of the representations and warranties of ICII or Merger Sub contained in this Agreement and qualified as to materiality or ICII Material Adverse Effect were untrue or incorrect when made or have since become untrue or incorrect or (B) any other representations or warranties of ICII or Merger -31- Sub contained in this Agreement were when made or have since become untrue or incorrect and, except as to the representations and warranties in Section 3.9 as to which the following qualification shall not apply, such breach could reasonably be expected, individually or in the aggregate, to have an ICII Material Adverse Effect, or (ii) ICII or Merger Sub shall have breached or failed to comply in any material respect with any of their respective agreements or obligations under this Agreement, which breach shall not have been cured prior to 20 business days following notice of such breach (provided that such notice and grace period shall not be applicable to ICII's covenants in Section 4.11 as to the SPB Loans); (f) by ICII if prior to the consummation of the Merger (i) (A) any of the representations or warranties of the Company contained in this Agreement and qualified as to materiality or Company Material Adverse Effect were untrue or incorrect when made or have since become untrue or incorrect or (B) any other representations or warranties of the Company contained in this Agreement were when made or have become untrue or incorrect and such breach could reasonably be expected, individually or in the aggregate, to have a Company Material Adverse Effect, or (ii) the Company shall have breached or failed to comply in any material respect with any of its agreements or obligations under this Agreement, which breach shall not have been cured 20 business days following notice of such breach. The party desiring to terminate this Agreement pursuant to this Section 6.1 shall give written notice of such termination to the other party. Neither party may terminate this Agreement pursuant to this Section if such party has failed to use reasonable best efforts to consummate the Merger and the transactions contemplated hereby, as required by and subject to Section 4.4. In the event this Agreement is terminated pursuant to Section 6.1(c) or 6.1(d)(ii) as the result of a Superior Proposal entered into as contemplated by Section 4.3(a), ICII hereby agrees to vote, tender or exchange, and to use its reasonable best efforts to cause any other ICII Shares to be voted, tendered or exchanged, in favor of such Superior Proposal; provided, that such Superior -------- Proposal is an all-cash transaction. Section 6.2 Effect of Termination. In the event of the termination --------------------- and abandonment of this Agreement pursuant to Section 6.1, this Agreement shall forthwith become void and have no effect, without any liability on the part of any party hereto or its affiliates, directors, officers or stockholders, other than the provisions of this Section and Sections 1.8, 2.6, 3.5, 4.11, 4.14, 6.3 and Article VII. Nothing contained in this Section shall relieve any party from liability for any willful breach of this Agreement. Section 6.3 Expenses. -------- (a) Upon the termination of this Agreement pursuant to Section 6.1(c) or 6.1(d)(ii), the Company shall promptly pay ICII an amount equal to the lesser of (x) two million dollars ($2,000,000) and (y) ICII's actual expenses related to this Agreement and the transactions contemplated hereby (not including any investment banking fees other than the reimbursement of out-of-pocket expenses and not including any fees relating to arrangements related to the financing of the transactions contemplated hereby). -32- (b) In the event that this Agreement shall be deemed void or voidable pursuant to Section 3-602 of the MGCL by a final, non-appealable order, ICII shall promptly after such determination pay to the Company an amount equal to the Company's actual expenses related to this Agreement and the transactions contemplated hereby. (c) Except as specifically provided in this Section, each party shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby. Section 6.4 Amendment. This Agreement may be amended by action taken --------- by the Company, ICII and Merger Sub at any time before or after approval of the Merger by the Company Stockholders but, after any such approval, no amendment shall be made which requires the approval of such stockholders under applicable law without such approval. This Agreement may not be amended except by an instrument in writing signed on behalf of the parties hereto. Section 6.5 Extension; Waiver. At any time prior to the Effective ----------------- Time, each party hereto may (i) extend the time for the performance of any of the obligations or other acts of the other parties, (ii) waive any inaccuracies in the representations and warranties of the other parties contained herein or in any document, certificate or writing delivered pursuant hereto, or (iii) waive compliance by the other parties with any of the agreements or conditions contained herein. Any agreement on the part of any party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party and expressly referring to this Agreement. The failure of any party hereto to assert any of its rights hereunder shall not constitute a waiver of such rights. ARTICLE VII MISCELLANEOUS Section 7.1 Non-survival of Representations and Warranties. The ---------------------------------------------- representations and warranties made herein shall not survive beyond the Effective Time or a termination of this Agreement. This Section shall not limit any covenant or agreement which by its terms contemplates performance after the Effective Time. Section 7.2 Entire Agreement; Assignment. This Agreement (including ---------------------------- the documents and instruments referred to herein) (i) constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and (ii) shall not be assigned by operation of law or otherwise. Section 7.3 Notices. All notices, requests, demands and other ------- communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand (including recognized courier service) or mailed, certified or registered mail with postage prepaid, or communicated by facsimile transmission (receipt confirmed), as follows: -33- if to ICII or Merger Sub: Imperial Credit Industries Inc. 23550 Hawthorne Boulevard, Building-1 Torrance, California 90505 Attention: H. Wayne Snavely Fax: (310) 791-9955 with copies to: Imperial Credit Industries Inc. 23550 Hawthorne Boulevard, Building-1 Torrance, California 90505 Attention: Irwin Gubman Fax: (310) 791-8230 and: Mayer, Brown & Platt 350 South Grand Avenue, 25/th/ Floor Los Angeles, California 90071-1503 Attention: James R. Walther, Esq. Fax: (213) 625-0248 if to the Company: Imperial Credit Commercial Mortgage Investment Corp. 11601 Wilshire Boulevard, Suite 2080 Los Angeles, California 90023 Attention: Mark S. Karlan Fax: (310) 231-1281 with copies to: Joseph A. Jaconi, Jr. Chairman of the Special Committee of the ICCMIC Board of Directors Joseph Jaconi Company, Inc. P.O. Box 3907 Palo Verdes Peninsula, California 90274 Fax: (310) 373-8140 and: -34- Sonnenschein Nath & Rosenthal 8000 Sears Tower Chicago, Illinois 60606-6404 Attention: Andrew