-----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, Tcu9Vf05M+PFZdx9melJaZk8mOis8F9SL9Wc6wcqMpyryO+D9lolKnkDR+RtG8L+ c0BmkIXDOE8mKq2E8umkcA== 0000944209-97-000841.txt : 19970704 0000944209-97-000841.hdr.sgml : 19970704 ACCESSION NUMBER: 0000944209-97-000841 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19970703 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL CREDIT CAPITAL TRUST I CENTRAL INDEX KEY: 0001041870 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 954639513 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-30809 FILM NUMBER: 97636492 BUSINESS ADDRESS: STREET 1: 23550 HAWTHORNE BLVD STREET 2: STE 110 CITY: TORRANCE STATE: CA ZIP: 90505 BUSINESS PHONE: 3107918040 MAIL ADDRESS: STREET 1: C/O IMPERIAL CREDIT INDUSTRIES INC STREET 2: 23550 HAWTHORNE BLVD BLDG 1 STE 110 CITY: TORRANCE STATE: CA ZIP: 90505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000883811 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 954054791 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-30809-01 FILM NUMBER: 97636493 BUSINESS ADDRESS: STREET 1: 23550 HAWTHORNE BLVD STREET 2: STE 110 CITY: TORRANCE STATE: CA ZIP: 90505 BUSINESS PHONE: 7145560122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL BUSINESS CREDIT INC CENTRAL INDEX KEY: 0001035010 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 311447407 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-30809-02 FILM NUMBER: 97636494 BUSINESS ADDRESS: STREET 1: 16935 WEST BERNARDO DR STREET 2: STE 150 CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6196751070 MAIL ADDRESS: STREET 1: 16935 WEST BERNARDO DRIVE STREET 2: STE 150 CITY: SAN DIEGO STATE: CA ZIP: 92127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL CREDIT ADVISORS INC CENTRAL INDEX KEY: 0001035011 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 330648410 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-30809-03 FILM NUMBER: 97636495 BUSINESS ADDRESS: STREET 1: 20371 IRVINE AVE CITY: SANT ANA HEIGHTS STATE: CA ZIP: 92707 BUSINESS PHONE: 7144748500 MAIL ADDRESS: STREET 1: 20371 IRVINE AVE CITY: SANTA ANA HEIGHTS STATE: CA ZIP: 92707 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANCHISE MORTGAGE ACCEPTANCE CO LLC CENTRAL INDEX KEY: 0001035012 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 061429737 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-30809-04 FILM NUMBER: 97636496 BUSINESS ADDRESS: STREET 1: 2029 CENTURY PK E STREET 2: STE 1190 CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 8006613622 MAIL ADDRESS: STREET 1: 2029 CENTURY PARK EAST STREET 2: STE 1190 CITY: LOS ANGELES STATE: CA ZIP: 90067 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTO MARKETING NETWORK INC CENTRAL INDEX KEY: 0001036780 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 65031049 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-30809-05 FILM NUMBER: 97636497 BUSINESS ADDRESS: STREET 1: C/O IMPERIAL CREDIT INDUSTRIES INC STREET 2: 23550 HAWTHORNE BLVD BLDG ONE STE 110 CITY: TORRANCE STATE: CA ZIP: 90505 BUSINESS PHONE: 3107918040 MAIL ADDRESS: STREET 1: C/O IMPERIAL CREDIT INDUSTRIES INC STREET 2: 23550 HAWTHORNE BLVD BLDG ONE STE 110 CITY: TORRANCE STATE: CA ZIP: 90505 S-4 1 FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1997 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- IMPERIAL CREDIT CAPITAL TRUST I (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 6733 95-4639513 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
23550 HAWTHORNE BOULEVARD, BUILDING 1, SUITE 110 TORRANCE, CALIFORNIA 90505 (310) 373-1704 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) CHASE MANHATTAN BANK DELAWARE 1201 MARKET STREET WILMINGTON, DELAWARE 19801 (302) 428-3375 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) IMPERIAL CREDIT INDUSTRIES, INC. (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 6122 95-4054791 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
23550 HAWTHORNE BOULEVARD, BUILDING 1, SUITE 110 TORRANCE, CALIFORNIA 90505 (310) 373-1704 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF CO- REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) H. WAYNE SNAVELY CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER IMPERIAL CREDIT INDUSTRIES, INC. 23550 HAWTHORNE BOULEVARD, BUILDING 1, SUITE 110 TORRANCE, CALIFORNIA 90505 (310) 373-1704 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF AGENT FOR SERVICE) IMPERIAL BUSINESS CREDIT, INC. (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 6159 33-0664339 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
16935 WEST BERNARDO DRIVE, SUITE 150 SAN DIEGO, CALIFORNIA 92127 (619) 675-1070 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF CO- REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) IMPERIAL CREDIT ADVISORS, INC. (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 6282 33-0648410 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
20371 IRVINE AVENUE SANTA ANA HEIGHTS, CALIFORNIA 92707 (214) 474-8500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF CO- REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) H. WAYNE SNAVELY CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER IMPERIAL CREDIT INDUSTRIES, INC. 23550 HAWTHORNE BOULEVARD, BUILDING 1, SUITE 110 TORRANCE, CALIFORNIA 90505 (310) 373-1704 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF AGENT FOR SERVICE) FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 6159 06-1429737 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
2029 CENTURY PARK EAST, SUITE 1190 LOS ANGELES, CALIFORNIA 90067 (800) 661-3622 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF CO- REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) H. WAYNE SNAVELY CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER IMPERIAL CREDIT INDUSTRIES, INC. 23550 HAWTHORNE BOULEVARD, BUILDING 1, SUITE 110 TORRANCE, CALIFORNIA 90505 (310) 373-1704 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF AGENT FOR SERVICE) AUTOMARKETING NETWORK, INC. (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER) FLORIDA 6141 65-0310419 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
2101 CORPORATE BOULEVARD, SUITE 316 BOCA RATON, FLORIDA 33431 (561) 997-2440 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF CO- REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) STEPHEN S. RASKIN AUTO MARKETING NETWORK, INC. 2101 CORPORATE BOULEVARD, SUITE 316 BOCA RATON, FLORIDA 33431 (561) 997-2440 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF AGENT FOR SERVICE) COPIES TO: THOMAS J. POLETTI, ESQ. SUSAN B. KALMAN, ESQ. DARREN O. BIGBY, ESQ. FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN 9100 WILSHIRE BOULEVARD, 8TH FLOOR EAST BEVERLY HILLS, CALIFORNIA 90212 TELEPHONE (310) 273-1870 FACSIMILE (310) 274-8357 ---------------- Approximate Date of Commencement of Proposed Sale to the Public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: [_] ---------------- CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM AMOUNT MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE(1) FEE - -------------------------------------------------------------------------------- Remarketed Par Securities, Series B of Imperial Credit Capital Trust I .................. $70,000,000 100.000% $70,000,000 $21,212.12 - -------------------------------------------------------------------------------- Resettable Rate Debentures of Imperial Credit Industries, Inc........... * * * --(2) - -------------------------------------------------------------------------------- Guarantee of Imperial Credit Industries, Inc. of Remarketed Par Securities, Series B.................. * * * --(3) - -------------------------------------------------------------------------------- Guarantee of Resettable Rate Debentures, Series B. * * * --(4) - -------------------------------------------------------------------------------- Total............................................................. $21,212.12 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(f)(2) under the Securities Act of 1933. (2) The Resettable Rate Debentures, Series B will be exchanged for outstanding unregistered Resettable Rate Debentures, Series A which were purchased by Imperial Credit Capital Trust I with the proceeds of the sale of unregistered Remarketed Par Securities, Series A. No separate consideration will be received for the issuance of Resettable Rate Debentures, Series B. Pursuant to Rule 457(a), no separate fee is payable with respect to the Resettable Rate Debentures, Series B. (3) Imperial Credit Industries, Inc. will guarantee certain payments and distributions of the Remarketed Par Securities, Series B as set forth in the Registration Statement. Pursuant to Rule 457(n), no filing fee is required. (4) Imperial Business Credit, Inc., Imperial Credit Advisors, Inc., Auto Marketing Network, Inc. and Franchise Mortgage Acceptance Company LLC will guarantee the payment of the Resettable Rate Debentures, Series B. Pursuant to Rule 457(n), no filing fee is required. The Registrants hereby amend this registration statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion, dated June , 1997 PRELIMINARY PROSPECTUS $70,000,000 OFFER FOR ALL OUTSTANDING REMARKETED PAR SECURITIES, SERIES A IN EXCHANGE FOR REMARKETED PAR SECURITIES, SERIES B WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OF IMPERIAL CREDIT CAPITAL TRUST I (LIQUIDATION AMOUNT $1,000 PER SECURITY) FULLY AND UNCONDITIONALLY GUARANTEED, TO THE EXTENT SET FORTH HEREIN BY [LOGO OF IMPERIAL CREDIT INDUSTRIES, INC.] THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON , UNLESS EXTENDED Imperial Credit Capital Trust I, a Delaware statutory business trust (the "Trust"), hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter of Transmittal" which, together with this Prospectus, constitute the "Exchange Offer"), to exchange an aggregate liquidation amount of up to $70,000,000 of its Remarketed Par Securities, Series B (the "New Par Securities") of the Trust, which have been registered under the Securities Act, for a like liquidation amount of the issued and outstanding Remarketed Par Securities, Series A (the "Old Par Securities") (together, the "Par Securities") of the Trust from the registered holders thereof. Concurrently herewith, the following exchanges will also occur: (i) Imperial Credit Industries, Inc., a California corporation (the "Company"), will exchange its guarantee of the payment of distributions and payments on liquidation or redemption of the Old Par Securities (the "Old Trust Guarantee") for a like guarantee of the New Par Securities (the "New Trust Guarantee"); (ii) the Company will exchange all of its outstanding Resettable Rate Debentures, Series A (the "Old Debentures") for a like amount of its Resettable Rate Debentures, Series B (the "New Debentures"); (iii) Auto Marketing Network, Inc., a Florida corporation ("AMN"), Imperial Business Credit, Inc., a California corporation ("IBC"), Imperial Credit Advisors, Inc., a California corporation ("ICAI"), and Franchise Mortgage Acceptance Company LLC, a California limited liability company ("FMAC") (collectively the "Subsidiary Guarantors") will exchange their guarantee of the Old Debentures (the "Old Subsidiary Guarantees") for a guarantee of the New Debentures (the "New Subsidiary Guarantees") (these transactions, together with the exchange of the Old Par Securities for the New Par Securities, are collectively referred to herein as the "Exchange"). The New Trust Guarantee, the New Debentures, and the New Subsidiary Guarantees have also been registered under the Securities Act. The Old Par Securities, the Old Trust Guarantee, the Old Debentures and the Old Subsidiary Guarantees are referred to collectively herein as the "Old Securities," and the New Par Securities, New Trust Guarantee, New Debentures and the New Subsidiary Guarantees are collectively referred to herein as the "New Securities." The terms of the New Securities are identical in all material respects to the Old Securities, except for certain transfer restrictions relating to the Old Securities. The Par Securities represent undivided beneficial ownership interests in the assets of the Trust. The Company indirectly owns all of the beneficial ownership interests represented by common securities of the Trust (the "Common Securities" and together with the Par Securities, the "Trust Securities"). On June 9, 1997, the Trust issued $72,165,000 liquidation amount of Trust Securities pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. The Trust exists for the sole purposes of issuing the Trust Securities and investing the proceeds thereof in the Old Debentures, which will be exchanged for the New Debentures (together, the "Debentures"). New Debentures will evidence the same class of debt as the Old Debentures and will be issued pursuant to, and entitled to the benefits of, the Indenture governing the Old Debentures (the "Indenture"). (continued on page i) ----------- SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DESCRIPTION OF CERTAIN RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD PAR SECURITIES IN THE EXCHANGE OFFER AND FOR CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE PAR SECURITIES, INCLUDING THE PERIOD AND CIRCUMSTANCES DURING AND UNDER WHICH PAYMENTS OF DISTRIBUTIONS ON THE PAR SECURITIES MAY BE DEFERRED AND THE RELATED UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF SUCH DEFERRAL. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI- TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------- THE DATE OF THIS PROSPECTUS IS , 1997. IMPERIAL CREDIT INDUSTRIES, INC. PRINCIPAL OPERATING SUBSIDIARIES AND DIVISIONS -------------------- IMPERIAL CREDIT INDUSTRIES, INC. "ICII" -------------------- ------------------------------------------------------------------ 100% 100% 100% 66.7% 100% owned owned owned owned owned - -------------- ----------- --------------- --------------- Imperial Imperial Franchise Auto Business Credit Mortgage Marketing Credit, Inc. Advisors, Acceptance Co. Network, Inc. "IBC" Inc. LLC "AMN" "ICAI" "FMAC" - -------------- ----------- --------------- --------------- ------------------ Southern Pacific Thrift & Loan Association "SPTL" ------------------ -------------------------------------------------------- ------------- ---------- ----------- ---------- Auto Consumer Income Coast Lend Group Credit Property Business "Auto Lend" Division Lending Credit "CCD" Division "CBC" "IPLD" ------------- ---------- ----------- ---------- -------------- --------------- Auto Lending Loan Division Participation "ALD" and Investment Group "LPIG" -------------- --------------- (Continued from cover page) The Debentures will mature on June 15, 2032, or earlier in certain circumstances following the occurrence of a Tax Event (as defined herein). See "Description of Securities--Redemption--Special Event Redemption or Distribution of Debentures; Shortening of Stated Maturity." The Par Securities will have a preference under certain circumstances with respect to cash distributions and amounts payable on liquidation, redemption or otherwise over the Common Securities. See "Description of Securities--Subordination of Common Securities." Holders of Par Securities are entitled to receive cumulative cash distributions ("Distributions"), accumulating from the date of original issuance, at a rate per annum equal to 10 1/4% (the "Initial Distribution Rate") of the liquidation amount of $1,000 per Par Security from the date of original issuance until but excluding the Remarketing Settlement Date (as defined herein) . From and after the Remarketing Settlement Date, holders of Par Securities will be entitled to receive Distributions at the rate per annum that results from the implementation of the remarketing procedures described herein (the "Remarketing") consummated on the Remarketing Settlement Date. See "Prospectus Summary--Remarketing" and "Description of Securities-- Remarketing." The Remarketing is scheduled to occur on June 11, 2002, and the Remarketing Settlement Date is scheduled to be June 14, 2002. Distributions accumulate and are payable semi-annually in arrears on June 15th (June 14 in 2002) and December 15th of each year commencing December 15, 1997, and on the Scheduled Remarketing Settlement Date (as defined herein). At all times, the distribution rate in effect on the Par Securities (the "Applicable Distribution Rate"), the distribution payment dates and other payment dates for the Par Securities will correspond to the interest rate, interest payment dates and other payment dates for the Debentures, which are the sole assets of the Trust. See "Description of Securities--Distributions." The Company guarantees the payment of Distributions and payments on liquidation of the Trust or redemption of the Par Securities, but only in each case to the extent of funds held by the Trust, as described herein. See "Description of Guarantee." If the Company does not make interest payments on the Debentures held by the Trust, the Trust will have insufficient funds to pay Distributions on the Par Securities. The Debentures are unconditionally guaranteed on a senior unsecured basis by each of the Subsidiary Guarantors, which consist of all of the Company's Restricted Subsidiaries other than Southern Pacific Thrift and Loan Association ("SPTL") and the Special Purpose Subsidiaries (as defined herein) until the Remarketing Settlement Date. The Subsidiary Guarantees will be released on the Remarketing Settlement Date. The Company's obligations under the Guarantee, taken together with its obligations under the Debentures and the Indenture, including its obligation to pay all costs, expenses and liabilities of the Trust (other than with respect to the Par Securities), constitute a full and unconditional guarantee of all of the Trust's obligations under the Par Securities. Until the Remarketing Settlement Date, the Debentures and the Guarantee will be general unsecured obligations of the Company ranking on a parity with all Indebtedness of the Company, if any, that is not subordinated to the Debentures or the Guarantee and senior to any Indebtedness of the Company that is subordinated to the Debentures or the Guarantee. Until the Remarketing Settlement Date, when the Subsidiary Guarantees will be released, the Subsidiary Guarantees will rank on a parity with all Indebtedness of the Subsidiary Guarantors, if any, that is not subordinated to the Subsidiary Guarantees and senior to any Indebtedness of the Subsidiary Guarantors that is subordinated to the Subsidiary Guarantees. Until the Remarketing Settlement Date, the Debentures and the Guarantee will be effectively subordinated to all Indebtedness and other liabilities of SPTL and the Special Purpose Subsidiaries, and the Debentures, the Guarantee and the Subsidiary Guarantees will be effectively subordinated to secured Indebtedness of the Company and the Subsidiary Guarantors. As of March 31, 1997, on a pro forma basis after giving effect to the sale of the Par Securities by the Trust (the "Offering") and the application of proceeds thereof, the Debentures and the Guarantee would have been effectively subordinated to approximately $1.3 billion of deposits and other borrowings at SPTL and the Debentures, the Guarantee and the Subsidiary Guarantees would have been effectively subordinated to approximately $304.9 million of secured Indebtedness of the Subsidiary Guarantors. After the Remarketing Settlement Date, the Debentures and the Guarantee will be subordinated and junior in right of payment to all Senior Debt (as defined herein) of the Company and will be effectively subordinated to all Indebtedness and other liabilities of all the Subsidiaries of the Company. As of March 31, 1997, on a pro forma basis after giving effect to the Offering, and the application of proceeds thereof and the Remarketing, the Debentures and the Guarantee would have been subordinated to approximately $220.2 million of Senior Debt of the Company and would have been effectively subordinated to approximately $1.6 