L. Weil, Esq. Fax: (312) 876-7934 and: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Adam O. Emmerich, Esq. Fax: (212) 403-2000 or to such other address as the person to whom notice is given may have previously furnished to the other in writing in the manner set forth above. Each such notice, request, demand, application, service of process and other communication shall be deemed to have been given (i) as of the date faxed or delivered (which, with respect to a recognized courier service, shall be deemed to mean the business day following the date sent), (ii) as of the fifth business day after the date mailed, or (iii) if given by any other means, only when actually received by the addressee. Section 7.4 Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of Maryland without regard to the principles of conflicts of law thereof. Section 7.5 Descriptive Headings; Schedules, Interpretation. ----------------------------------------------- (a) The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Any matter disclosed pursuant to any Section of the Company Disclosure Schedule or the ICII Disclosure Schedule shall be deemed to qualify each representation and warranty of the Company, ICII and Merger Sub, respectively. Any matter set forth in the Company SEC Reports or the ICII SEC Reports, as the case may be, shall be deemed to be set forth in the applicable Section of the Company Disclosure Schedule or the ICII Disclosure Schedule, as the case may be, and no matter disclosed in the Company SEC Reports or the ICII SEC Reports shall be deemed to constitute a breach of any representation or warranty of the Company, ICII or Merger Sub, as the case may be, set forth herein. (b) As used in this Agreement, (i) the term "includes" and the word -------- "including" and words of similar import shall be deemed to be followed by the - ---------- words "without limitation"; (ii) "control" (including its correlative meanings, ------- "controlled by" and "under common control with") shall mean the possession, directly or indirectly, of the power to direct or cause the direction of management or policies of a person, whether through the ownership of securities or partnership or other interests, by contract or otherwise; (iii) "Person" ------ means, as appli- -35- cable, a natural person, firm, partnership, limited liability company, joint venture, corporation, association, business enterprise, joint stock company, unincorporated association, trust, Regulatory Entity (as defined in Section 2.4 hereof) or any other entity, whether acting in an individual, fiduciary or other capacity; (iv) references to "knowledge" in this Agreement, or words of similar --------- import, shall mean the actual knowledge of the Persons named in Section 7.5 of the Company Disclosure Schedule (where used herein with respect to the Company) and shall mean the actual knowledge of the Persons named in Section 7.5 of the ICII Disclosure Schedule (where used with respect to ICII); (v) definitions contained in this Agreement apply to singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms; (vi) words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires; (vii) the terms "hereof," "herein," and "herewith" ------ ------ -------- and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and Article, Section, paragraph, Schedule and Exhibit references are to the Articles, Sections, paragraphs, Schedules and Exhibit to this Agreement unless otherwise specified; (viii) the word "or" shall not be exclusive; (ix) -- provisions shall apply, when appropriate, to successive events and transactions ; and (x) the terms "subsidiary" and "affiliate", as used herein with reference ---------- --------- to ICII, shall be deemed not to include the Company and its subsidiaries, and the term "affiliate", as used herein with reference to the Company, shall be --------- deemed not to include ICII and its subsidiaries and affiliates, other than the Company and its subsidiaries. Section 7.6 Parties in Interest. This Agreement shall be binding ------------------- upon and inure solely to the benefit of each party hereto and its successors and permitted assigns, and except as provided in Sections 1.9, 1.10, 4.7 and 4.13 nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. Section 7.7 Severability. If any term or other provision of this ------------ Agreement is invalid, illegal or unenforceable, all other provisions of this Agreement shall remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. Section 7.8 Consent to Jurisdiction. Each of the parties hereto (i) ----------------------- consents to submit itself to the personal jurisdiction of any federal court located in the State of Maryland or any Maryland state court in the event any dispute arises out of this Agreement or any of the transactions contemplated hereby, (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, and (iii) agrees that it will not bring any action relating to this Agreement in any court other than a federal court sitting in the State of Maryland or a Maryland state court. -36- Section 7.9 Enforcement. The parties hereto agree that irreparable ----------- damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any federal court sitting in the State of Maryland or in any Maryland state court, in addition to any other remedy to which any party is entitled at law or in equity. Section 7.10 Counterparts. This Agreement may be executed in ------------ counterparts, each of which shall be deemed to be an original, but both of which shall constitute one and the same agreement. -37- IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed on its behalf as of the day and year first above written. IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP. By: /s/ Mark Karlan ----------------------------- Name: Mark Karlan Title: President and CEO IMPERIAL CREDIT INDUSTRIES, INC. By: /s/ H. Wayne Snavely ----------------------------- Name: H. Wayne Snavely Title: Chairman ICCMIC ACQUISITION CORP. By: /s/ H. Wayne Snavely ----------------------------- Name: H. Wayne Snavely Title: Chairman -38- APPENDIX B July 22, 1999 The Independent Members of the Board of Directors Imperial Credit Commercial Mortgage Investment Corp. 11601 Wilshire Blvd., Suite 2080 Los Angeles, CA 90025 Gentlemen: We understand that Imperial Credit Commercial Mortgage Investment Corp. ("ICMI"), a Maryland corporation, Imperial Credit Industries, Inc. ("ICII"), a California corporation and ICCMIC Acquisition Corp., a Maryland corporation and wholly-owned subsidiary of ICII (the "Merger Sub"), propose to enter into a Merger Agreement (the "Merger Agreement"), pursuant to which ICII will purchase each outstanding share of ICMI common stock, par value $.0001, (a "Share") for $11.50 in cash (the "Consideration"). We note each Share could receive an additional cash payment equal to the quotient of (a) the amount by which $35 million exceeds the independently appraised value of the amount that would be payable to Imperial Credit Commercial Asset Management Corp., a California corporation and wholly-owned subsidiary of ICII (the "Manager") pursuant to Section 15 of the Management Agreement, dated October 22, 1997 (the "Management Agreement"), between ICMI and the Manager if the Management Agreement were not renewed by ICMI and expired October 22, 1999, divided by (b) the sum of (x) the number of ICMI shares issued and outstanding as of the Merger Agreement date entitled to receive the Consideration and (y) the aggregate number of Shares issuable pursuant to ICMI stock options having an exercise price less than $11.50 per share. You have asked us whether, in our opinion, the Consideration to be received by the ICMI shareholders (other than ICII, the Merger Sub and certain other ICII affiliates) is fair to such ICMI shareholders from a financial point of view. In conducting our analysis and arriving at the opinion set forth below, we have reviewed such materials and considered such financial and other factors as we considered relevant, including: 1. ICMI's historical financial statements including (a) ICMI's reports on Form 10-K for the fiscal years ended December 31, 1998 and December 31, 1997 and (b) ICMI's reports on Form 10-Q for the quarters ended March 31, 1999, September 30, 1998, June 30, 1998 and March 31, 1998; 2. certain information furnished to us by ICMI, including financial projections, relating to the business, earnings, cash flow, assets and prospects of ICMI; 3. the historical market prices and trading volumes of the Shares and the common stock of certain publicly traded companies we deemed to be reasonably similar to ICMI and the B-1 Imperial Credit Commercial Mortgage Investment Corp. July 22, 1999 Page 2 historical and projected results of operations of ICMI and the historical and certain future earnings estimates of such companies we deemed to be reasonably similar to ICMI; 4. publicly available financial and operating data concerning certain companies engaged in businesses we deemed comparable to ICMI or otherwise relevant to our inquiry; 5. the financial terms of certain transactions we deemed relevant; 6. the Merger Agreement, dated July 22, 1999 (the "Agreement"); and 7. such other financial studies, analyses and investigations and matters as we deemed necessary. We have met with senior management of ICMI to discuss: (i) the prospects for their business, (ii) senior management's estimates of ICMI's future financial performance and (iii) such other matters as we deemed relevant. In preparing our opinion, we have relied on the accuracy and completeness of publicly available information and all of the information supplied or otherwise made available to us by ICMI and we have not independently verified such information. With respect to the projections furnished by ICMI, we have assumed that they have been reasonably prepared and reflect the best currently available estimates and judgment of ICMI's management as to the expected future financial performance of ICMI. We have not made or been provided with an independent evaluation or appraisal of the assets of ICMI. Our opinion is necessarily based upon information available to us, and financial and other conditions and circumstances existing and disclosed to us, as of the date hereof. In connection with the preparation of this opinion we have not, prior to the date hereof, been authorized by the Independent Members of the Board of Directors to solicit, nor have we solicited, third party indications of interest for the acquisition of all or part of ICMI. We have, however, pursuant to Section 4.3 of the Merger Agreement, been asked by the Special Committee of the Board of Directors (the "Special Committee"), consisting of the Independent Members of the Board of Directors, to solicit third party indications of interest for the acquisition of all or part of ICMI (as contemplated by the Merger Agreement) for a period of 60 days following the execution of the Merger Agreement. As you know, we have been retained by the Independent Members of the Board of Directors to render this opinion and other financial advisory services in connection with the Merger and will receive a fee for such services. We may actively trade the ICMI common stock for our own account or for the accounts of customers and accordingly, may at any time hold a B-2 Imperial Credit Commercial Mortgage Investment Corp. July 22, 1999 Page 3 long or short position in such securities. Additionally, in April 1999, an affiliate of Prudential Securities entered into a lending agreement with ICMI pursuant to which Prudential Securities made available to ICMI a secured warehouse lending facility up to $300 million. The lending agreement was terminated on June 30, 1999. This letter and the opinion expressed herein may not be reproduced, summarized, excerpted from or otherwise publicly referred to or disclosed in any manner, without our prior written consent, which consent shall not be unreasonably withheld or delayed; provided that, ICMI may set forth in full this letter in any proxy statement relating to the Merger sent to ICMI's shareholders. Our advisory services and the opinion expressed herein are solely for the benefit of the Special Committee in the evaluation of the Merger, and our opinion is not intended to be, and does not constitute, a recommendation to any shareholder of ICMI. On the basis of, and subject to, the foregoing, we are of the opinion that, as of the date hereof, the Consideration to be received by the ICMI shareholders (other than ICII, the Merger Sub and certain other ICII affiliates) is fair to such ICMI shareholders from a financial point of view. Very truly yours, /s/ Prudential Securities Incorporated PRUDENTIAL SECURITIES INCORPORATED B-3 APPENDIX C Summary of Appraisals of Robert A. Stanger & Co., Inc., Houlihan Lokey Howard & Zukin Financial Advisors, Inc. and Eastdil Realty, L.L.C. Stanger. Stanger, an independent financial advisory and investment banking firm, was engaged by the special committee on behalf of ICCMIC to perform an appraisal and deliver a report (which included its valuation opinion) of the estimated value of the management agreement termination fee pursuant to an agreement dated August 13, 1999. Stanger delivered its report to the special committee on September 13, 1999. The full text of the Stanger valuation opinion, which contains a description of the assumptions and qualifications applicable to the review and analysis by Stanger, has been filed with the SEC as an exhibit to the Schedule 13E-3 relating to this transaction, and such valuation opinion is incorporated by reference in this proxy statement. The summary of the Stanger valuation opinion set forth below is qualified in its entirety by reference to the full text of the Stanger valuation opinion. A copy of the full Stanger report is available for inspection and copying at the principal executive offices of ICCMIC during regular business hours. You, or your representative, may inspect or copy the Stanger report during those hours. Stanger, founded in 1978, has provided investment banking and consulting services to clients located throughout the United States, including major New York Stock Exchange member firms and insurance companies and over seventy companies engaged in the management and operation of real estate and real estate related assets. The investment banking activities of Stanger include financial advisory services, asset and securities valuations, industry and company research and analysis, litigation support and expert witness services, and