billion of Indebtedness of the Company's Subsidiaries (including approximately $1.3 billion of deposits and other borrowings at SPTL and approximately $304.9 million of secured Indebtedness of the Company's Subsidiaries, but not including the Trust's guarantee of $200.0 million of the 9 7/8% Senior Notes due 2007 (the "9 7/8% Senior Notes")). After the Remarketing Settlement Date, the terms of the Debentures place no limitation on the amount of Indebtedness that may be incurred by the Company or on the amount of liabilities and obligations of the Company's subsidiaries. See "Description of Debentures--Ranking." Following the Remarketing Settlement Date, the Company has the right to defer payment of interest on the Debentures at any time or from time to time for a period not exceeding 10 consecutive semi-annual periods with respect to each deferral period (each, an "Extension Period"), provided that no Extension Period may extend beyond the Stated Maturity (as defined herein) of the Debentures. Upon the termination of any such Extension Period and the payment of all amounts then due on any Interest Payment Date (as defined herein), the Company may elect to begin a new Extension Period subject to the requirements set forth herein. Accordingly, there could be multiple Extension Periods of varying lengths throughout the term of the Debentures. If interest payments on the Debentures are so deferred, distributions on the Par Securities will also be deferred and the Company may not, and may not permit any subsidiary of the Company to, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, the Company's capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities that rank on a parity with or junior to the Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks on a parity with or junior to the Debentures (other than (a) dividends or distributions in common stock of the Company, (b) payments under the Guarantee, (c) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (d) purchases of common stock related to the issuance of common stock or rights under any of the Company's benefit plans). During an Extension Period, interest on the Debentures will continue to accrue (and the amount of Distributions to which holders of the Par Securities are entitled will accumulate) at the Adjusted Distribution Rate (as defined herein), compounded semi-annually, and holders of the Par Securities will be required to accrue interest income for United States federal income tax purposes prior to receipt of the cash related to such interest income. See "Description of Debentures-- Option to Extend Interest Payment Period" and "Certain United States Federal Income Tax Consequences--Interest Income and Original Issue Discount." The Par Securities are subject to mandatory redemption, in whole or in part, upon repayment of the Debentures held by the Trust at maturity or their earlier redemption, in an amount equal to the amount of related Debentures maturing or being redeemed and at a redemption price equal to the redemption price of such Debentures, in each case plus accumulated and unpaid Distributions thereon to the date of redemption. The Debentures are redeemable at the option of the Company, in whole or in part, at any time or from time to time through and including June 15, 2001, at a redemption price equal to the greater of (i) 100% of the principal amount of such Debentures or (ii) the present value of the principal amount of such Debentures if such Debentures were redeemed on June 14, 2002 together with scheduled payments of interest from the prepayment date to but excluding June 14, 2002 (the "Remaining Life") discounted at the Adjusted Treasury Rate (as defined herein), plus, in each case, accrued and unpaid interest, if any, to the date of redemption. On and after June 15, 2012, the Debentures are redeemable prior to maturity, at the option of the Company, in whole or in part, at a redemption price equal to 100% of the principal amount thereof, plus a premium which will decline ratably on each June 15 thereafter to zero on and after June 15, 2022, plus accrued and unpaid interest thereon, ii if any, to the date of redemption. If the Exchange Offer has occurred, any Old Par Securities which have not been exchanged for New Par Securities pursuant to the Exchange Offer will be mandatorily redeemed by the Company on the Remarketing Settlement Date, as described under "Description of Securities-- Redemption--Transfer Restricted Security Redemption." After the Remarketing Settlement Date, the Debentures are also redeemable by the Company at any time, in whole (but not in part), upon the occurrence and continuation of a Special Event, at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of redemption, subject to the further conditions described under "Description of Securities--Redemption." If, by 4:00 P.M., New York City time, on any Scheduled Remarketing Date (as defined herein), the Remarketing Agent (as defined herein) is unable to remarket, at a price of $1,000 per Par Security, all of the Par Securities tendered or deemed tendered for purchase in the Remarketing on such Scheduled Remarketing Date, then such unsold Par Securities will be exchanged on the related Scheduled Remarketing Settlement Date with the Trust for Debentures having an aggregate principal amount equal to the aggregate liquidation amount of such unsold Par Securities and such Debentures shall be immediately redeemed, unless as a result of such redemption, less than $25.0 million principal amount of Debentures would remain outstanding. In such latter event, the Company is required to redeem on such Scheduled Remarketing Settlement Date all of the Debentures and the consummation of purchases and sales of Par Securities pursuant to such Remarketing will not occur. In either such case (a "Special Mandatory Redemption"), the redemption price of the Debentures will be 100% of the principal amount of the Debentures so redeemed. See "Description of the Securities--Remarketing." Upon the occurrence and continuation of a Special Event, the Company will have the right, if certain conditions are met, (i) to terminate the Trust and cause the Debentures to be distributed to the holders of the Par Securities in exchange therefor upon liquidation of the Trust, (ii) to shorten the Stated Maturity of the Debentures, in the case of a Tax Event, to a date not earlier than June 14, 2012, or (iii) after the Scheduled Remarketing Date, to redeem the Debentures in whole (but not in part) within 90 days following the occurrence of such Special Event and thereby cause a mandatory redemption of the Par Securities. See "Description of Securities--Redemption--Special Event Redemption or Distribution of Debentures; Shortening of Stated Maturity." Moreover, the Debentures are also redeemable on the Remarketing Settlement Date in connection with a Tax Opinion Redemption. See "Description of Securities--Redemption--Tax Opinion Redemption." In the event of the liquidation of the Trust, after satisfaction of the claims of creditors of the Trust, if any, as provided by applicable law, the holders of the Par Securities will be entitled to receive a liquidation amount of $1,000 per Par Security, plus accumulated and unpaid Distributions thereon to the date of payment, which may be in the form of a distribution of such amount in Debentures as described above. If such liquidation amount can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate liquidation amount, then the amounts payable directly by the Trust on the Par Securities will be paid on a pro rata basis. The holders of the Common Securities will be entitled to receive distributions upon any such liquidation pro rata with the holders of the Par Securities, except that if an Indenture Event of Default (as defined herein) has occurred and is continuing, the Par Securities will have a priority over the Common Securities. See "Description of Securities--Liquidation Distribution Upon Dissolution." The Trust is making the Exchange Offer of the New Par Securities in reliance on the position of the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (the "Commission") as set forth in certain interpretive letters addressed to third parties in other transactions relating to the transferability of the exchanged securities following registration. However, none of the Company, the Trust nor the Subsidiary Guarantors (collectively, the "Registrants") has sought its own interpretive letter and there can be no assurance that the Staff of the Division of Corporation Finance of the Commission would make a similar determination with respect to the Exchange Offer as it has in such interpretive letters to third parties. Based on these interpretations by the Staff of the Division of Corporation Finance, and subject to the two immediately following sentences, the Registrants believe that New Par Securities issued pursuant to this Exchange Offer in exchange for Old Par Securities may be offered for resale, resold and otherwise transferred by a holder thereof (other than iii a holder who is a broker-dealer) without further compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such New Par Securities are acquired in the ordinary course of such holder's business and that such holder is not participating, and has no arrangement or understanding with any person to participate, in a distribution (within the meaning of the Securities Act) of such New Par Securities. However, any holder of Old Par Securities who is an "affiliate" of the Registrants (within the meaning of Rule 405 under the Securities Act) or who intends to participate in the Exchange Offer for the purpose of distributing New Par Securities, or any broker-dealer who purchased Old Par Securities from the Trust to resell them pursuant to Rule 144A under the Securities Act ("Rule 144A") or any other available exemption under the Securities Act, (a) will not be able to rely on the interpretations of the Staff of the Division of Corporation Finance of the Commission set forth in the above-mentioned interpretive letters, (b) will not be permitted or entitled to tender such Old Par Securities in the Exchange Offer and (c) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or other transfer of such Old Par Securities unless such sale is made pursuant to an exemption from such requirements. In addition, as described below, if any broker-dealer holds Old Par Securities acquired for its own account as a result of market-making or other trading activities and exchanges such Old Par Securities for New Par Securities, then such broker-dealer must deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of such New Par Securities. Each holder of Old Par Securities who wishes to exchange Old Par Securities for New Par Securities in the Exchange Offer will be required to represent that (i) it is not an "affiliate" of any of the Registrants (ii) any New Par Securities to be received by it are being acquired in the ordinary course of its business, (iii) it has no arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of such New Par Securities, and (iv) if such holder is not a broker-dealer, such holder is not engaged in, and does not intend to engage in, a distribution (within the meaning of the Securities Act) of such New Par Securities. In addition, the Registrants may require such holder, as a condition to such holder's eligibility to participate in the Exchange Offer, to furnish to the Registrants (or an agent thereof) in writing information as to the number of "beneficial owners" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")) on behalf of whom such holder holds the Par Securities to be exchanged in the Exchange Offer. Each broker-dealer that receives New Par Securities for its own account pursuant to the Exchange Offer must acknowledge that it acquired the New Par Securities for its own account as the result of market-making activities or other trading activities and must agree that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Par Securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Based on the position taken by the Staff of the Division of Corporation Finance of the Commission in the interpretive letters referred to above, the Registrants believe that broker-dealers who acquired Old Par Securities for their own accounts, as a result of market-making activities or other trading activities ("Participating Broker-Dealers") may fulfill their prospectus delivery requirements with respect to the New Par Securities received upon exchange of such Old Par Securities with this Prospectus, as it may be amended or supplemented from time to time. Subject to certain exceptions, the Registrants have agreed that this Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of such New Par Securities for a period ending one year after the Registration Statement of which this Prospectus constitutes a part is declared effective. Any Participating Broker-Dealer who is an "affiliate" of the Registrants (within the meaning of Rule 405 under the Securities Act) may not rely on such interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. See "The Exchange Offer--"Purpose and Effect." Any Old Par Securities not tendered and accepted in the Exchange Offer will remain outstanding and will be entitled to all the same rights and will be subject to the same limitations applicable thereto under the Declaration (except for those rights relating to the Exchange Offer which terminate upon consummation of the Exchange Offer). Following consummation of the Exchange Offer, the holders of Old Par Securities will continue to be subject to all of the existing restrictions upon transfer thereof and none of the Registrants will have any iv further obligation to such holders (other than under certain limited circumstances) to provide for registration under the Securities Act of the Old Par Securities held by them. Any Old Par Securities which have not been exchanged for New Par Securities pursuant to the Exchange Offer will be mandatorily redeemed by the Company on the Remarketing Settlement Date, as described under "Description of the Securities--Redemption--Transfer Restricted Security Redemption." To the extent that Old Par Securities are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered Old Par Securities could be adversely affected. See "Risk Factors-- Consequences of a Failure to Exchange Old Par Securities." The New Par Securities will be a new issue of securities for which there currently is no established trading market. Accordingly, there can be no assurance as to the development or liquidity of any market for the New Par Securities. See "Risk Factors--Lack of Public Market." Old Par Securities may be tendered for exchange on or prior to 5:00 p.m., Eastern Daylight Time, on , 1997 (such time on such date being hereinafter called the "Expiration Date"), unless the Exchange Offer is extended by the Trust (in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended.) Tenders of Old Par Securities may be withdrawn at any time on or prior to the Expiration Date. The Exchange Offer is not conditioned upon any minimum liquidation amount of Old Par Securities being tendered for exchange. However, the Exchange Offer is subject to certain events and conditions which may be waived by the Company or the Trust. The Company has agreed to pay all expenses of the Exchange Offer. See "The Exchange Offer--Fees and Expenses." This Prospectus, together with the Letter of Transmittal, is being sent to all registered holders of Old Par Securities as of , 1997. Neither the Company nor the Trust will receive any cash proceeds from the issuance of the New Par Securities offered hereby. No dealer-manager is being used in connection with this Exchange Offer. See "Use of Proceeds." ---------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE DOCUMENTS INCORPORATED OR DEEMED INCORPORATED BY REFERENCE HEREIN, AND ANY INFORMATION OR REPRESENTATIONS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SUBSIDIARY GUARANTORS OR THE TRUST OR BY ANY AGENT, DEALER OR UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION. v SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Prospectus, including, without limitation, the statements under "Prospectus Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and located elsewhere herein regarding industry prospects and the Company's financial position are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed in this Prospectus including, without limitation, the forward-looking statements included in this Prospectus and under "Risk Factors." All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. --------------- AVAILABLE INFORMATION The Company and Franchise Mortgage Acceptance Company LLC ("FMAC") are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file reports and other information with the Commission. The Company, the Trust and the Subsidiary Guarantors have filed a Registration Statement on Form S-4 (the "Registration Statement") with the Commission under the Securities Act with respect to the New Securities. This Prospectus does not contain all the information, exhibits and undertakings contained in the Registration Statement, to which reference is hereby made. Statements contained in this Prospectus as to the terms of any contract or other document are not necessarily complete with respect to each such contract or other document filed as an exhibit to the Registration Statement. Reference is made to the exhibits for a more complete description of the matter involved. Such reports, proxy statements and other information filed by the Company and FMAC with the Commission pursuant to the informational requirements of the Exchange Act may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following Regional Offices of the Commission: Chicago Regional Office, Suite 1400, Citicorp Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661; and New York Regional Office, 7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. Documents filed by the Company can also be inspected at the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Commission also maintains a Web site (http://www.sec.gov) that contains reports, proxy statements and other information regarding the Company and FMAC. No separate financial statements of the Trust have been included or incorporated by reference herein. The Company does not believe such financial statements would be material to holders of the Securities because (i) all of the voting securities of the Trust will be owned, directly or indirectly, by the Company, a reporting company under the Exchange Act, (ii) the Trust has no independent operations but exists for the sole purpose of issuing securities representing undivided beneficial interests in its assets and investing the proceeds thereof in Debentures issued by the Company and (iii) the obligations of the Trust under the Securities are guaranteed by the Company to the extent described herein. See "Relationship Among the Securities, the Debentures and the Guarantee." No separate financial statements of AMN, IBC or ICAI, have been included or incorporated by reference herein. The Company does not believe that such financial statements would be material to holders of the Par Securities because (i) all of the common stock of AMN, IBC, and ICAI is owned by the Company, a reporting company under the Exchange Act and (ii) each of AMN, IBC, and ICAI fully and unconditionally guarantees the obligations of the Company under the Debentures. See "Description of Debentures" and "Description of Guarantee." vi INCORPORATION BY REFERENCE The Company's annual report on Form 10-K for the fiscal year ended December 31, 1996 and the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997, filed by the Company with the Commission pursuant to the Exchange Act are incorporated herein by reference. The reports and other documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the Exchange Offer hereunder shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing of such reports and documents. Any statement contained in this Prospectus or in a document incorporated by reference herein will be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in this Prospectus or in any subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of the Registration Statement or this Prospectus. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of any such person, copies of any and all of the documents incorporated herein by reference, except the exhibits to such documents (unless such exhibits are specifically incorporated by reference into the information incorporated herein). Requests for such documents should be directed to Imperial Credit Industries, Inc., 23550 Hawthorne Boulevard, Building One, Suite 240, Torrance California 90505, telephone number (310) 791-8040. Attention: General Counsel. THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE NO LATER THAN FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE. vii PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including "Risk Factors" and the consolidated financial statements and the notes thereto appearing elsewhere in this Prospectus. References in this Prospectus to "ICII" refer to the Company as a separate entity from its subsidiaries. All references to the "Company" in this Prospectus refer, unless otherwise stated or unless the context otherwise requires, to ICII and its subsidiaries on a consolidated basis. THE TRUST The Trust is a statutory business trust formed under the Delaware Business Trust Act, as amended (the "Trust Act"), pursuant to (i) a declaration of trust (as so amended and restated, the "Declaration") dated as of May 28, 1997, executed by the Company, as sponsor, and the trustees of the Trust and (ii) a certificate of trust, dated as of May 28, 1997, filed with the Secretary of State of the State of Delaware. The Trust exists for the exclusive purpose of (i) issuing and selling the Trust Securities representing undivided beneficial ownership interests in the assets of the Trust, (ii) investing the gross proceeds from such sales in the Debentures and (iii) engaging in only those other activities necessary or incidental thereto. All of the Common Securities of the Trust are owned by the Company. The Par Securities rank on a parity, and payments will be made thereon pro rata, with the Common Securities; provided, however, that if on any Distribution Date (as defined herein) or Redemption Date (as defined herein) an Indenture Event of Default (as defined herein) shall have occurred and be continuing, the rights of the holders of the Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise will be subordinated to the rights of holders of the Par Securities. See "Description of Securities-- Subordination of Common Securities." The Trust's affairs are conducted by the trustees (the "Trustees") appointed by the Company as the owner of all of the Common Securities. The holder of the Common Securities is entitled to appoint, remove or replace any of, or increase or reduce the number of, the Trustees (as defined herein). The duties and obligations of the Trustees are governed by the Declaration. As of the date of this Prospectus, the Trust has five Trustees. Three Trustees (the "Regular Trustees") are employees or officers of the Company. A fourth Trustee (the "Property Trustee") of the Trust is a financial institution that is not affiliated with the Company and has a minimum amount of combined capital and surplus of not less than $50,000,000, which acts as property trustee and as indenture trustee for the purposes of compliance with the provisions of Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The fifth Trustee of the Trust is an entity having a principal place of business in, or a natural person resident of, the State of Delaware (the "Delaware Trustee"). The Company will pay all fees and expenses related to the Trust and the Exchange Offer. The Property Trustee for the Trust is The Chase Trust Company of California and its principal corporate trust office is at 101 California Street, Suite 2725, San Francisco, California 94111. The Delaware Trustee for the Trust is The Chase Manhattan Bank Delaware and its address in the State of Delaware is 1201 Market Street, Wilmington, Delaware 19801. THE COMPANY Imperial Credit Industries, Inc. (the "Company") is a diversified commercial and consumer finance company. In 1995, the Company began to reposition its business from originating and selling conforming residential mortgage loans to offering higher margin loan and lease products. The Company accomplished this repositioning through a business strategy that emphasizes: (i) opportunistic expansion and acquisitions of businesses in niche segments of the financial services industry, (ii) conservative and disciplined underwriting 1 and credit risk management, (iii) loan and lease originations, where possible, on a wholesale basis, (iv) securitization or sale in the secondary market of substantially all of the Company's loans and leases, other than those held by SPTL for investment and (v) maintaining business and financial flexibility to take advantage of changing market conditions with respect to specific financial services businesses. The Company has diversified its loan and lease products by focusing on the creation and acquisition of additional finance businesses in order to reduce its dependency on residential mortgage lending. When acquiring new businesses or targeting expansion opportunities, the Company seeks to retain existing management and recruit additional experienced management to increase growth and profitability and to reduce the risks associated with operating the newly acquired entity. As a result, the Company has divested substantially all of its residential mortgage lending and residential mortgage servicing businesses and expanded its presence in other specialty finance markets. Throughout this realignment, the Company's core business has remained consistent in that it originates loans and leases funded primarily by warehouse lines of credit and repurchase facilities and securitizations and whole loan sales in the secondary market. For the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, the Company originated or acquired $275.8 million, $2.2 billion and $3.0 billion of loans and leases, respectively. In addition, during the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, the Company completed securitization transactions totaling $97.9 million, $1.3 billion and $1.0 billion, respectively. For the year ended December 31, 1996, a substantial portion of the Company's operations were conducted through its non-conforming residential mortgage lending subsidiary, SPFC. In June 1996, as part of the Company's repositioning, SPFC completed an initial public offering of its common stock pursuant to which ICII was a selling shareholder. During the fourth quarter of 1996 and the first quarter of 1997, ICII sold additional shares of its SPFC common stock reducing its ownership percentage to 49.4% as of March 31, 1997. As a result, commencing with the three months ended March 31, 1997, the financial statements of SPFC are no longer consolidated with those of ICII. As a result of this deconsolidation, certain of the financial and operating data presented for the three months ended March 31, 1997 and thereafter will not be comparable with such data for periods prior to the deconsolidation. For a further description of the effect of such deconsolidation, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--General-- Deconsolidation." The Company offers loan and lease products in the following sectors: FRANCHISE LENDING. Franchise lending is conducted through ICII's 66.7% owned subsidiary, Franchise Mortgage Acceptance Company LLC ("FMAC"), the assets of which were acquired from a division of Greenwich Financial Capital Products, Inc. in June 1995. FMAC is a full service franchise finance company which originates loans and equipment leases to top-tier national and regional franchisee concept operators. While FMAC historically focused on franchise concepts such as Taco Bell, Burger King, Hardee's, Wendy's, Pizza Hut and KFC, it is currently expanding its marketing focus to include other food and non- food related franchise concepts. In addition, FMAC recently established divisions to provide financing to experienced golf course operators and energy and retail related franchisees. For the three months ended March 31, 1997, the year ended December 31, 1996 and the six months ended December 31, 1995, FMAC originated or acquired $133.4 million, $449.3 million and $163.5 million of franchise loans and securitized $0, $325.1 million and $105.2 million of loans, respectively. BUSINESS FINANCE LENDING. Business finance lending is conducted through the Imperial Business Credit, Inc. ("IBC") subsidiary of the Company and three divisions of the Company's SPTL subsidiary: Coast Business Credit ("CBC") the Loan Participation and Investment Group ("LPIG") and the Auto Lend Group ("Auto Lend"). Coast Business Credit. CBC is an asset-based lender specializing in lending to middle market manufacturing and high-technology businesses. CBC's predecessor operated as a division of Coast Federal 2 Bank until its acquisition by the Company in September 1995. CBC originates loans and commitments subject to stringent underwriting and collateral requirements. As of March 31, 1997, CBC had total loan commitments of $589.0 million of which $318.0 million of loans were outstanding. Imperial Business Credit. IBC leases business equipment including copying, data processing, communication, printing and manufacturing equipment exclusively to business users. IBC was formed in May 1995 to combine the Company's existing leasing business with the assets acquired from First Concord Acceptance Corporation ("FCAC"). In October 1996, IBC expanded its business through the acquisition of substantially all of the assets of Avco Leasing Services, Inc. and all of the assets of Avco Financial Services of Southern California, Inc. related to its business of originating and servicing business equipment leases. For the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, IBC originated $30.1 million, $87.2 million and $36.0 million of leases and securitized $97.9 million, $87.0 million and $85.2 million of leases, respectively. Loan Participation and Investment Group. LPIG was formed in September 1995 to invest in and purchase syndicated commercial loan participations in the secondary market originated by commercial banks. As of March 31, 1997, LPIG had total loan commitments of $276.4 million of which $161.2 million of loans were outstanding. Auto Lend Group. Auto Lend was formed in September 1996 to finance automobile dealership inventories. As of March 31, 1997, Auto Lend had total loan commitments of $28.8 million of which $9.4 million of loans were outstanding. COMMERCIAL MORTGAGE LENDING. The Company conducts its commercial mortgage lending operations through the Income Property Lending Division ("IPLD") of SPTL. IPLD was formed in February 1994 to expand the Company's apartment and commercial property lending business. The focus of IPLD's lending activities is the small loan market (consisting of loans less than $2.5 million) for multi- family apartments and commercial buildings. For the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, IPLD loan originations totaled $75.9 million, $260.9 million and $160.0 million, respectively. CONSUMER LENDING. Consumer lending is conducted through the Auto Marketing Network, Inc. ("AMN") subsidiary of the Company and through the Auto Lending Division ("ALD") and Consumer Credit Division ("CCD") of SPTL. Auto Marketing Network. AMN was acquired on March 14, 1997 to finance on a nationwide basis the purchase of new and used automobiles primarily to sub-prime borrowers. At March 31, 1997, AMN was headquartered in Florida and had regional offices in Texas, Virginia, Tennessee, and operations facilities in Oklahoma. For the period from its acquisition through March 31, 1997, AMN originated $16.1 million in sub-prime auto loans. Auto Lending Division. ALD was formed in October 1994 and lends primarily to credit-impaired buyers of new and used automobiles who are unable to access traditional sources of financing from banks and automobile finance companies. ALD currently operates from three retail offices in Northern California and expects to further expand its operations within California. For the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, ALD originated $16.3 million, $35.0 million and $19.0 million, respectively, of sub-prime auto loans. Consumer Credit Division. CCD was formed in early 1994 and offers loans to finance home improvements and consumer goods. For the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, CCD originated $4.0 million, $22.0 million and $14.6 million respectively, in loans and had $42.6 million of loans outstanding as of March 31, 1997. 3 ADVISORY, INVESTMENT AND OTHER ACTIVITIES. The Company conducts advisory services through its Imperial Credit Advisors, Inc. ("ICAI") subsidiary and has substantial investments in Southern Pacific Funding Corporation ("SPFC"), a publicly traded non-conforming residential mortgage lender, Dabney/ Resnick/Imperial, LLC ("DRI"), an investment banking firm, and Imperial Credit Mortgage Holdings, Inc. ("IMH"), a publicly traded real estate investment trust engaged in mortgage finance activities. Imperial Credit Advisors. ICAI oversees the day-to-day operations of IMH pursuant to a management agreement more fully described in "Certain Transactions--Relationships with IMH--Other Arrangements and Transactions with IMH." For the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, ICAI earned $1.6 million, $3.3 million and $37,888 in management fees and incentive payments pursuant to the management agreement. Southern Pacific Funding Corporation. SPFC is a publicly traded specialty finance company (NYSE Symbol: "SFC") which originates, purchases and sells high yielding, single family non-conforming mortgage loans. Substantially all of SPFC's loans are secured by first or second mortgages on owner occupied single family residences. The majority of the originated and purchased loans are made to borrowers who do not qualify for or are unwilling to obtain financing from conventional mortgage sources. As of March 31, 1997, ICII owned 10,242,500 shares of SPFC common stock, representing 49.4% of the outstanding common stock of SPFC, which, commencing with the three months ended March 31, 1997, is reflected on the Company's financial statements as "Investment in Southern Pacific Funding Corporation." ICII's investment in SPFC constituted 2.3% of the Company's total assets and contributed 15.5% of the Company's total revenue for the three months ended March 31, 1997. Dabney/Resnick/Imperial. In September 1996, ICII entered into various transactions with Dabney/Resnick, Inc., subsequently renamed Dabney/Resnick/Imperial, LLC, and its affiliated entities. DRI engages in investment banking activities. ICII has acquired a 1% equity interest in DRI and has purchased a warrant to acquire an additional 48% interest therein. Imperial Credit Mortgage Holdings. Simultaneously with IMH's initial public offering in November 1995, the Company contributed certain operating assets of ICII's mortgage conduit operations and SPTL's warehouse lending operations for 500,000 shares of IMH's common stock. IMH is a publicly traded specialty finance company (AMEX Symbol: "IMH") which operates three businesses: (i) long-term investment operations which invests primarily in nonconforming residential mortgage loans and securities backed by such loans, (ii) warehouse lending operations which provides short-term lines of credit to originators of mortgage loans and (iii) conduit operations, through its affiliate ICI Funding Corporation ("ICIFC"), which primarily purchases and sells or securitizes non-conforming mortgage loans. As of March 31, 1997, the Company owned 462,269 shares of IMH common stock, representing 4.9% of the outstanding common stock of IMH. ICII was incorporated in California in 1986. The Company's principal executive offices are located at 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance, California 90505 and its telephone number is (310) 373-1704. FUNDING STRATEGY Pending loan securitization transactions or whole loan sales, the Company has historically funded its loan originations from warehouse lines of credit and repurchase facilities, equity and debt offerings in the capital markets and deposits or borrowings at SPTL. As of March 31, 1997, the Company had warehouse lines of credit and commitments of $500.0 million. Amounts outstanding under these facilities at March 31, 1997 totaled $304.9 million. The Company plans to use 4 existing warehouse lines to fund the business operations and securitization programs of its subsidiaries. Business operations are conducted through divisions of SPTL and are also financed through deposits, capital contributions from ICII to SPTL and Federal Home Loan Bank of San Francisco ("FHLB") and commercial borrowings. At March 31, 1997, SPTL had total deposits of approximately $1.2 billion (excluding deposits of the Company maintained with SPTL). On January 23, 1997, the Company concurrently completed a tender offer (the "Tender Offer") for its 9 3/4% Senior Notes due 2004 (the "9 3/4% Senior Notes") and issued $200.0 million of the 9 7/8% Senior Notes for net proceeds of approximately $193.8 million. The Company used approximately $73.2 million of the net proceeds to consummate the Tender Offer. Approximately $20.2 million of the 9 3/4% Senior Notes remain outstanding. 5 THE EXCHANGE OFFER On June 9, 1997, the Trust issued $70,000,000 liquidation amount of Old Par Securities. The Old Par Securities were sold pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. Lehman Brothers Inc. (the "Initial Purchaser"), as a condition to their purchase of the Old Par Securities, required that the Trust, the Company and the Subsidiary Guarantors agreed to commence the Exchange Offer following the offering of the Old Par Securities. The New Par Securities will evidence the same class of security as the Old Par Securities and will be issued pursuant to, and entitled to the benefits of, the Indenture. As used herein, the term "Par Securities" means the Old Par Securities and the New Par Securities, treated as a single class. SECURITIES OFFERED.... Up to $70,000,000 aggregate liquidation amount of New Par Securities which have been registered under the Securities Act. The terms of the New Par Securities and the Old Par Securities are identical in all material respects, except for certain transfer restrictions relating to the Old Par Securities. THE EXCHANGE OFFER.... The New Par Securities are being offered in exchange for a like principal amount of Old Par Securities. The issuance of the New Par Securities is intended to satisfy obligations of the Trust, the Company and the Subsidiary Guarantors contained in the Registration Rights Agreement, dated June 9, 1997, among the Trust, the Company, the Subsidiary Guarantors and the Initial Purchaser (the "Registration Rights Agreement"). The Company will issue, promptly after the Expiration Date, $1,000 liquidation amount of New Par Securities in exchange for each $1,000 liquidation amount of outstanding Old Par Securities tendered and accepted in connection with the Exchange Offer. For a description of the procedures for tendering Old Par Securities, see "The Exchange Offer--Procedures for Tendering Old Par Securities." TENDERS, EXPIRATION DATE; WITHDRAWAL..... The Exchange Offer will expire at 5:00 P.M., New York City time, on , 1997, or such later date and time to which it is extended (as so extended, the "Expiration Date"). A tender of Old Par Securities pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Par Security not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. PROCEDURES FOR TENDERING OLD PAR SECURITIES........... Tendering holders of Old Par Securities must complete and sign a Letter of Transmittal in accordance with the instructions contained therein and forward the same by mail, facsimile or hand delivery, together with any other required documents, to the Exchange Agent, either with the Old Par Securities to be tendered or in compliance with the specified procedures for guaranteed delivery of Old Par Securities. Certain brokers, dealers, commercial banks, trust companies and other nominees may also effect tenders by book-entry transfer. Holders of Old Par Securities registered in the name of a broker, dealer, commercial bank, trust company or other nominee are urged to contact such person promptly if they wish to tender Old Par Securities pursuant to the Exchange Offer. See "The Exchange Offer--Procedures for Tendering Old Par Securities." 