due diligence investigations in connection with both publicly registered and privately placed securities transactions. Stanger's valuation practice involves the valuation of real estate, mortgages secured by real estate, real estate management companies and related management contracts and other real estate related assets. The special committee selected Stanger through a process in which it initially considered a number of nationally recognized valuation firms, then eliminated any of those firms which had any material relationships with either ICCMIC, ICII or the affiliates of ICCMIC or ICII, and, with the assistance of its financial advisor, interviewed certain reputable firms regarding Stanger and finally selected Stanger because of its nationally recognized reputation in the REIT industry and its experience in the valuation of real estate management companies and related management contracts and the recommendation of prior clients of Stanger. Summary of Materials Considered and Investigation Undertaken ------------------------------------------------------------ Neither the merger agreement nor ICCMIC's management agreement with the manager prescribed the factors that Stanger, or any other person, must take into account in appraising the termination fee. Similarly, Stanger's retention agreement did not specify what factors or information Stanger would take into account in its valuation of the termination fee. Stanger's analysis of the value of the management agreement termination fee involved a review of the following information: . the management agreement; . the prospectus for the initial public offering of common shares of ICCMIC; C-1 . policies and guidelines of ICCMIC as set by the board of directors; . quarterly and annual financial statements for ICCMIC for 1998 and 1999, as available; . a summary of fees paid to the manager during 1998 and the first six months of 1999; . management agreements for comparable mortgage REITs; . fees charged by comparable mortgage REITs; . the financial performance of comparable mortgage REITs; . actual operating performance of the manager for the year ended December 31, 1998 and the six months ended June 30, 1999, as reported by the manager; . annualized 1999 and budgeted 2000 operating performance of the manager, as estimated by the manager; . offers for the manager received during the past two years; . the merger agreement; . a memorandum prepared by the special committee's legal counsel, on behalf of and at the request of the special committee; . the financial terms of comparable transactions involving similar companies; and . certain other data provided by ICCMIC and the special committee. Stanger also interviewed representatives of the special committee, its legal and financial advisors; representatives of the manager and ICII; a representative of legal counsel to ICCMIC; and a representative of Friedman Billings, the dealer manager for the initial public offering for ICCMIC (Friedman Billings is currently acting as financial advisor to ICII). Stanger considered the utilization of a capitalization of earnings analysis as the most appropriate analysis to value the management agreement termination fee. Capitalization of earnings analysis requires the development of an estimate of earnings before interest, taxes, depreciation and amortization ("EBITDA") and the capitalization of such earnings based upon an earnings multiple (the "EBITDA C-2 Multiple") derived from comparable transactions. Stanger advised the special committee that the capitalization of earnings analysis is an appropriate method of analysis for the management agreement termination fee for the following reasons, among others: . EBITDA, as adjusted for normalized operations, is readily determinable from the information available with respect to the valuation of the management agreement termination fee; . sufficient data from comparable transactions is available to derive an appropriate EBITDA multiple; and . capitalization of earnings analysis is a commonly used valuation technique in determining the value of a manager and related contract rights by buyers and sellers of such companies and rights. For these reasons, Stanger prepared a capitalization of earnings analysis in connection with the valuation of the management agreement termination fee. Capitalization of Earnings Analysis ----------------------------------- In its capitalization of earnings analysis, Stanger first established a normalized level of EBITDA based upon a review of the historical results of the manager. Stanger noted that, for the year ended December 31, 1998, the manager reported EBITDA of $3,350,000 during a period of substantial investment activity by ICCMIC. Stanger further noted that the manager reported EBITDA of $1,995,000 for the six months ended June 30, 1999 and the manager estimated full year 1999 EBITDA of $4,407,000. In addition, Stanger observed that the manager estimated EBITDA for the year ending 2000 at $11,113,000 based upon substantial growth from fees associated with a substantial increase in assets of ICCMIC from approximately $700 million to more than $1.4 billion of average invested assets. Stanger advised the special committee that, in Stanger's view, it is appropriate to establish a base level of EBITDA for the manager based upon the current level of assets under management. Stanger observed that the management agreement provides for termination, which in Stanger's view, precludes consideration of growth in company assets under the management of the manager. Stanger further observed that the merger agreement appears to limit transactions other than in the ordinary course of business, thereby minimizing, at this time, opportunities to reduce assets under management. As a result, Stanger estimated the stabilized management fee based upon invested assets as of June 30, 1999. As of June 30, 1999, Stanger estimated average invested assets of ICCMIC at $717.2 million and the related management fee of 1% at $7,172,000. Stanger observed that actual manager operating expenses were reported at $2,990,000 for 1998 and $1,768,000 for the six months ended June 30, 1999. Stanger observed that the manager's estimate of operating expenses for the full year 1999 was $3,080,000 and for the year 2000 was $3,530,000, predicated on increases in assets under management. Stanger observed that expenses of the manager are broadly chargeable to ICCMIC in accordance with Section 9 of the management agreement and that the prospectus for the initial public offering (the "IPO Prospectus") indicates that compensation to officers and employees of ICCMIC shall not be paid by ICCMIC. Stanger observed that while the management agreement appears to clearly indicate that expenses of the manager incurred on behalf of ICCMIC are chargeable to ICCMIC, it was not clear to Stanger from its review of the IPO Prospectus and other C-3 information, that general and administrative expenses such as rent are chargeable to ICCMIC. Based upon Stanger's review of the matters set forth above with respect to expenses of the manager, Stanger estimated a stabilized level of operating expenses equal to 50% of revenues or $3,586,000. Based upon Stanger's estimate of the management fee at $7,172,000 and Stanger's estimate of operating expenses of $3,586,000, Stanger estimated the stabilized level of EBITDA for the manager derived from the management agreement at $3,586,000. Stanger considered two primary sources of comparable data to estimate an EBITDA multiple for the valuation of the management agreement termination fee. First, Stanger considered EBITDA multiples for public companies in the real estate services business such as Jones Lang LaSalle, Trammel Crow, CB Richard Ellis and Grubb & Ellis. Stanger concluded that such companies (i) generally were much larger than the manager (based on the value ascribable to the management agreement termination fee); (ii) generally had more diverse sources of revenue; and (iii) possessed few attributes which could be deemed comparable to the manager's cash flow from the management agreement. Stanger then considered selected transactions involving the acquisition of private management companies in connection with consolidation transactions involving assets managed by such management companies. Stanger observed that such transactions: . involved the valuation of management agreements which are terminable; . involved, generally, management agreements which cover the management of assets owned by a limited number of ownership interests; and . involved transactions in which investor approval was sought or would be sought and obtained and in which subsequent trading of the security resulting from the transaction confirmed the reasonableness of the overall value utilized in connection with such valuation. Stanger concluded that the EBITDA multiple data derived from private management company transactions provides a reasonable and supportable range of data from which to derive an appropriate EBITDA multiple for the valuation of the management agreement termination fee. Stanger's review of private management company transactions indicated that EBITDA multiples have ranged from 5.0 to 11.4 during the past five years and such range has narrowed during the last three years to 5.0 to 8.76 with an average of 7.0. Stanger attributed the narrowing of this range primarily to a general lowering of expectations with respect to management companies and the real estate related assets managed by them. Stanger advised the special committee that in Stanger's view the appropriate EBITDA multiple for the management agreement termination fee should be at the low end of the range because of several factors, including the following: . the management agreement, like others in this industry, is terminable; . growth expectations for the manager, ICCMIC and the mortgage REIT industry are low as the financial performance of such industry has been negative during the past two years; C-4 . the manager does not directly or indirectly control ICCMIC as a controlling stockholder or as a general partner of a partnership; . the language contained in Section 15 of the management agreement regarding the determination of the termination fee is vague; . the level of expense reimbursements to be received by the manager pursuant to the management agreement is unclear; and . the board of directors of ICCMIC has the authority to revise the investment policies and guidelines of ICCMIC and reduce the level of assets under management, in the absence of the merger agreement. Based upon Stanger's review of the above factors, Stanger estimated an EBITDA multiple for the determination of the management agreement termination fee in the range of 4.5 to 5.5 and concluded that an EBITDA multiple of 5.0 would be appropriate. Stanger's value conclusion was based upon its estimate of EBITDA associated with the management agreement of $3,586,000 and an EBITDA multiple of 5.0 resulting in a value of $17,930,000 which Stanger rounded to $18,000,000. Assumptions and Limitations --------------------------- In preparing and rendering the Stanger valuation opinion, Stanger relied, without independent verification, on the completeness and accuracy, in all material respects, of all financial and other information furnished or otherwise communicated to Stanger by ICCMIC, the manager and/or their respective agents, advisors or representatives. With respect to information provided to Stanger by ICCMIC, the manager and/or their respective agents, advisors, and representatives, Stanger assumed that: . data provided to Stanger was accurate and complete in all material respects; . all budgets and projections provided to Stanger were reasonably prepared on bases consistent with actual historical experience and reflect the best currently available estimates and good faith judgments; . no material changes have occurred in the information reviewed between the date the information was provided to Stanger and the date of the Stanger valuation opinion, and . ICCMIC, the manager and/or their respective agents, advisors and representatives are not aware of any facts that would cause the information supplied to Stanger to be incomplete or misleading in a material respect. In preparing and rendering the Stanger valuation opinion, Stanger advised ICCMIC and the special committee that they are not attorneys. Stanger advised ICCMIC and the special committee that in C-5 determining the value of the management agreement termination fee and preparing its report, Stanger made assumptions regarding the interpretation of certain terms of the management agreement and other agreements. ICCMIC and the special committee authorized Stanger to make such assumptions and ICCMIC and the special committee were advised that such assumptions made by Stanger may have affected the conclusion reached by Stanger in its valuation opinion on the value of the management agreement termination fee. Stanger's estimate of value is based on certain assumptions, which include the following: . no action or inaction on the part of ICCMIC or the manager has occurred or will occur in the near future which would enable ICCMIC to terminate the management agreement for cause and without the payment of a termination fee; . the management agreement does not require that the termination fee payable pursuant to Section 15 of the management agreement be determined on the basis of an assumed liquidation of the assets of ICCMIC and an immediate payment of liquidation proceeds to the shareholders of ICCMIC (although such a basis for valuation is not prohibited); . neither ICCMIC nor the board of directors has the authority to unilaterally change the terms of the management agreement to reduce the charges thereunder without the consent of the manager and the manager has not agreed and does not intend to agree to a reduction in fees payable pursuant to the management agreement; . all fees paid by ICCMIC to the manager are proper and consistent with the terms of the management agreement; . neither ICCMIC nor its board of directors has altered the investment policies and guidelines of ICCMIC, nor adopted a plan of liquidation; . upon termination of the management agreement, a termination fee, if such were payable, would be based upon the assets then under management, using reasonable valuation parameters and techniques determined by independent parties and without regard to the actual financial performance of ICCMIC prior to the time of such termination; and . neither the management