6 Letters of Transmittal and certificates representing Old Par Securities should not be sent to the Trust, the Company, or the Subsidiary Guarantors. Such documents should only be sent to the Exchange Agent. Questions regarding how to tender and requests for information should be directed to the Exchange Agent. See "The Exchange Offer-Exchange Agent." ACCRUED DISTRIBUTIONS........ Each New Par Security will pay cumulative distributions from June 9, 1997. Holders of the Old Par Securities whose Old Par Securities are accepted for exchange will not receive any accumulated distributions on such Old Par Securities and will be deemed to have waived the right to receive any distributions on such Old Preferred Securities accumulated from and after June 9, 1997. FEDERAL INCOME TAX CONSEQUENCES......... The exchange pursuant to the Exchange Offer should not constitute a taxable event for United States federal income tax purposes. Holders of Old Par Securities should review the information set forth under "Certain United States Federal Income Tax Consequences" prior to tendering Old Par Securities in the Exchange Offer. USE OF PROCEEDS....... There will be no proceeds to the Company from the exchange pursuant to the Exchange Offer. EXCHANGE AGENT........ The Chase Trust Company of California is serving as the Exchange Agent in connection with the Exchange Offer. SHELF REGISTRATION STATEMENT............ Under certain circumstances described in the Registration Rights Agreement, certain holders of Par Securities (including holders who are not permitted to participate in the Exchange Offer or who may not freely resell New Par Securities received in the Exchange Offer) may require the Trust, the Company and the Subsidiary Guarantors to file, and use best efforts to cause to become effective, a shelf registration statement under the Securities Act, which would cover resales of Par Securities by such holders. See "The Exchange Offer--Purpose and Effect." CONDITIONS TO THE EXCHANGE OFFER....... The Exchange Offer is not conditioned on any minimum principal amount of Old Par Securities being tendered for exchange. The Exchange Offer is subject to certain other customary conditions, each of which may be waived by the Trust. See "The Exchange Offer--Certain Conditions to the Exchange Offer." CONSEQUENCES OF FAILURE TO EXCHANGE.. Any Old Par Securities not tendered and accepted in the Exchange Offer will remain outstanding and will be entitled to all the same rights and will be subject to the same limitations applicable thereto under the Declaration (except for those rights which terminate upon consummation of the Exchange Offer). Following consummation of the Exchange Offer, the holders of Old Par Securities will continue to be subject to all of the existing restrictions upon transfer thereof and neither the Company nor the Trust will have any further obligation to such holders (other than under certain limited circumstances to provide for registration under the Securities Act of the Old Par Securities held by them. Any Old Par Securities which have not been 7 exchanged for New Par Securities pursuant to the Exchange Offer will be mandatorily redeemed by the Company on the Remarketing Settlement Date, as described under "Description of the Securities-- Redemption--Transfer Restricted Security Redemption." To the extent that Old Par Securities are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered Old Par Securities could be adversely affected. See "Risk Factors--Consequences of a Failure to Exchange Old Par Securities." THE NEW PAR SECURITIES THE TRUST............. Imperial Credit Capital Trust I, a Delaware statutory business trust. The sole assets of the Trust are the Debentures. SECURITIES OFFERED.... $70,000,000 aggregate liquidation amount of the Trust's Remarketed Par Securities, Series B, which have been registered under the Securities Act (liquidation amount $1,000 per Par Security). The terms of the New Par Securities are identical in all material respects to the terms of the Old Par Securities, except for certain transfer restrictions relating to the Old Par Securities. See "The Exchange Offer--Purpose and Effect of the Exchange Offer," "Description of Securities" and "Description of "Old Securities." DISTRIBUTIONS......... From the date of original issuance until but excluding the Remarketing Settlement Date, holders of the Par Securities will be entitled to receive Distributions at a rate per annum equal to 10 1/4% of the liquidation amount of $1,000 per Par Security. From and after the Remarketing Settlement Date, holders of Par Securities will be entitled to receive Distributions at the rate per annum that results from the Remarketing consummated on the Remarketing Settlement Date. See "--Remarketing" below. The Remarketing is scheduled to occur on June 11, 2002, and the Remarketing Settlement Date is scheduled to be June 14, 2002. See "Description of Securities--Distributions." Distributions accumulate and will be payable semi-annually in arrears on June 15th (June 14 in 2002) and December 15th of each year, commencing December 15, 1997, and on each Scheduled Remarketing Settlement Date. The distribution rate, distribution payment dates and other payment dates for the Par Securities will correspond to the interest rate, interest payment dates and other payment dates on the Debentures. See "Description of Securities." DEBENTURES............ The Trust invested the proceeds from the issuance of the Trust Securities in an equivalent amount of Debentures of the Company. The Debentures will mature on June 15, 2032, or earlier in certain circumstances, following the occurrence of a Tax Event (the "Stated Maturity"). See "Risk Factors--Ranking of Obligations Under the Debentures, the Guarantee, and the Subsidiary Guarantees" and "Description of Debentures--Ranking." SUBSIDIARY GUARANTEES........... Until the Remarketing Settlement Date, the Debentures will be unconditionally guaranteed on a senior unsecured basis by each of the Company's Restricted Subsidiaries (as defined herein) other than SPTL and the Special Purpose Subsidiaries (the "Subsidiary Guarantors"). The Subsidiary Guarantees will be released on the Remarketing Settlement Date. See "Description of Debentures--Subsidiary Guarantees." 8 GUARANTEE............. Payment of distributions out of monies held by the Trust, and payments on liquidation of the Trust or the redemption of Par Securities, are guaranteed by the Company to the extent the Trust has funds available therefor. If the Company does not make principal or interest payments on the Debentures, the Trust will not have sufficient funds to make Distributions on the Par Securities, in which event the Guarantee shall not apply to such Distributions until the Trust has sufficient funds available therefor. The Company's obligations under the Guarantee, taken together with its obligations under the Debentures and the Indenture, including its obligation to pay all costs, expenses and liabilities of the Trust (other than with respect to the Par Securities), constitute a full and unconditional guarantee of all of the Trust's obligations under the Par Securities. See "Description of Guarantee" and "Relationship Among the Par Securities, the Debentures and the Guarantee." RANKING............... Until the Remarketing Settlement Date, the Debentures and the Guarantee will be general unsecured obligations of the Company ranking on a parity with all Indebtedness of the Company, if any, that is not subordinated to the Debentures or Guarantee and senior to any Indebtedness of the Company that is subordinated to the Debentures or Guarantee. Until the Remarketing Settlement Date, when the Subsidiary Guarantees will be released, the Subsidiary Guarantees will rank on a parity with all Indebtedness of the Subsidiary Guarantors, if any, that is not subordinated to the Subsidiary Guarantees and senior to any Indebtedness of the Subsidiary Guarantors that is subordinated to the Subsidiary Guarantees. Until the Remarketing Settlement Date, the Debentures and the Guarantees will be effectively subordinated to all Indebtedness and other liabilities of SPTL and the Special Purpose Subsidiaries, and the Debentures, the Guarantee and the Subsidiary Guarantees will be effectively subordinated to secured Indebtedness of the Company and the Subsidiary Guarantors. As of March 31, 1997, on a pro forma basis after giving effect to the Offering and the application of proceeds thereof, the Debentures and the Guarantee would have been effectively subordinated to approximately $1.3 billion of deposits and other borrowings at SPTL and the Debentures, the Guarantee and the Subsidiary Guarantees would have been effectively subordinated to approximately $304.9 million of secured Indebtedness of the Subsidiary Guarantors. After the Remarketing Settlement Date, the Debentures and the Guarantee will be subordinated and junior in right of payment to all Senior Debt (as defined) of the Company, will be effectively subordinated to secured Indebtedness of the Company and will be effectively subordinated to all Indebtedness and other liabilities of all of the Subsidiaries of the Company. As of March 31, 1997, on a pro forma basis after giving effect to the Offering and the application of proceeds thereof, and the Remarketing, the Debentures and the Guarantee would have been subordinated to approximately $220.2 million of Senior Debt of the Company, and would have been effectively subordinated to approximately $1.6 billion of Indebtedness of the Company's Subsidiaries (including approximately $1.3 billion of deposits and other borrowings at SPTL and approximately $304.9 million of secured Indebtedness of the Company's subsidiaries but not including the Trust's guarantee of $200.0 million of the 9 7/8% Senior Notes). See "Risk Factors--Ranking of Obligations under the Debentures, the Guarantee and the 9 Subsidiary Guarantees." "Description of Debentures-- Ranking" and "Description of Guarantee--Status of Guarantee." REMARKETING......... On the Scheduled Remarketing Date, Lehman Brothers Inc. (the "Remarketing Agent") will use commercially reasonable efforts to remarket, at a price equal to 100% of the liquidation amount thereof, Par Securities (or, if the Debentures have been distributed to holders of the Par Securities in liquidation of the Trust, Debentures) which holders of the Par Securities have tendered or have been deemed to have tendered for purchase in the Remarketing. In the Remarketing, the Remarketing Agent will determine, after canvassing the market and considering prevailing market conditions at the time for the Par Securities and similar securities, the lowest distribution rate per annum, if any, on the Par Securities, not exceeding the Maximum Adjusted Distribution Rate (as defined herein), that will enable it to remarket, at a price of $1,000 per Par Security, all Par Securities tendered or deemed tendered for purchase in the Remarketing (the "Adjusted Distribution Rate"). Notwithstanding the foregoing, if the Remarketing Agent is able to market some, but is unable to remarket all, of the Par Securities tendered or deemed tendered for purchase in the Remarketing, the Adjusted Distribution Rate will be the highest rate, not exceeding the Maximum Adjusted Distribution Rate, required to remarket the Par Securities sold in the Remarketing. See "Description of Par Securities-- Remarketing." Each holder of Par Securities will be given the opportunity to indicate irrevocably, no later than the second Business Day prior to the Scheduled Remarketing Date (the "Election Date"), whether it wishes (i) to tender all or any portion of such Par Securities for purchase in the Remarketing or (ii) to retain and not have all or any portion of the Par Securities owned by it remarketed in the Remarketing. IF ANY HOLDER OF PAR SECURITIES FAILS TIMELY TO DELIVER A NOTICE OF ELECTION (AS DEFINED HEREIN), THE PAR SECURITIES OWNED BY IT WILL BE DEEMED TO BE TENDERED FOR PURCHASE IN THE REMARKETING. See "Description of Securities-- Remarketing." If a holder of Par Securities has indicated by timely delivery of a Notice of Election that it wishes to tender Par Securities held by it for purchase in the Remarketing and such holder desires to purchase Par Securities in the Remarketing at or above a specified rate, such holder should separately notify the Remarketing Agent in accordance with the procedures specified in the Notice of Remarketing and indicate the specified rate per annum at or above which such holder will purchase Par Securities. In such case, the Remarketing Agent will give priority to such holder's purchase of a number of Par Securities equal to the number of Par Securities tendered by such holder in the Remarketing, provided that the Adjusted Distribution Rate is not less than the specified rate. If, by 4:00 P.M., New York City time, on any Scheduled Remarketing Date, the Remarketing Agent is unable to remarket, at a price of $1,000 per Par Security, all of the Par Securities tendered or deemed tendered for purchase in the Remarketing on such Scheduled Remarketing Date, then such unsold Par Securities will be exchanged on the related Scheduled Remarketing Settlement Date with the Trust for Debentures having an aggregate principal amount equal to the aggregate liquidation amount of such unsold Par Securities and such Debentures shall be immediately redeemed, unless as a result of such redemption, less than $25.0 million principal amount of Debentures would remain outstanding. In such latter event, the Company is required to redeem on such Scheduled Remarketing 10 Settlement Date all of the Debentures and the consummation of purchases and sales of Par Securities pursuant to such Remarketing will not occur. In either such case, the redemption price of the Debentures will be 100% of the principal amount of the Debentures so redeemed. AS A RESULT OF SUCH SPECIAL MANDATORY REDEMPTION, ALL PAR SECURITIES TENDERED OR DEEMED TENDERED FOR PURCHASE IN THE REMARKETING WILL BE PURCHASED IN THE REMARKETING, OR MANDATORILY REDEEMED, ON THE REMARKETING SETTLEMENT DATE. RIGHT TO DEFER INTEREST........... Following the Remarketing Settlement Date, the Company has the right to defer payment of interest on the Debentures by extending the interest payment period on the Debentures, from time to time, for up to 10 consecutive semi-annual periods. There could be multiple Extension Periods of varying lengths throughout the term of the Debentures. If interest payments on the Debentures are so deferred, distributions on the Par Securities will also be deferred for an equivalent period and the Company may not, and may not permit any subsidiary of the Company to, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, the Company's capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities that rank on a parity with or junior to the Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks on a parity with or junior to the Debentures (other than (a) dividends or distributions in common stock of the Company, (b) payments under the Guarantee, (c) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (d) purchases of common stock related to the issuance of common stock or rights under any of the Company's benefit plans). During an Extension Period, interest on the Debentures will continue to accrue (and the amount of Distributions to which holders of the Par Securities are entitled will accumulate) at the Adjusted Distribution Rate, compounded semi-annually. During an Extension Period, holders of Par Securities will be required to include the stated interest on their pro rata share of Debentures in their gross income as original issue discount ("OID") even though the cash payments attributable thereto have not been made. See "Description of Debentures--Option to Extend Interest Payment Period" and "Certain United States Federal Income Tax Consequences--Interest Income and Original Issue Discount." REDEMPTION.......... The Trust Securities will be redeemed upon repayment of the Debentures held by the Trust at maturity or their earlier redemption. The Debentures are redeemable at the option of the Company, in whole or in part, at any time or from time to time prior to June 15, 2001, at a redemption price equal to the greater of (i) 100% of the principal amount of such Debentures and (ii) the present value of the principal amount of such Debentures as if redeemed on June 14, 2002, together with scheduled prepayments of interest from the prepayment date to but excluding June 14, 2002, discounted at the Adjusted Treasury Rate, plus, in each case, accrued and unpaid interest, if any, to the date of redemption. On and after June 15, 2012, the Debentures are redeemable by the Company, in whole or in part, at a redemption price equal to 100% of the aggregate principal amount thereof plus a premium which will decline ratably on each June 15 thereafter to zero on and after June 15, 2022, plus accrued and unpaid interest, if any, to the date of redemption. In 11 addition, the Debentures are redeemable at the option of the Company at any time after the Remarketing Settlement Date, in whole, upon the occurrence and continuation of a Special Event, as described under "--Special Event" below, at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the date of redemption. If all Par Securities tendered or deemed tendered in the Remarketing are not remarketed at a price of $1,000 per Par Security, Debentures (and, thus, Par Securities) are subject to redemption as part of a Special Mandatory Redemption. As a result, investors who do not validly elect to hold the Par Securities following the Remarketing Settlement Date are entitled to receive, on the Remarketing Settlement Date, an amount equal to 100% of the liquidation amount of such Par Securities. If the Exchange Offer has occurred, any Par Securities which have not been exchanged for New Par Securities pursuant to such Exchange Offer must be redeemed by the Company on the Remarketing Settlement Date, as described under "Description of Securities--Redemption--Transfer Restricted Security Redemption" and "--Registration Rights." SPECIAL EVENT....... Upon the occurrence and continuation of a Special Event (including a Tax Event), the Company will have the right, if certain conditions are met, (i) to terminate the Trust and cause the Debentures to be distributed to the holders of the Trust Securities in exchange therefor upon liquidation of the Trust, (ii) to shorten the stated maturity of the Debentures, in the case of a Tax Event, to a date not earlier than June 14, 2012, or (iii) after the Scheduled Remarketing Date, to redeem the Debentures in whole (but not in part) within 90 days following the occurrence of such Special Event and thereby cause a mandatory redemption of the Trust Securities. See "Description of Securities--Redemption-- Special Event Redemption or Distribution of Debentures; Shortening of Stated Maturity." Moreover, the Debentures are redeemable on the Remarketing Settlement Date in connection with a Tax Opinion Redemption. See "Description of Securities--Redemption--Tax Opinion Redemption." LIQUIDATION OF THE TRUST.............. In the event of the liquidation of the Trust, after satisfaction of the claims of creditors of the Trust, if any, as provided by applicable law, the holders of the Trust Securities will be entitled to receive a liquidation amount of $1,000 per Trust Security plus accumulated and unpaid Distributions thereon to the date of payment, which may be in the form of a distribution of such amount in Debentures as described above. If such liquidation amount can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate liquidation amount, then the amounts payable directly by the Trust on the Trust Securities shall be paid on a pro rata basis. The holder of the Common Securities will be entitled to receive distributions upon any such liquidation pro rata with the holders of the Par Securities, except that if an Indenture Event of Default has occurred and is continuing, the Par Securities shall have a priority over the Common Securities. See "Description of Securities--Liquidation Distribution Upon Dissolution." 