agreement, merger agreement nor any other agreement, whether written, oral or otherwise, serves to define, limit or otherwise determine the amount of the management agreement termination fee, other than Section 15 of the management agreement and Section 1.8 of the merger agreement. Stanger advised ICCMIC and the special committee that they have not been requested to and therefore did not: . render any opinion as to the fairness, from a financial point of view, or reasonableness of the terms, of the management agreement (including, without limitation, Section 15 C-6 thereof) and the merger agreement (including, without limitation, Section 1.8 thereof); and . make any recommendation to the special committee, the board of directors of ICCMIC, ICCMIC or its stockholders with respect to (a) whether to approve or reject the proposed merger; (b) alternatives to the proposed merger; (c) the tax consequences of the proposed merger; or (d) any other aspect of the management agreement or the merger agreement other than Stanger's estimate of the value of the management agreement termination fee. Compensation ------------ Stanger was paid a fee of $250,000 for its services as described herein, without regard to the results of its appraisal or the successful completion of the merger or any other transaction. In addition, Stanger and its affiliates were reimbursed for all reasonable out-of-pocket expenses, including legal fees, and will be indemnified by ICCMIC against certain liabilities, including certain liabilities under the securities laws. The fee was negotiated between the special committee, on behalf of ICCMIC, and Stanger. Houlihan Lokey. Pursuant to an agreement dated August 6, 1999, the manager retained Houlihan Lokey on its own behalf to prepare a written report expressing its conclusions as to valuation of the termination fee payable to the manager upon termination or non-renewal of its management agreement with ICCMIC. Houlihan Lokey is a nationally recognized investment banking firm that provides financial advisory services in connection with mergers and acquisitions, leveraged buyouts, business valuations for a variety of regulatory and planning purposes, recapitalizations, financial restructurings, and private placements of debt and equity securities. The manager selected Houlihan Lokey through a process in which it initially considered a number of nationally recognized valuation firms, then eliminated any of those firms which had any material relationships with either ICCMIC, ICII or the affiliates of ICCMIC or ICII, and finally selected Houlihan Lokey due to its extensive experience and local knowledge in the valuation of REITs and related management companies and agreements. The full text of the Houlihan Lokey valuation opinion, which sets forth the assumptions made, matters considered and scope of the review taken, has been filed with the SEC as an exhibit to the Schedule 13E-3 relating to this transaction, and such valuation opinion is incorporated by reference in this proxy statement. The summary of the Houlihan Lokey valuation opinion set forth below is qualified in its entirety by reference to the full text of the Houlihan Lokey valuation opinion. A copy of the full Houlihan Lokey report is available for inspection and copying at the principal executive offices of ICCMIC during regular business hours. You, or your representative, may inspect or copy the Houlihan Lokey report during those hours. The Houlihan Lokey valuation opinion is directed only to Houlihan Lokey's valuation of the manager's termination fee and does not constitute a recommendation to any stockholder as to how he or she should vote at the special meeting or as to any other action he or she should take regarding the proposed merger. Further, Houlihan was engaged by the manager on its own behalf and not on behalf of the stockholders or any other party. The Houlihan Lokey valuation opinion did not address, nor should it be construed to address, the relative merits of the merger and alternative business strategies that may be available to ICCMIC. C-7 Houlihan Lokey has stated that it understands that the manager and any other party will consult with and rely solely upon their own legal counsel with respect to the management agreement and that Houlihan Lokey's valuation is not a representation as to any legal matter. Neither the merger agreement nor ICCMIC's management agreement with the manager prescribed the factors that Houlihan Lokey, or any other person, must take into account in appraising the termination fee. Similarly, Houlihan Lokey's retention agreement did not specify what factors or information Houlihan Lokey would take into account in its valuation of the termination fee. In conducting its valuation and arriving at its determination of the fair market value of the manager's termination fee, Houlihan Lokey made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances. Among other things, Houlihan Lokey: . held discussions with the manager's senior management to discuss the proposed merger and the operations, financial condition, future prospects, projected operations and performance of the manager and ICCMIC; . held discussions with certain independent members of ICCMIC's board of directors; . reviewed Prudential Securities' presentations to ICCMIC's board of directors dated March 16, 1999, May 3, 1999 and June 25, 1999; . reviewed ICCMIC's annual audited financial statements for the years ended December 31, 1998 and December 31, 1997; . reviewed the unaudited financial statements of ICCMIC for the six months ended June 30, 1999 and June 30, 1998; . reviewed the management agreement between ICCMIC and the manager; . reviewed two-year projections for ICCMIC and the manager as prepared by the manager as of August 1999; C-8 . reviewed the 1999 budget for the manager as prepared by the manager as of August 1999; . reviewed minutes from meetings of ICCMIC's board of directors; . reviewed proposals to purchase ICCMIC or merge with ICCMIC, including proposals to purchase the manager, from various public and private en- tities; . reviewed publicly available information on companies Houlihan Lokey deemed comparable to the manager and ICCMIC; and . conducted such other analyses, studies and investigations as Houlihan Lokey deemed appropriate under the circumstances for rendering the opinion expressed in its report. In connection with its valuation, Houlihan Lokey relied upon and assumed, without independent verification, that the financial forecasts and projections provided to it by the manager were reasonably prepared and reflected the best currently available estimates of the future financial results and conditions of ICCMIC and the manager, and that there had been no material change in the assets, financial condition, business or prospects of ICCMIC or the manager since the date of the most recent financial statements made available to it. In addition, Houlihan Lokey's conclusions were based upon the assumption that present management of ICCMIC and the manager would continue to maintain the character and integrity of their enterprises through any sale, reorganization or diminution of the owners' participation. Further, the Houlihan Lokey valuation was necessarily based on business, economic, market and other conditions as they existed on, September 10, 1999. Houlihan Lokey has not independently verified the accuracy and completeness of the information supplied to it with respect to ICCMIC or the manager and does not assume any responsibility with respect to such information. Houlihan Lokey has not made any physical inspection or independent appraisal of any of the properties or assets of ICCMIC or the manager. In determining the fair market value of the manager's termination fee, Houlihan Lokey took into consideration the income- and cash-generating capability of the manager through the management agreement and associated rights. Typically, in Houlihan Lokey's view, an investor contemplating an investment with income- and cash-generating capability similar to ICCMIC's management agreement with the manager will evaluate the risks and returns of its investment on a going-concern basis. Accordingly, after due consideration of other appropriate and generally accepted valuation methodologies, Houlihan, Lokey developed the fair market value of the termination fee primarily on the basis of the capitalization of earnings and discounted cash flow approaches. Furthermore, Houlihan Lokey valued the termination fee viewing the manager as a going concern, meaning that the underlying tangible assets of ICCMIC were presumed to attain their highest values as integral components of a business entity in continued operation and that liquidation of such assets would likely diminish the value of the whole to the stockholders and creditors of ICCMIC. All valuation methodologies that estimate the worth of an enterprise as a going concern are predicated on numerous assumptions pertaining to prospective economic and operating conditions. Unanticipated events and circumstances may occur which cause the actual results to vary from those assumed, and the variations may be material. C-9 The term "fair market value," as used by Houlihan Lokey, is defined as the price at which an asset (or in this case the management agreement) would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties are able, as well as willing, to trade and are well-informed about the asset and the market for that asset. ICCMIC's manager delivered projections to Houlihan Lokey for the purpose of assisting Houlihan Lokey in performing its valuation of the termination fee payable under the management agreement. Houlihan Lokey treated these projections as a "Best Case Scenario" with respect to ICCMIC's future performance and therefore as presenting a scenario likely to result in a larger appraised value for the manager's termination fee. See "Cautionary Statement Concerning Forward-Looking Statements." Houlihan Lokey discounted the "Best Case" projections to arrive at "Base Case" and "Worst Case" projections. Then, for each of these three scenarios, Houlihan Lokey developed a valuation range for the termination fee based on the market capitalization and discounted cash flow analyses described below. In addition, Houlihan Lokey developed valuation ranges for the termination fee based on the comparable transaction analysis and the value from prior offers analysis described below. Market Capitalization Approach ------------------------------ Houlihan Lokey reviewed certain financial information for two types of comparable public companies: real estate management companies and asset management companies. The comparable real estate management companies included the following seven publicly traded companies selected solely by Houlihan Lokey: CB Richard Ellis Services, Inc., Grubb & Ellis Co., Insignia Financial Group, Inc., Intergroup Corporation, Jones Lang LaSalle Inc., Trammell Crow Company and DeWolfe Companies, Inc. (the "Real Estate Management Comparables"). The comparable asset management companies included the following nine publicly traded companies selected solely by Houlihan Lokey: Affiliated Managers Group, Inc., Alliance Capital Management L.P., Atalanta/Sosnoff Capital Corp., Conning Corp, Eaton Vance Corp, Lexington Global Asset Managers, Inc., Phoenix Investment Partners, Ltd, PIMCO Advisors Holdings L.P. and United Asset Management Corp. (the "Asset Management Comparables" and together with the Real Estate Management Comparables, the "Advisor Comparables"). Houlihan Lokey calculated certain financial ratios of the Advisor Comparables based on the most recent publicly available information with respect to such companies. The financial ratios for the Advisor Comparables reviewed by Houlihan Lokey ranged from (i) enterprise value ("EV") to the latest twelve months ended June 30, 1999 ("LTM") EBITDA multiples: a low of 4.0x to a high of 22.5x, (ii) EV to the next fiscal year ended December 31, 1999 ("NFY") EBITDA multiples: a low of 3.6x to a high of 12.1x, (iii) EV to the next twelve months ended June 30, 2000 ("NTM") EBITDA multiples: a low of 3.6x to a high of 10.7x, and (iv) EV to the next fiscal year +1 ending December 31, 2000 ("NFY + 1") EBITDA multiples: a low of 3.6x to a high of 10.0x. Based on the Advisor Comparables, Houlihan Lokey selected a ratio of EV/LTM EBITDA multiples for the manager ranging from a low of 7.0x to a high of 8.0x , a ratio of EV/NFY EBITDA multiples for the manager ranging from a low of 6.5x to a high of 7.5x, a ratio of EV/NTM EBITDA multiples ranging from a low of 5.0x to a high of 6.0x, and a ratio of EV/NFY + 1 EBITDA multiples ranging from a low of 4.0x to a high of 5.0x (collectively the "Manager EBITDA Multiples"). Houlihan Lokey determined an indication of the value of the termination fee under the management agreement by applying the Manager EBITDA Multiples to the manager's historical EBITDA (after considering certain cost adjustments) for the LTM, the forecast for the NFY based on the Best Case, Base Case and Worst Case projections, the forecast for the NTM based on such projections, and the forecast for the NFY + 1 based on such projections. Such analyses resulted in an indication of a range of value for the termination fee under the management agreement of $29.2 million to $41.3 million. C-10 Comparable Transaction Analysis ------------------------------- Houlihan Lokey reviewed the consideration paid in certain acquisitions of real estate advisory and management companies by publicly traded real estate investment trusts, as well as certain acquisitions of publicly traded real estate management companies. Such analysis yielded mean multiples of 10.3x EBITDA and 22.1x EBIT (i.e. earnings before interest and taxes). In performing its analysis, Houlihan Lokey considered that the merger and acquisition transaction environment varies over time because of, among other things, interest rate and equity market fluctuations and industry results and growth expectations. No company or transaction used in the comparable transaction analysis was directly comparable to the manager, the termination of the management agreement or the proposed transaction. Accordingly, Houlihan Lokey reviewed the foregoing transactions to understand the range of multiples of EBITDA and EBIT paid for companies in the real estate advisory and management industry and the real estate management industry. Based upon the manager's LTM EBITDA and the manager's latest quarter ended June 30, 1999 