12 An explanation of the significance of ratings may be obtained from S&P and Moody's. Generally, rating agencies base their ratings on such material and information, and such of their own investigations, studies and assumptions, as they deem appropriate. A credit rating of a security is not a recommendation to buy, sell or hold securities. There is no assurance that any rating will apply for any given period of time or that a rating may not be adjusted or withdrawn. ABSENCE OF MARKET FOR THE NEW PAR SECURITIES........... The New Par Securities will be a new issue of securities for which there currently is no established trading market. Accordingly, there can be no assurance as to the development or liquidity of any market for the New Par Securities. The Company currently is obligated to apply for listing of the New Par Securities, upon request of the holders of a majority in aggregate liquidation amount of the New Par Securities, provided that the New Par Securities qualify for listing. ---------------- FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE PAR SECURITIES, SEE "RISK FACTORS" BEGINNING ON PAGE . 13 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA The following table sets forth summary historical and unaudited pro forma consolidated financial and other data for the periods indicated. The following summary historical balance sheet data and income statement data are derived from the consolidated financial statements of the Company as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996, which have been audited by KPMG Peat Marwick LLP, independent auditors. The report of KPMG Peat Marwick LLP covering the December 31, 1996 consolidated financial statements contains an explanatory paragraph regarding the adoption of Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights" ("SFAS 122") in 1995. This data should be read in conjunction with the consolidated financial statements and related notes for these periods and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The selected consolidated balance sheet data as of December 31, 1994, 1993 and 1992 and the income statement data for the years ended December 31, 1993 and 1992 are derived from audited consolidated financial statements of the Company, which have been audited by KPMG Peat Marwick LLP, but are not included in this Prospectus. The balance sheet data as of March 31, 1997, and income statement data for the three-month periods ended March 31, 1997 and 1996 have been derived from the unaudited consolidated financial statements of the Company and, in the opinion of management, include all adjustments (consisting of normal, recurring and other adjustments) necessary for a fair presentation of such information. The unaudited consolidated pro forma income statement data and other operating data for the three month period ended March 31, 1997 give effect to the application of the net proceeds of $67.3 million from the Offering and the acquisition by the Company of all of the capital stock of AMN as if they had occurred at the beginning of such period (the "Pro Forma Transactions"). The unaudited consolidated pro forma balance sheet data gives effect to the Offering as if it had occurred on March 31, 1997. The pro forma consolidated financial data are unaudited and do not purport to represent what the Company's financial position or results of operations would actually have been if the Pro Forma Transactions, as applicable, had occurred on the dates specified and do not project the Company's financial position or results of operations for any future periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------------------ ----------------------------------------------------------- PRO FORMA 1997(1) 1997 1996 1996 1995 1994 1993 1992 --------- --------- --------- --------- ---------- --------- ---------- -------- (IN THOUSANDS) INCOME STATEMENT DATA: Gain on sale of loans and leases............ $8,758 $ 8,666 $ 21,711 $ 88,156 $ 39,557 $ 8,628 $ 18,149 $ 20,606 Net interest income after provision for loan losses....... 15,499 17,938 11,237 62,662 28,304 15,959 21,423 13,264 Gains on sale of SPFC stock................. 4,306 4,306 -- 82,690 -- -- -- -- Equity in net income of SPFC.................. 6,253 6,253 -- -- -- -- -- -- Other income........... 3,878 3,132 11,277 23,425 17,448 48,217 31,854 13,222 ------ --------- --------- --------- ---------- --------- ---------- -------- Total revenue........ 38,694 40,295 44,225 256,933 85,309 72,804 71,426 47,092 Personnel expense...... 12,849 10,671 12,435 48,355 34,053 33,477 24,520 15,678 Other expenses......... 12,662 10,463 14,733 50,649 27,127 28,037 15,433 8,190 ------ --------- --------- --------- ---------- --------- ---------- -------- Total expenses....... 25,511 21,134 27,168 99,049 61,180 61,514 39,953 23,868 ------ --------- --------- --------- ---------- --------- ---------- -------- Income before income taxes............... 13,183 19,161 17,057 157,884 24,129 11,290 31,473 23,224 Income taxes........... 5,587 7,976 6,901 69,874 10,144 4,685 13,055 9,583 Minority interest in income (loss) of consolidated subsidiaries.......... 153 153 1,540 12,026 (208) -- -- -- ------ --------- --------- --------- ---------- --------- ---------- -------- Income before extraordinary item.. 7,443 11,032 8,616 75,984 14,193 6,605 18,418 13,641 Extraordinary item- repurchase of 9 3/4% Senior Notes due 2004, net of income taxes... (3,995) (3,995) -- -- -- 919 -- -- ------ --------- --------- --------- ---------- --------- ---------- -------- Net income............. $3,448 $ 7,037 $ 8,616 $ 75,984 $ 14,193 $ 7,524 $ 18,418 $ 13,641 ====== ========= ========= ========= ========== ========= ========== ======== CASH FLOW DATA: Net cash provided by (used in) operating activities............ $ 357,524 $ 284,377 $ 199,407 $ (668,666) $ 961,579 $ (903,050) $(78,865) Net cash (used in) provided by investing activities............ (45,968) 295,771 (51,117) (364,076) (796,638) (145,701) 21,302 Net cash (used in) provided by financing activities............ (356,710) (584,368) (113,209) 1,047,004 (177,314) 1,066,584 70,216 --------- --------- --------- ---------- --------- ---------- -------- Net change in cash... $ (45,154) $ (4,220) $ 35,081 $ 14,262 $ (12,373) $ 17,833 $ 12,653 ========= ========= ========= ========== ========= ========== ========
14
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ----------------------- ------------------------------------------ PRO FORMA 1997(1) 1997 1996 1996 1995 1994 1993 1992 --------- ----- ------ ------ ------ ------ ------ ------ (DOLLARS IN MILLIONS) OPERATING AND FINANCIAL DATA(2): Loans originated: ICII.................. $ -- $ -- $ 297 $ 310 $1,816 $4,260 $6,019 $3,383 SPTL.................. 96 96 66 531 724 NA(3) NA(3) NA(3) SPFC(4)............... -- -- 85 790 288 190 -- -- FMAC.................. 134 134 101 450 164 -- -- -- IBC................... 30 30 14 87 36 -- -- -- AMN................... 67 16 -- -- -- -- -- -- ----- ----- ------ ------ ------ ------ ------ ------ Total................ $ 327 $ 276 $563 $2,168 $3,028 $4,450 $6,019 $3,383 ===== ===== ====== ====== ====== ====== ====== ====== Loans securitized: ICII.................. $ -- $ -- $ -- $ -- $ 177 $ -- $ -- $ -- SPTL.................. -- -- -- 277 511 46 -- -- SPFC(4)............... -- -- 103 657 165 -- -- -- FMAC.................. -- -- -- 325 105 -- -- -- IBC................... 98 98 19 87 85 -- -- -- AMN................... -- -- -- -- -- -- -- -- ----- ----- ------ ------ ------ ------ ------ ------ Total................ $ 98 $ 98 $ 122 $1,346 $1,043 $ 46 $ -- $ -- ===== ===== ====== ====== ====== ====== ====== ====== Outstanding balance of loans and leases securitized (at the end of period)(5)..... $ 373 $ 373 $1,117 $2,118 $1,047 $ 45 $ -- $ -- SELECTED RATIOS: Ratio of earnings to fixed charges(6)...... 1.4x 1.7x 1.5x 2.2x 1.3x 1.2x 2.1x 2.2x Pre-tax interest coverage ratio(7)..... 3.1 5.2 8.4 17.0 3.9 2.4 -- -- Ratio of indebtedness to total capitalization (at end of period)(8)..... 53.9% 47.0% 46.1% 40.5% 46.1% 51.4% -- % -- % Average equity to average assets........ 12.02 12.45 3.78 7.27 4.72 4.86 6.71 7.71 Return on average common equity......... 5.66 11.55 39.86 45.55 17.59 10.57 31.76 37.75 Return on average assets................ 0.68 1.44 1.51 3.31 0.82 0.51 2.13 2.91 SPTL REGULATORY CAPITAL RATIOS (AT END OF PERIOD): California leverage limitation(9)......... 11.58% 11.58% 11.63% 13.50% 11.58% 11.50% 7.29% 8.73% Risk-based--Tier 1..... 8.57 8.57 8.83 9.71 11.72 14.21 10.27 14.94 Risk-based--Total...... 12.13 12.13 9.91 10.87 13.18 15.13 10.73 15.74 FDIC Leverage Ratio.... 8.61 8.61 8.02 9.35 8.04 8.08 9.47 8.78 ASSET QUALITY RATIOS (AT END OF PERIOD): Non-performing assets as a percentage of total assets.......... 3.08% 3.19% 2.32% 2.64% 1.55% 1.16% 0.64% 0.79% Allowance for loan losses as a percentage of non- performing loans...... 44.47 44.47 34.63 38.94 44.30 53.83 65.91 79.10 Net charge-offs as a percentage of average total loans held for investment............ 0.67 0.67 0.90 0.94 0.36 0.23 0.89 0.18
15
AT MARCH 31, AT DECEMBER 31, --------------------- ---------------------------------------------------- PRO FORMA 1997(1) 1997 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash................... $ 96,418 $ 29,093 $ 74,247 $ 39,166 $ 24,904 $ 37,277 $ 19,444 Interest bearing deposits.............. 88,670 88,670 3,369 267,776 10,600 90,000 30,000 Loans held for sale ... 700,110 700,110 940,096 1,341,810 263,807 1,238,006 328,575 Loans held for investment, net....... 1,013,359 1,013,359 1,068,599 668,771 1,029,556 154,595 84,843 Securitization related assets................ 33,000 33,000 159,707 58,272 4,558 529 982 Total assets........... 2,166,241 2,096,241 2,470,639 2,510,635 1,420,409 1,572,663 479,430 Deposits............... $1,161,357 $1,161,357 $1,069,184 $1,092,989 $ 934,621 $1,001,468 $422,551 Borrowings from FHLB... 79,500 79,500 140,500 190,000 295,000 320,000 -- Other borrowings....... 304,902 304,902 694,352 987,810 -- 147,611 -- Senior notes(10)....... 219,782 219,782 88,209 80,472 80,344 -- -- Debentures(11)......... 70,000 -- -- -- -- -- -- Total liabilities...... 1,918,600 1,848,600 2,231,131 2,416,533 1,344,536 1,504,411 429,652 Shareholders' equity... 247,641 247,641 239,508 94,102 75,873 68,253 49,778
- -------- (1) Income statement and related data and ratios for the three months ended March 31, 1997 reflect the Pro Forma Transactions and balance sheet and related data and ratios reflect the Offering as of March 31, 1997 as follows: (a) The sale of the Debentures generated estimated net proceeds of $67.3 million. As a result, cash and total assets were increased by $67.3 million and $70.0 million, respectively, and the Debentures and total liabilities were increased by $70.0 million. (b) The acquisition of AMN and the issuance of the Debentures are reflected as if they occurred on January 1, 1997. Interest expense was increased on a pro forma basis by $1.8 million reflecting interest on the Debentures at 10.25%. Results of operations for AMN are reflected for the period from January 1 to March 31, 1997. Earnings on investment of the proceeds of the issuance of the Debentures have not been included. Assuming such proceeds had been invested at 5% at January 1, 1997, pro forma income for the three months ended March 31, 1997 before extraordinary item would have been $7.9 million. (2) Does not include loans originated or securitized by ICIFC. Commencing with the three months ended March 31, 1997, the financial statements of ICIFC are no longer consolidated with those of ICII. (3) Information not available. (4) Commencing with the three months ended March 31, 1997, the financial statements of SPFC are no longer consolidated with those of ICII. (5) Represents outstanding balance of loans and leases securitized, excluding loans held for sale and investment. (6) For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes and extraordinary item, plus fixed charges. Fixed charges represent interest expense on all indebtedness and the interest factor of rent expense estimated to be one- third of occupancy expense. (7) Ratio of (i) the sum of income before income taxes and extraordinary item plus interest expense on non-funding indebtedness to (ii) interest expense on non-funding indebtedness. (8) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness plus total shareholders' equity. (9) Ratio of (i) SPTL's total shareholders' equity to (ii) total deposits. (10) At March 31, 1997, represents $200.0 million of the 9 7/8% Senior Notes and approximately $20.2 million of the 9 3/4% Senior Notes not tendered pursuant to the Tender Offer , net of discount of $392,000 related to the 9 3/4% Senior Notes. (11) Represents Guaranteed Preferred Beneficial Interests in the Debentures. 16 RISK FACTORS Prospective purchasers of the Par Securities should carefully review the information contained elsewhere in this Prospectus and should particularly consider the following matters. To the extent any of the information contained in this Prospectus constitutes a "forward-looking statement" as defined in Section 27A(i)(1) of the Securities Act, the risk factors set forth below are cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement. See "Special Note Regarding Forward-Looking Statements." SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE OUTSTANDING INDEBTEDNESS The Company is highly leveraged. At March 31, 1997, on a pro forma basis after giving effect to the Offering, the Company's total Indebtedness (excluding deposits and borrowings at SPTL) was $595.1 million and its total shareholders' equity was $247.6 million. The Company's ability to make scheduled payments of the principal of, or to pay the interest on, or to refinance its Indebtedness (including the Debentures) will depend upon its future performance which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. Management believes that, based on current levels of operations, cash flows from operations and available borrowings will enable the Company to fund its liquidity and capital expenditure requirements for the foreseeable future, including scheduled payments of interest on the Debentures and payments of interest and principal on the Company's other Indebtedness. There can be no assurance, however, that the Company's business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable the Company to service its Indebtedness, including the Debentures, or to make anticipated capital expenditures. It may be necessary for the Company to refinance all or a portion of the principal of the Debentures on or prior to maturity, under certain circumstances, but there can be no assurance that the Company will be able to effect such refinancing on commercially reasonable terms or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The degree to which the Company is leveraged could have material adverse effects on the Company and the holders of Debentures, including, but not limited to, the following: (i) the Company's ability to obtain additional financing in the future for acquisitions, working capital, capital expenditures, and general corporate or other purposes may be impaired, (ii) a substantial portion of the Company's cash flow from operations will be dedicated to debt service and will be unavailable for other purposes, (iii) certain of the Company's borrowings may be at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates and (iv) the Company will be subject to a variety of restrictive covenants, the failure to comply with which could result in events of default that, if not cured or waived, could restrict the Company's ability to make payments of principal of, and interest and Additional Interest (as defined herein), if any, on the Debentures. See "Business--Funding and Securitizations" and "Description of Debentures." DIVERSIFICATION STRATEGY Beginning in 1995, the Company diversified away from the conforming residential mortgage lending business, the Company's traditional focus, and expanded into other commercial and consumer finance lending businesses. In connection with the Company's diversification strategy, the Company sold substantially all of its conforming residential mortgage loan origination business. In addition, the Company sold or subcontracted out substantially all of the servicing with respect to such loans. The Company significantly expanded several existing businesses and commenced several new businesses, including equipment leasing, non-conforming residential mortgage lending, franchise lending, asset-based commercial lending and loan participations. Furthermore, in March 1997, the Company reduced its percentage ownership of SPFC, its former non-conforming residential mortgage subsidiary, to 49.4% as of March 31, 1997. Prior to the expansion and commencement of these new businesses, the Company had little or no experience in operating certain of such businesses. Although the Company believes that these new and expanded businesses are currently managed by individuals who have 17 significant experience in the applicable areas, there can be no assurance that the Company's efforts to develop as a diversified commercial and consumer finance company will prove successful or that it can manage these new and expanded businesses successfully. DEPENDENCE ON KEY PERSONNEL The success of the Company's business is highly dependent upon the members of the senior management of the Company. The loss of the services of one or more of them could have a material adverse effect upon the Company's business and development. In addition, the Company conducts its business through a number of subsidiary companies operated by individual management teams. In each subsidiary, there are key personnel, the loss of whom may have a temporary adverse effect on that subsidiary. The Company believes that its ability to successfully manage the growth of its subsidiaries as well as the Company itself is due in part to its proven ability to retain and attract highly skilled and qualified personnel. Although the Company has established incentive compensation plans and entered into employment agreements to retain key executives, no assurances can be made that key personnel will not depart, or that their departure would not have adverse consequences to the operations of the Company or any of its subsidiaries. VOLATILITY OF SECURITIZATION RELATED ASSETS As a fundamental part of its business and financing strategy, the Company sells substantially all of its loans and leases, except loans held for investment by SPTL, through securitization. In a securitization, the Company sells loans or leases that it has originated or purchased to a trust or special purpose entity for a cash purchase price and an interest in the loans or leases securitized. The cash price is raised through an offering of pass- through certificates by the trust or special purpose entity. Following the securitization, the purchasers of the pass-through certificates receive the principal collected