annualized ("LQA") EBITDA, Houlihan Lokey selected a range of multiples of EV/LTM EBITDA and EV/LQA EBITDA with a low of 8.0x and a high of 10.0x determined under the comparable transaction analysis. Houlihan Lokey also reviewed the consideration in certain acquisitions of affiliated real estate advisory and management companies by publicly traded real estate investment trusts selected solely by Houlihan Lokey in terms of percentage of stock outstanding of the acquiror provided to the acquired company as consideration for such acquisition. Such analysis yielded average consideration of 8.7% of total stock outstanding paid to the target managers in certain transactions since 1995. The transactions produced a range of between 3.4% and 15.3% of stock consideration. Houlihan Lokey also calculated the relative contribution of the manager's revenue and EBITDA as a percentage of ICCMIC's revenue and EBITDA at 10.4% and 9.6% respectively. Houlihan Lokey applied the selected range of consideration with a low of 9.0% to a high of 10.0% to the transaction value to arrive at indications of the value of the termination fee under the management agreement. Under the two comparable transaction approaches presented above, Houlihan Lokey calculated an indication of the value of the termination fee under the management agreement to be between $41.3 million and $46.2 million. Discounted Cash Flow Approach ----------------------------- Houlihan Lokey utilized cash flow projections received from the manager covering fiscal years 1999, 2000 and 2001. After calculating the net present value of cash flows for the applicable periods under the Best Case, Base Case and Worst Case projections using discount rates of 14.0% to 22.0%, a terminal value was calculated based upon exit EBITDA multiples of 5.0x to 7.0x. Based on the manager's projections and this analysis, Houlihan Lokey calculated indications of the range of value for the termination fee under the management agreement to be between $33.3 million and $76.2 million. Indications of Value from Prior Offers -------------------------------------- Houlihan Lokey reviewed the consideration offered for ICCMIC and the manager in offers received from third parties during the period from September 1998 to March 1999. The consideration offered for the manager ranged from a low of $45 million to a high of $60 million with a mean of $50 million. Based on these indications of value for the manager, Houlihan Lokey calculated the range of value for the termination fee under the management agreement to be between $45.0 million and $60.0 million. C-11 Conclusion ---------- Based upon the investigation, premises, provisos, and analyses outlined above, and subject to the limiting factors and other assumptions set forth in its valuation opinion, Houlihan determined that as of September 10, 1999, the fair market value of the termination fee is reasonably stated in the amount of $45 million. The summary set forth above describes the material points of more detailed analyses performed by Houlihan Lokey in arriving at its valuation of the termination fee. The preparation of a valuation is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and application of those methods to the particular circumstances and is therefore not readily susceptible to summary description. In arriving at its valuation, Houlihan Lokey made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Houlihan Lokey believes that its analyses and summary set forth above must be considered as a whole and that selecting portions of its analyses, without considering all analyses and factors, or portions of this summary, could create an incomplete view of the processes underlying the analyses set forth in Houlihan Lokey's valuation. In its analysis, Houlihan Lokey made numerous assumptions with respect to the manager, ICCMIC, industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the respective entities. The estimates contained in such analyses are not necessarily indicative of actual values or predictive of future results or values, which may be more or less favorable than suggested by such analyses. Compensation ------------ The manager agreed to pay Houlihan Lokey a fee of $250,000 for its preparation and delivery of the valuation of the termination fee. No portion of Houlihan Lokey's fee is contingent upon the results of the valuation or the successful completion of the merger or any other transaction. The retention agreement provides that ICII and the manager will defend and indemnify Houlihan Lokey and its affiliates for damages and expenses arising in connection with its engagement. Eastdil [Summary of Eastdil appraisal to be provided.] C-12 PRELIMINARY COPY DATED __________, 1999 [FRONT OF PROXY CARD] P R O X Y IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP. 11601 Wilshire Boulevard, Suite 2080, Los Angeles, CA 90025 Proxy for Special Meeting of Stockholders on __________, _____ This Proxy is Solicited on Behalf of the Board of Directors The undersigned hereby appoints Mark S. Karlan and Norbert M. Seifert or either of them, each with full power of substitution, as proxies to attend the special meeting of the Stockholders of Imperial Credit Commercial Mortgage Investment Corp. at (location) on (date) at (time), and at any adjournment or postponement thereof, and to vote the number of shares the undersigned would be entitled to vote if personally present on the following matters set forth herein. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. YOU NEED NOT MARK ANY BOX IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATION. THE PROXIES CANNOT VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD. [Continued and to be signed on reverse side] [BACK OF PROXY CARD] [X] Please mark your vote as in this example. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1 1. Approve the Agreement and Plan of Merger dated as of July 22, 1999, which provides for the merger of ICCMIC ACQUISITION CORP., a wholly owned subsidiary of IMPERIAL CREDIT INDUSTRIES, INC, with and into IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP. [_] FOR [_] AGAINST [_] ABSTAIN ______________________________________________________________________________ MARK HERE [ ] IF YOU PLAN TO MARK HERE [ ] FOR ADDRESS ATTEND MEETING CHANGE AND NOTE AT LEFT Note: Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as an attorney, executor, administrator, trustee or guardian, give full title as such. If a corporation, sign in full corporate name by President or other authorized officer. If a partnership, sign in partnership name by authorized person. DATE: ___________________________________ _________________________________________ Signature The above named proxies of the undersigned are authorized to initiate and vote for proposals to recess or adjourn the Special Meeting for any reason, including to allow inspectors to certify the outcome of the Proposal described above or to allow the solicitation of additional votes, if necessary, for such Proposal, to vote against proposals to recess or adjourn the Special Meeting, and to vote, in their discretion, upon such other matters as may properly come before the Special Meeting and any adjournment or postponement thereof. -----END PRIVACY-ENHANCED MESSAGE-----