and the investor pass-through interest rate on the principal balance of the loans or leases, while the Company receives the excess cash flows generated by the securitized assets. The interests representing the excess cash flows are classified either as trading securities or retained interest in loan and lease securitizations. Each loan or lease securitization has specific overcollateralization requirements which must be met before the Company receives cash flows due. As the securitized assets produce excess cash flows, they are initially used to pay down the balance of the pass-through certificates until such time as the ratio of securitized assets to pass-through certificates reaches the overcollateralization requirement specified in each securitization. This overcollateralization amount is carried on the balance sheet as retained interest in loan and lease securitizations. After the overcollateralization requirement and the other requirements specified in the pooling and servicing agreement have been met, the Company receives the remaining excess cash flows and a portion of the retained interest on a monthly basis. The Company's securitization related assets and trading securities currently include interest-only securities and overcollateralization amounts and may in the future include principal-only and subordinated securities. Realization of these securitization related assets and trading securities in cash is subject to the timing and ultimate realization of cash flows associated therewith, which is in turn effected by the prepayment and loss characteristics of the underlying loans and leases. The Company estimates future cash flows from these securitization related assets and trading securities and values such securities utilizing assumptions that it believes are consistent with those that would be utilized by an unaffiliated third party purchaser. If actual experience differs from the assumptions used in the determination of the asset value, future cash flows and earnings could be negatively impacted, and the Company could be required to reduce the value of its securitization related assets and trading securities. The value of such securities can therefore fluctuate widely and may be extremely sensitive to changes in discount rates, projected mortgage loan prepayments and loss assumptions. To the Company's knowledge, the market for the sale of the securitization related assets and trading securities is limited. No assurance can be given that securitization related assets and trading securities could be sold at their reported value, if at all. 18 LIQUIDITY NEEDS AND DEPENDENCE ON SECURITIZATION AND WAREHOUSE FACILITIES TO FINANCE LENDING ACTIVITIES The Company has an ongoing need for capital to finance its lending activities. This need is expected to increase as the volume of the Company's loan and lease originations and acquisitions increases. The Company's primary cash requirements include the funding of (i) loan and lease originations and acquisitions pending their pooling and sale, (ii) points and expenses paid in connection with the acquisition of wholesale loans, (iii) fees and expenses incurred in connection with its securitization programs, (iv) overcollateralization or reserve account requirements in connection with loans and leases pooled and securitized, (v) ongoing administrative and other operating expenses and (vi) the costs of the Company's warehouse credit and repurchase facilities with certain financial institutions. The Company has financed its activities through warehouse lines of credit and repurchase facilities from financial institutions, equity and debt offerings in the capital markets, deposits or borrowings at SPTL and securitizations. The Company believes that such sources, together with the net proceeds of the Offering, will be sufficient to fund the Company's liquidity requirements for the foreseeable future. The Company currently pools and sells through securitization substantially all of the loans or leases which it originates or purchases, other than loans held by SPTL for investment. Accordingly, adverse changes in the securitization market could impair the Company's ability to originate, purchase and sell loans or leases on a favorable or timely basis. Any such impairment could have a material adverse effect upon the Company's business and results of operations. In addition, the securitization market for many types of assets is relatively undeveloped and may be more susceptible to market fluctuations or other adverse changes than more developed capital markets. Finally, any delay in the securitization of a loan or lease pool could cause the Company's earnings to fluctuate from quarter to quarter. In a securitization, the Company recognizes a gain on sale of the loans or leases securitized upon the closing of the securitization but does not receive the cash representing such gain until it receives the excess cash flows which are payable over the actual life of the loans or leases securitized. As a result, such transactions may not generate cash flows to the Company for an extended period. In addition, in order to gain access to the secondary market for loans and leases, the Company has historically relied on monoline insurance companies to provide guarantees on outstanding senior interests in the special purpose entities to which such loans and leases are sold to enable it to obtain investment grade ratings for such interests. In addition, the Company also relies on overcollateralization to support outstanding senior interests. However, any unwillingness of the monoline insurance companies to guarantee the senior interests in the Company's loan or lease pools could have a material adverse effect on the Company's financial position and results of operations. The Company is dependent upon its ability to access warehouse credit and repurchase facilities in addition to its ability to continue to pool and sell loans and leases in the secondary market, in order to fund new originations and purchases. The Company has warehouse lines of credit and repurchase facilities under which it had available an aggregate of approximately $500.0 million in financing at March 31, 1997. See "Business--Other Activities." These credit and repurchase facilities expire between April 10, 1997 and December 31, 1997. The Company expects to be able to maintain existing warehouse lines of credit and repurchase facilities (or to obtain replacement or additional financing) as current arrangements expire or become fully utilized; however, there can be no assurance that such financing will be obtainable on favorable terms. To the extent that the Company is unable to arrange new warehouse lines of credit and repurchase facilities, the Company may have to curtail its loan origination and purchasing activities, which could have a material adverse effect on the Company's operations and financial position. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 19 ECONOMIC CONDITIONS General The risks associated with the Company's businesses become more acute in any economic slowdown or recession. Periods of economic slowdown or recession may be accompanied by decreased demand for consumer and commercial credit and declining real estate and other asset values. In the secured lending business, any material decline in collateral values increases the loan-to-value ratios of loans previously made and leases previously entered into by the Company, thereby weakening collateral coverage and increasing the possibility of a loss in the event of a default. Delinquencies, foreclosures and losses generally increase during economic slowdowns or recessions. In addition, in an economic slowdown or recession, the Company's servicing costs will increase. Any sustained period of increased delinquencies, foreclosures, losses or increased costs could adversely affect the Company's ability to sell loans or leases through securitization and could increase the cost of selling loans or leases through securitization, which in either case could adversely affect the Company's financial condition and results of operations. Interest Rates The Company's profitability may be directly affected by the level of and fluctuations in interest rates because they affect the Company's ability to earn a spread between interest received on its loans and leases and the costs of its liabilities. While the Company monitors the interest rate environment and employs a hedging strategy designed to reduce the impact of changes in interest rates, there can be no assurance that the profitability of the Company would not be adversely affected during any period of changes in interest rates. In addition, an increase in interest rates may decrease the demand for consumer or commercial credit. A substantial and sustained increase in interest rates could adversely affect the Company's ability to purchase or originate loans or leases, reduce the average size of loans and leases underwritten by the Company and reduce the gains recognized by the Company upon their securitization and sale. A significant decline in interest rates could decrease the size of the Company's securitized loan and lease portfolio by increasing the level of loan and lease prepayments which shortens the average life and impairs the value of the securitization related assets. Fluctuating interest rates also may affect the net income earned by the Company resulting from the difference between the yield to the Company on loans and leases held pending sale and funds borrowed by the Company to finance the origination or purchase of such loans and leases. In addition, inverse or flattened interest yield curves could have an adverse impact on the profitability of the Company because the loans or leases pooled and sold by the Company are priced based on longer-term interest rates as compared to the senior interests in the related trusts. To reduce risks associated with its originations and purchases of loans and leases, the Company may enter into transactions designed to hedge interest rate risks, including buying and selling of futures and forwards. The nature and quantity of the hedging transactions is determined by management based on various factors, including market conditions and the expected volume of mortgage loan and equipment lease originations and purchases. No assurance can be given that such hedging transactions will offset the risks of changes in interest rates, and it is possible that there will be periods during which the Company could incur losses after accounting for or resulting from its hedging activities. CONTINGENT RISKS Although the Company sells a majority of the loans and leases which it originates or purchases (other than those held for investment by SPTL), the Company retains some degree of risk on substantially all loans and leases sold. During the period of time that loans or leases are held pending sale or securitization, the Company is subject to various risks associated with the lending business, including the risk of borrower default, the risk of foreclosure and the risk that an increase in interest rates would result in a decline in the value of such loans or leases. The documents governing the Company's securitization programs generally require (i) the Company to establish deposit accounts or (ii) the related trust or special purpose entity to build overcollateralization levels by retaining excess cash flows or applying excess cash flows to reduce the principal balances of the senior interests 20 issued by the trust or special purpose entity. These actions serve as credit enhancement for the related trust or special purpose entity and are therefore available to fund losses realized on loans or leases held by such trust or special purpose entity. At March 31, 1997 and December 31, 1996, credit enhancement amounts provided by the Company (in the form of deposit accounts and overcollateralization levels) aggregated approximately $33.0 million and $49.5 million, respectively. The Company is subject to the risks of default and foreclosure following the sale of the loans or leases sold through securitizations. In addition, documents governing the Company's securitization programs require the Company to commit to repurchase or replace loans or leases which do not conform to the representations and warranties made by the Company at the time of the sale. When borrowers are delinquent in making monthly payments on loans or leases included in a trust or special purpose entity and serviced by the Company, the servicer is required to advance interest and principal payments with respect to such delinquent loans or leases. The Company may be required to fund such advances from the Company's available capital resources, but such advances will have priority of repayment from the succeeding month's payments. CREDIT-IMPAIRED BORROWERS In the Company's sub-prime lending businesses, such as AMN's sub-prime auto loan business and certain of the Company's other businesses, the Company markets some of its loan products specifically to credit-impaired borrowers. Loans made to such borrowers may entail a higher risk of delinquency and higher losses than loans made to more creditworthy borrowers. While the Company believes that its underwriting policies and collection methods enable it to control the higher risks inherent in loans made to credit-impaired borrowers, no assurance can be given that such criteria or methods will afford adequate protection against such risks. In the event that loans originated or acquired by the Company, as the case may be, (whether held for investment or serviced for others) experience higher delinquencies, foreclosures or losses than anticipated, the Company's financial condition or results of operations could be adversely affected. GOVERNMENT REGULATION The Company's operations are subject to regulation by federal, state and local government authorities, as well as to various laws and judicial and administrative decisions, that impose requirements and restrictions affecting, among other things, the Company's loan originations, credit activities, maximum interest rates, finance and other charges, disclosures to customers, the terms of secured transactions, collection, repossession and claims- handling procedures, multiple qualification and licensing requirements for doing business in various jurisdictions, and other trade practices. Except as set forth below, the Company believes that it is in compliance in all material respects with applicable local, state and federal laws, rules and regulations. There can be no assurance that more restrictive laws, rules or regulations will not be adopted in the future that could make compliance much more difficult or expensive, restrict the Company's ability to originate, purchase or sell loans or leases, further limit or restrict the amount of interest and other charges earned on loans originated or purchased by the Company, further limit or restrict the terms of loan or lease agreements, or otherwise adversely affect the business of the Company. In addition, changes in government sponsored loan programs could adversely affect the Company's business. SPTL, as a California chartered industrial loan company with deposits insured by the Bank Insurance Fund of the FDIC, is subject to extensive federal and state governmental supervision, regulation and control, including regulation by the FDIC and the Commissioner. Future legislation and government policy could adversely affect the thrift and loan industry, including SPTL. The full impact of such legislation and regulation cannot be predicted and future changes may alter the structure and competitive relationship among financial institutions. In addition, federal and state laws impose standards with respect to, and regulatory authorities have the power in certain circumstances to limit or prohibit, transactions between ICII and SPTL and between SPTL and any of ICII's other subsidiaries, the growth of SPTL's assets and liabilities and the payment of dividends from SPTL to ICII, among other things. SPTL is also required to maintain capital ratios in accordance with regulatory requirements. See "Business--Thrift and Loan Operations--Recent Legislation." 21 In January 1996, the California Department of Corporations and the FDIC conducted a joint examination of SPTL. As a result of such examination, SPTL entered into a joint memorandum of understanding with the FDIC and the California Department of Corporations. The memorandum of understanding requires certain measures to be taken in the areas of: (i) hiring and retention of management, (ii) adoption of systems to monitor and control risk, (iii) correction of certain violations of law, (iv) credit review and (v) enhancement of other operational policies. SPTL does not believe that this informal agreement has had or will have an adverse effect on the Company. In the event that SPTL fails to comply with the memorandum of understanding, SPTL could be subject to various enforcement actions, including cease and desist orders, criminal or civil penalties, removal of management and directors from office, termination of deposit insurance or the revocation of SPTL's charter. Any such enforcement action could have a material adverse effect on the Company. See "Business--Regulation." COMPETITION The businesses in which the Company operates are highly competitive. The Company faces significant competition from other commercial and consumer finance lenders, commercial banks, credit unions, thrift institutions and securities firms, among others. Many of these competitors are substantially larger and have more capital and other resources than the Company. Competition can take many forms, including convenience in obtaining a loan or lease, customer service, marketing and distribution channels and interest rates charged to borrowers. In addition, the current level of gains realized by the Company and its competitors on the sale of their loans and leases could attract additional competitors into these markets, with the possible effect of lowering gains that may be realized on the Company's future loan and lease sales. Wholesale originations are expected to remain a significant part of the Company's loan and lease production programs. As a wholesale purchaser of loans and leases, the Company is exposed to fluctuations in the volume and cost of wholesale loans and leases resulting from competition with other purchasers of such loans and leases, market conditions and other factors. ENVIRONMENTAL LIABILITIES In the course of its business, the Company has acquired, and may in the future acquire, real property securing loans that are in default. There is a risk that hazardous substances or waste, contaminants, pollutants or sources thereof could be discovered on such properties after acquisition by the Company. In such event, the Company might be required to remove such substances from the affected properties at its sole cost and expense. There can be no assurances that the cost of such removal would not substantially exceed the value of the affected properties or the loans secured by such properties or that the Company would have adequate remedies against the prior owners or other responsible parties, or that the Company would not find it difficult or impossible to sell the affected real properties either prior to or following any such removal. EFFECT OF SPFC'S OPERATIONS As of March 31, 1997, ICII owned 49.4% of SPFC's outstanding common stock. ICII's investment in SPFC, which is recorded on the Company's financial statements in "Investment in Southern Pacific Funding Corporation," accounted for 2.3% of the Company's total assets and contributed 15.5% to the Company's total revenue for the three months ended March 31, 1997. Of the net income or loss of SPFC, 49.4% is recognized on a pre-tax basis in the Company's financial statements. Any such recognized net loss may adversely affect the Company's ability to conduct future activities under the covenants of the Indenture and otherwise. As an originator of non-conforming residential mortgage loans, SPFC is or may be subject to many of the same risks set forth in "--Dependence on Key Personnel," "--Volatility of Securitization Related Assets," "--Liquidity Needs and Dependence on Securitization and Warehouse Facilities to Finance Lending Activities," "--Economic Conditions," "-- Contingent Risks," "--Credit Impaired Borrowers," "--Government Regulation," "--Competition" and "--Environmental Liabilities." In addition, SPFC is specifically subject to additional risks relating to the following: 22 Limited History of Independent Operations SPFC commenced operations in January 1993 as a division of SPTL and became an operating subsidiary of ICII in April 1995. Although SPFC has been profitable for each year since inception and has experienced substantial growth in mortgage loan originations and total revenues, there can be no assurance that SPFC will be profitable in the future or that these rates of growth will be sustainable or indicative of future results. Since inception in January 1993, SPFC's growth in originating and purchasing loans has been significant. In light of this growth, the historical financial performance of SPFC may be of limited relevance in predicting future performance. Also, the loans originated and purchased by SPFC and included in SPFC's securitizations have been outstanding for a relatively short period of time. As of March 31, 1997, SPFC's delinquency ratio (representing mortgage loans 30 days or more past due) was 7.6%, with total foreclosures of $36.5 million. Also, the mortgage loans related to the interest-only and residual certificates retained by SPTL which were not contributed to SPFC by the Company in connection with SPFC's initial public offering have generally had higher delinquency ratios than SPFC's delinquency ratios, even though such loans were generally underwritten to SPFC's underwriting standards. Consequently, the delinquency and loss experience of SPFC's loans to date may not be indicative of future results. It is unlikely that SPFC will be able to maintain delinquency and loan loss ratios at their present levels as SPFC's loan portfolio becomes more seasoned. Adjustable Rate Mortgage Loans SPFC originates adjustable rate residential mortgage loans ("ARMs"). Substantially all such ARMs include a "teaser" rate, i.e., an initial interest rate significantly below the fully-indexed interest rate at origination. Although these loans are underwritten at the fully-indexed rate at origination, credit-impaired borrowers may encounter financial difficulties as a result of increases in the interest rate over the life of the loan. Further, some non-conforming ARMs may be subject to periodic and lifetime payment caps that result in some portion of the interest accruing on such ARMs being deferred and added to the principal outstanding. This could result in receipt by SPFC of less cash income on its non-conforming ARMs than it is required to pay in interest on the related borrowings, which do not have such payment caps. Recent Expansion SPFC's operations have substantially expanded since inception and SPFC intends to continue to pursue a growth strategy for the forseeable future. There can be no assurance that SPFC will anticipate and respond effectively to all of the changing demands that its expanding operations will have on SPFC's management, information and operating systems and cash reserves and the failure of SPFC to meet challenges of any such expansion could have a material adverse effect on SPFC's results of operations and financial condition. There can be no assurance that SPFC will successfully achieve its planned expansion or, if achieved, that the expansion will result in profitable operations. Risks of Contracted Servicing SPFC currently contracts for the servicing of all loans it originates, purchases and holds for sale. As with any external service provider, SPFC is subject to risks associated with inadequate or untimely services. Many of SPFC's borrowers require notices and reminders to keep their loans current and to prevent delinquencies and foreclosures. A substantial increase in SPFC's delinquency rate or foreclosure rate could adversely affect its ability to access profitably the capital markets for its financing needs, including future securitizations. SPFC has no plans to establish and perform servicing operations at this time. If any contract servicer were to be terminated either by SPFC or by any outside third party in connection with a securitization, the change in servicing may result in greater delinquencies and losses on the related loans, which in turn would adversely impact the value of the interest- only and residual certificates held by SPFC in connection with any securitization. 23 FRAUDULENT CONVEYANCE Various fraudulent conveyance laws enacted for the protection of creditors may apply to the Subsidiary Guarantors' issuance of the Subsidiary Guarantees. To the extent that a court were to find that (x) a Subsidiary Guarantee was incurred by a Subsidiary Guarantor with intent to hinder, delay or defraud any present of future creditor or the Subsidiary Guarantor contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (y) a Subsidiary Guarantor did not receive fair consideration or reasonably equivalent value for issuing its Subsidiary Guarantee and such Subsidiary Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of the issuance of such Subsidiary Guarantee, (iii) was engaged or about to engage in a business or transaction for which the remaining assets of such Subsidiary Guarantor constituted unreasonably small capital to carry on its business or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, the court could avoid or subordinate such Subsidiary Guarantee in favor of the Subsidiary Guarantor's creditors. Among other things, a legal challenge of a Subsidiary Guarantee on fraudulent conveyance grounds may focus on the benefits, if any, realized by the Subsidiary Guarantor as a result of the Company's issuance of the Debentures. The Indenture contains a savings clause, which generally limits the obligations of each Subsidiary Guarantor under its Subsidiary Guarantee to the maximum amount as will, after giving effect to all of the liabilities of such Subsidiary Guarantor, result in such obligations not constituting a fraudulent conveyance. To the extent a Subsidiary Guaranty of any Subsidiary Guarantor was avoided or limited as a fraudulent conveyance or held unenforceable for any other reason, holders of the Debentures would cease to have any claim against such Subsidiary Guarantor and would be creditors solely of the Company and any Subsidiary Guarantor whose Subsidiary Guarantee was not avoided or held unenforceable. In such event, the claims of the holders of the Debentures against the issuer of an invalid Subsidiary Guarantee would be subject to the prior payment of all liabilities (including trade payables) of such Subsidiary Guarantor. There can be no assurance that, after providing for all prior claims, there would be sufficient assets to satisfy the claims of the holders of the Debentures relating to any avoided portions of any of the Subsidiary Guarantees. The measure of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any such proceeding. Generally, however, a Subsidiary Guarantor may be considered insolvent if the sum of its debts, including contingent liabilities, is greater than the fair marketable value of all of its assets at a fair valuation or if the present fair marketable value of its assets is less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature. Based upon financial and other information, the Company and the Subsidiary Guarantors believe that the Subsidiary Guarantees are being incurred for proper purposes and in good faith and that the Company and each Subsidiary Guarantor is solvent and will continue to be solvent after issuing its Subsidiary Guarantee, will have sufficient capital for carrying on its business after such issuance and will be able to pay its debts as they mature. There can be no assurance, however, that a court passing on such standards would agree with the Company. See "Description of Debentures--Subsidiary Guarantees." CHANGE OF CONTROL The Declaration provides that upon the occurrence of a Change of Control on or prior to the Remarketing Settlement Date, each holder of Par Securities will have the right to require the Trust to cause all or any part (equal to $1,000 liquidation amount or any integral multiple thereof) of the Par Securities to be exchanged for an equivalent principal amount of Debentures. Promptly thereafter, such Debentures will be repurchased by the Company pursuant to the Indenture (the "Change of Control Offer"), at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon to the date of purchase. See "Description of Securities--Change of Control." Certain future credit or other borrowing agreements may contain similar restrictions. The Company's ability to pay cash to the holders of Debentures upon a repurchase may prohibit the Company from purchasing any Debentures prior to their stated maturity and may provide that certain Change of Control events would constitute a default thereunder. See "Description of Debentures-- Certain Covenants of the Company." 24 If a Change of Control were to occur, it is unlikely that the Company would be able to both repurchase all of the Debentures and repay all of its obligations under other indebtedness that would become payable upon the occurrence of such Change of Control, unless it could obtain alternate financing. There can be no assurance that the Company would be able to obtain any such financing on commercially reasonable terms or at all, and consequently no assurance can be given that the Company would be able to purchase any of the Debentures issued in exchange for Securities tendered pursuant to a Change of Control Offer. ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF SECURITIES If a Trust Enforcement Event (as defined herein) occurs and is continuing, then the holders of Par Securities would rely on, and in certain circumstances could cause, the enforcement by the Property Trustee (as defined herein) of its rights as a holder of the Debentures against the Company. In addition, the holders of a majority in liquidation amount of the Par Securities will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee or to direct the exercise of any trust or power conferred upon the Property Trustee under the Declaration, including the right to direct the Property Trustee to exercise the remedies available to it as a holder of the Debentures. If the Property Trustee fails to enforce its rights with respect to the Debentures held by the Trust, any holder of Par Securities may institute legal proceedings directly against the Company to enforce the Property Trustee's rights under such Debentures without first instituting any legal proceedings against such Property Trustee or any other person or entity. If the Company were to default on its obligation to pay amounts payable under the Debentures, the Trust would lack funds for the payment of Distributions or amounts payable on redemption of the Par Securities or otherwise, and, in such event, holders of the Par Securities would not be able to rely upon the Guarantee for payment of such amounts. However, in the event the Company failed to pay interest on or principal of the Debentures on the payment date on which such payment is due and payable, then a holder of Par Securities may directly institute a proceeding against the Company for enforcement of payment to such holder of the interest or Additional Interest on, premium, if any, or principal of such Debentures having a principal amount equal to the aggregate liquidation amount of the Par Securities of such holder (a "Direct Action"). In connection with such Direct Action, the Company will be subrogated to the rights of such holder of Par Securities under the Declaration to the extent of any payment made by the Company to such holder of Securities in such Direct Action. Except as set forth herein, holders of Par Securities will not be able to exercise directly any other remedy available to the holders of Debentures or assert directly any other rights in respect of the Debentures. See "Description of Securities--Trust Enforcement Events," "Description of Guarantee" and "Description of Debentures--Indenture Events of Default." The Declaration provides that each holder of Par Securities by acceptance thereof agrees to the provisions of the Guarantee and the Indenture. RANKING OF OBLIGATIONS UNDER THE DEBENTURES, THE GUARANTEE AND THE SUBSIDIARY GUARANTEES Until the Remarketing Settlement Date, the Debentures and the Guarantee will be general unsecured obligations of the Company ranking on a parity with all Indebtedness of the Company, if any, that is not subordinated to the Debentures or Guarantee and senior to any Indebtedness of the Company that is subordinated to the Debentures or Guarantee. Until the Remarketing Settlement Date, when the Subsidiary Guarantees will be released, the Subsidiary Guarantees will rank on a parity with all Indebtedness of the Subsidiary Guarantors, if any, that is not subordinated to the Subsidiary Guarantees, and senior to any Indebtedness of the Subsidiary Guarantors that is subordinated to the Subsidiary Guarantees. Until the Remarketing Settlement Date, the Debentures and the Guarantee will be effectively subordinated to all Indebtedness and other liabilities of SPTL and the Special Purpose Subsidiaries, and the Debentures, the Guarantee and the Subsidiary Guarantees will be effectively subordinated to secured Indebtedness of the Company and the Subsidiary Guarantors. As of March 31, 1997, on a pro forma basis after giving effect to the Offering and the application of proceeds thereof, the Debentures and Guarantee would have been effectively subordinated to approximately $1.3 billion of deposits and other borrowings at SPTL and the Debentures, Guarantee and Subsidiary Guarantees would have been effectively subordinated to approximately $304.9 million of secured Indebtedness of the Subsidiary Guarantors. 25 After the Remarketing Settlement Date, the Debentures and the Guarantee will be subordinated and junior in right of payment to all Senior Debt of the Company, will be effectively subordinated to secured Indebtedness of the Company and will be effectively subordinated to all Indebtedness and other liabilities of all of the Subsidiaries of the Company. As of March 31, 1997, on a pro forma basis after giving effect to the Offering and the application of proceeds thereof, the Debentures and Guarantee would have been subordinated to approximately $220.2 million of Senior Debt of the Company and would have been effectively subordinated to approximately $1.6 billion of Indebtedness of the Company's Subsidiaries (including approximately $1.3 billion of deposits and FHLB borrowings at SPTL and $304.9 million of secured Indebtedness of the Company's Subsidiaries). ICII is a holding company that conducts substantially all of its business operations through its subsidiaries. For the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, approximately 21.1%, 34.8% and 30.2%, respectively, of the Company's total revenue was generated by the operations of ICII, with 78.9%, 65.2% and 69.8%, respectively, being generated by the Company's subsidiaries. Consequently, the Company's operating cash flow and its ability to service its Indebtedness, including the Debentures, are dependent upon the cash flow of the Company's subsidiaries and the payment of funds by such subsidiaries to ICII in the form of loans, dividends or otherwise. The Restricted Subsidiaries are separate and distinct legal entities apart from ICII and each Subsidiary Guarantor has agreed to guarantee payment of the Debentures on a senior unsecured basis until the Remarketing Settlement Date. In addition, although a substantial portion of the Company's business is conducted through SPTL, SPTL is not a Subsidiary Guarantor and SPTL's ability to pay dividends to ICII is dependent upon its ability to generate earnings and is subject to a number of regulatory and other restrictions described below. Because SPTL will not execute a Subsidiary Guarantee, the Debentures will be effectively subordinated to all indebtedness of SPTL. As of March 31, 1997, SPTL had approximately $1.3 billion of deposits and other borrowings, all of which would have been effectively senior to the Debentures. In addition, due to these restrictions and SPTL's rapid growth, SPTL has retained most of its internally generated earnings and has required the infusion of significant amounts of additional capital by ICII. The Company expects such trends to continue for the foreseeable future and has contributed approximately $35.0 million of the proceeds of the 9 7/8% Senior Notes offering to the capital of SPTL in the form of subordinated indebtedness. In addition, the Company intends to contribute approximately $25.0 million of the proceeds of the Offering to SPTL. Depending upon SPTL's growth, ICII may be required to make additional capital contributions to SPTL. There can be no assurance that the Company's operations will generate sufficient cash flow to support payment of interest or principal on the Debentures, or that dividend distributions will be available from SPTL or any ICII subsidiary to fund such payments. Certain provisions of the Federal Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA") generally prohibit any state nonmember bank (including, for this purpose, SPTL) from making a capital distribution (including payment of dividends) if it would cause the institution to become "undercapitalized" (as defined for purposes of those provisions). See "Business--Regulation-- Thrift and Loan Operations." In addition, the Federal Deposit Insurance Corporation (the "FDIC") has advised insured institutions that the payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, SPTL may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items. Federal regulators also have authority to prohibit financial institutions from engaging in business practices which are considered to be unsafe or unsound. It is possible, depending upon the financial condition of SPTL and other factors, that such regulators could assert that the payment of dividends to ICII in some circumstances might constitute unsafe or unsound practices and prohibit payment of dividends. Under California law, a thrift and loan is subject to certain leverage limitations that are not generally applicable to commercial banks or savings and loan associations. In particular, a financial institution that has been in operation in excess of 60 months may have outstanding at any time deposits not to exceed 20 times paid-up and unimpaired capital and surplus as restricted by the institution's by-laws not to be available for dividends, with the exact limitation subject to order by the California Commissioner of Corporations (the "Commissioner"). The Commissioner has issued an order to SPTL authorizing the maximum 20 times leverage standard. 26 Under California law, SPTL is not permitted to declare dividends on its capital stock unless it has at least $750,000 of unimpaired capital plus additional capital stock of $50,000 for each branch office. In addition, no distribution of dividends is permitted unless: (i) such distribution would not exceed a thrift and loan's retained earnings, (ii) any payment would not result in a violation of the approved minimum capital to thrift and loan deposit leverage ratio and (iii) in the alternative, after giving effect to the distribution, either (y) the sum of a thrift and loan's assets (net of goodwill, capitalized research and development expenses and deferred charges) would not be less than 125% of its liabilities (net of deferred taxes, income and other credits), and (z) current assets would not be less than current liabilities (except that if a thrift and loan's average earnings before taxes for the last two years had been less than average interest expense, current assets must be not less than 125% of current liabilities). A portion of SPTL's capital and surplus is currently restricted from the payment of dividends. As of March 31, 1997, the amount SPTL could dividend to ICII under California law would be limited to $59.6 million. TENDER OF PAR SECURITIES IN THE REMARKETING; EFFECT OF ELECTION TO RETAIN Any Notice of Election to retain or tender Par Securities for purchase in the Remarketing will be irrevocable. In addition, if any holder of Par Securities fails timely to deliver a Notice of Election, the Par Securities of such holder will be deemed tendered for purchase in the Remarketing. See "Description of Securities--Remarketing." If a holder of Par Securities makes a valid election to retain Par Securities, following the Remarketing Settlement Date, the distribution rate on such holder's retained Securities will be the Adjusted Distribution Rate and the Distributions on such holder's retained Par Securities may be deferred as described in "--Option to Extend Interest Payment Period; Tax Consequences." In addition, the obligations of the Company under the Guarantee and under the Debentures will no longer be senior unsecured obligations of the Company and will rank subordinate and junior in right of payment to all Indebtedness of the Company. See "--Ranking of Obligations under the Debentures, the Guarantee and the Subsidiary Guarantees." OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES Following the Remarketing Settlement Date, the Company has the right under the Indenture to defer the payment of interest on the Debentures at any time or from time to time for a period not exceeding 10 consecutive semi-annual periods, provided that no Extension Period may extend beyond the Stated Maturity of the Debentures. As a consequence of any such deferral, semi-annual Distributions on the Securities by the Trust will be deferred during such Extension Period but would continue to accumulate at the Adjusted Distribution Rate, compounded semi-annually during any such Extension Period. During any such Extension Period, the Company may not, and may not permit any subsidiary of the Company to, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank on a parity with or junior to the Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks on a parity with or junior to the Debentures (other than (a) dividends or distributions in common stock of the Company, (b) payments under the Guarantee (c) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (d) purchases of common stock related to the issuance of common stock or rights under any of the Company's benefit plans). Prior to the termination of any such Extension Period, the Company may further extend the Extension Period, provided that no Extension Period may exceed 10 consecutive semi- annual periods or extend beyond the Stated Maturity of the Debentures. Upon the termination of any Extension Period and the payment of all amounts then due on any Interest Payment Date, the Company may elect to begin a new Extension Period subject to the above requirements. See "Description of Securities--Distributions" and "Description of Debentures--Option to Extend Interest Payment Period." 27 Should the Company defer payment of interest on the Debentures, a holder of Par Securities will be required to accrue income (in the form of original issue discount) for United States federal income tax purposes in respect of its pro rata share of the Debentures held by the Trust. As a result, a holder of Par Securities will include such interest income in gross income for United States federal income tax purposes in advance of the receipt of cash attributable to such interest income, and will not receive the cash related to such income from the Trust if the holder disposes of the Par Securities prior to the record date for the payment of Distributions with respect to such Extension Period. See "Certain United States Federal Income Tax Consequences-- Interest Income and Original Issue Discount" and "--Sales of Par Securities." The Company has no current intention of exercising its right, following the Remarketing Settlement Date, to defer payments of interest by extending the interest payment period on the Debentures. However, should the Company elect to exercise such right in the future, the market price of the Par Securities is likely to be adversely affected. A holder that disposes of its Par Securities during an Extension Period, therefore, might not receive the same return on its investment as a holder that continues to hold its Par Securities. In addition, as a result of the existence of the Company's right to defer interest payments, the market price of the Par Securities (which represent undivided beneficial ownership interests in the Debentures), following the Remarketing Settlement Date, may be more volatile than the market prices of other similar securities where the issuer does not have such right to defer interest payments. SPECIAL EVENT REDEMPTION; SHORTENING OF STATED MATURITY Upon the occurrence and continuation of a Special Event, the Company will have the right, if certain conditions are met, (i) to terminate the Trust and cause the Debentures to be distributed to the holders of the Par Securities in exchange therefor upon liquidation of the Trust, (ii) to shorten the Stated Maturity of the Debentures, in the case of a Tax Event, to a date not earlier than June 14, 2012 or (iii) after the Remarketing Settlement Date, to redeem the Debentures in whole (but not in part) within 90 days following the occurrence of such Special Event and thereby cause a mandatory redemption of the Par Securities. See "Description of Securities--Redemption--Special Event Redemption or Distribution of Debentures; Shortening of Stated Maturity." There can be no assurance as to the market prices for the Par Securities or the Debentures that may be distributed in exchange for Par Securities if a dissolution or liquidation of the Trust were to occur or if the Stated Maturity of the Debentures is shortened. Because holders of Par Securities may receive Debentures upon the occurrence of a Special Event, prospective purchasers of Par Securities are also making an investment decision with regard to the Debentures and should carefully review all the information regarding the Debentures contained herein. See "Description of Securities-- Redemption--Special Event Redemption or Distribution of Debentures; Shortening of Stated Maturity" and "Description of Debentures--General." PROPOSED TAX LEGISLATION Both the United States Senate and the House of Representatives have approved proposals regarding certain changes to United States federal income tax law. While President Clinton previously proposed legislation that would have denied an issuer an interest deduction, for United States federal income tax purposes, on instruments such as the Debentures, the proposed provisions approved by both the United States Senate and the House of Representatives do not include any such provision. There can be no assurance, however, that future legislative proposals or final legislation will not adversely affect the ability of the Company to deduct interest on the Debentures or otherwise affect the tax treatment of the transactions described herein. Moreover, such legislation could give rise to a Tax Event which would permit the Company to distribute the Debentures to the holders of the Par Securities, shorten the maturity of the Debentures or cause a redemption of the Par Securities as described more fully under "Description of Securities--Redemption--Special Event Redemption or Distribution of Debentures; Shortening of Stated Maturity." 28 LIQUIDATION DISTRIBUTION OF DEBENTURES Upon the occurrence and continuation of a Special Event, the Company will have the right to terminate the Trust and cause the Debentures to be distributed, after the satisfaction of liabilities to creditors (if any), to the holders of the Trust Securities in liquidation of the Trust. In addition, upon liquidation of the Trust and certain other events, the Debentures may be distributed to such holders. Under current United States federal income tax law and interpretations thereof and assuming, as expected, the Trust is treated as a grantor trust for United States federal income tax purposes, a distribution by the Trust of the Debentures pursuant to a liquidation of the Trust will not be a taxable event to the Trust or to holders of the Par Securities and will result in a holder of the Par Securities receiving directly such holder's pro rata share of the Debentures (previously held indirectly through the Trust). If, however, the liquidation of the Trust were to occur because the Trust is subject to United States federal income tax with respect to income accrued or received on the Debentures as a result of the occurrence of a Tax Event or otherwise, the distribution of Debentures to holders of the Par Securities by the Trust could be a taxable event to the Trust and each holder, and holders of the Par Securities may be required to recognize gain or loss as if they had exchanged their Par Securities for the Debentures they received upon the liquidation of the Trust. See "Certain United States Federal Income Tax Consequences--Distribution of Debentures or Cash Upon Liquidation of the Trust." There can be no assurance as to the market prices for Par Securities or Debentures that may be distributed in exchange for Par Securities if a liquidation of the Trust occurs. Accordingly, the Par Securities that an investor may purchase, whether pursuant to the offer made hereby or in the secondary market, or the Debentures that a holder of Par Securities may receive on liquidation of the Trust, may trade at a discount to the price that the investor paid to purchase the Par Securities offered hereby. Because holders of Par Securities may receive Debentures on termination of the Trust, prospective purchasers of Par Securities are also making an investment decision with regard to the Debentures and should carefully review all the information regarding the Debentures contained herein. See "Description of Securities--Redemption--Special Event Redemption or Distribution of Debentures; Shortening of Stated Maturity" and "Description of Debentures-- General." If the holders of Par Securities receive Debentures upon liquidation or dissolution of the Trust, the Debentures will be subject to the remarketing procedures that would have been applicable to the Par Securities. See "Description of Securities--Remarketing." LIMITED VOTING RIGHTS Holders of Par Securities generally will have limited voting rights relating only to the modification of the Par Securities and certain other matters described herein. Holders of Par Securities will not be entitled to vote to appoint, remove or replace any of the Trustees (as defined below), which voting rights are vested exclusively in the holder of the Common Securities. The Trustees and the Company may amend the Declaration without the consent of holders of Par Securities to ensure that the Trust will be classified as a grantor trust for United States federal income tax purposes, even if such action adversely affects the interests of such holders. See "Description of Securities--Voting Rights; Amendment of the Declaration." LACK OF PUBLIC MARKET The New Par Securities are being offered to the holders of the Old Par Securities. The Old Par Securities constitute a new class of securities with no established trading market. The Old Par Securities are eligible for trading in the PORTAL market. To the extent that Old Par Securities are tendered and accepted in the Exchange Offer, the trading market for the remaining untendered Old Par Securities could be adversely affected. There is no existing trading market for the New Par Securities, and there can be no assurance regarding the future development of a market for the New Par Securities, or the ability of holders of the New Par Securities to sell their New Par Securities or the price at which such holders may be able to sell their New Par Securities. If such a market were to develop, the New Par Securities could trade at prices that may be higher or lower than their principal amount or purchase price, depending on many factors, including prevailing interest rates, the 29 Company's operating results and the market for similar securities. The Initial Purchaser has advised the Company that it currently intends to make a market in the New Par Securities. The Initial Purchaser is not obligated to do so, however, and any market-making with respect to the New Par Securities may be discontinued at any time without notice. Therefore, there can be no assurance as to the liquidity of any trading market for the New Par Securities or that an active public market for the New Par Securities will develop. The Company does not intend to apply for listing or quotation of the New Par Securities on any securities exchange or stock market unless requested to do so by the holders of a majority in aggregate principal amount of the New Par Securities or the managing underwriter, if any. CONSEQUENCES OF FAILURE TO EXCHANGE OLD PAR SECURITIES Holders of Old Par Securities who do not exchange their Old Par Securities for New Par Securities pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Par Securities as set forth in the legend thereon as a consequence of the issuance of the Old Par Securities pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Par Securities may not be offered or sold, unless registered under the Securities Act and applicable state securities laws. None of the Trust, the Company nor the Subsidiary Guarantors (collectively, the "Registrants") currently anticipate that it will register Old Par Securities under the Securities Act. Based on interpretations by the Staff of the Division of Corporation Finance of the Commission, as set forth in no-action letters issued to third parties, the Registrants believe that New Par Securities issued pursuant to this Exchange Offer in exchange for Old Par Securities may be offered for resale, resold and otherwise transferred by a holder thereof (other than a holder who is a broker-dealer) without further compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such New Par Securities are acquired in the ordinary course of such holder's business and that such holder is not participating, and has no arrangement or understanding with any person to participate, in a distribution (within the meaning of the Securities Act) of such New Par Securities. However, any holder of Old Par Securities who is an "affiliate" of the Registrants (within the meaning of Rule 405 under the Securities Act) or who intends to participate in the Exchange Offer for the purpose of distributing New Par Securities, or any broker-dealer who purchased Old Par Securities from the Trust to resell them pursuant to Rule 144A under the Securities Act ("Rule 144A") or any other available exemption under the Securities Act, (a) will not be able to rely on the interpretations of the Staff of the Division of Corporation Finance of the Commission set forth in the above-mentioned interpretive letters, (b) will not be permitted or entitled to tender such Old Par Securities in the Exchange Offer and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or other transfer of such Old Par Securities unless such sale is made pursuant to an exemption from such requirements. In addition, as described below, if any broker-dealer holds Old Par Securities acquired for its own account as a result of market-making or other trading activities and exchanges such Old Par Securities for New Par Securities, then such broker-dealer must deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of such New Par Securities. Each holder of Old Par Securities who wishes to exchange Old Par Securities for New Par Securities in the Exchange Offer will be required to represent that (i) it is not an "affiliate" of the Registrants, (ii) any New Par Securities to be received by it are being acquired in the ordinary course of its business, (iii) it has no arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of such New Par Securities, and (iv) if such holder is not a broker-dealer, such holder is not engaged in, and does not intend to engage in, a distribution (within the meaning of the Securities Act) of such New Par Securities. In addition, the Registrants may require such holder, as a condition to such holder's eligibility to participate in the Exchange Offer, to furnish to the Registrants (or an agent thereof) in writing information as to the number of "beneficial owners" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")) on behalf of whom such holder holds the Par Securities to be exchanged in the Exchange Offer. Each broker-dealer that receives New Par Securities for its own account pursuant to the Exchange Offer must acknowledge that it acquired the Old Par Securities for its own account as the result of market-making activities or other trading activities and must agree that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Par Securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Based on the position 30 taken by the Staff of the Division of Corporation Finance of the Commission in the interpretive letters referred to above, the Registrants believe that broker-dealers who acquired Old Par Securities for their own accounts, as a result of market-making activities or other trading activities ("Participating Broker-Dealers") may fulfill their prospectus delivery requirements with respect to the New Par Securities received upon exchange of such Old Par Securities with this Prospectus, as it may be amended or supplemented from time to time. Subject to certain exceptions, the Registrants have agreed that this Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of such New Par Securities for a period ending one year after the Registration Statement of which this Prospectus constitutes a part is declared effective. Any Participating Broker-Dealer who is an "affiliate" of the Registrants (within the meaning of Rule 405 under the Securities Act) may not rely on such interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. See "The Exchange Offer--Resales of New Par Securities" and "-- Broker-Dealer Considerations." Any Old Par Securities not tendered and accepted in the Exchange Offer will remain outstanding and will be entitled to all the same rights and will be subject to the same limitations applicable thereto under the Declaration (except for those rights relating to the Exchange Offer which terminate upon consummation of the Exchange Offer). Following consummation of the Exchange Offer, the holders of Old Par Securities will continue to be subject to all of the existing restrictions upon transfer thereof and none of the Registrants will have any further obligation to such holders (other than under certain limited circumstances) to provide for registration under the Securities Act of the Old Par Securities held by them. Any Old Par Securities which have not been exchanged for New Par Securities pursuant to the Exchange Offer will be mandatorily redeemed by the Company on the Remarketing Settlement Date, as described under "Description of the Securities--Redemption--Transfer Restricted Security Redemption." To the extent that Old Par Securities are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered Old Par Securities could be adversely affected. See "The Exchange Offer--Consequences of a Failure to Exchange Old Par Securities." In addition, to comply with the securities laws of certain jurisdictions, if applicable, the New Par Securities may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or an exemption from registration or qualification is available and is complied with. The Registrants have agreed, pursuant to the Registration Rights Agreement, subject to certain limitations specified therein, to register or qualify the New Par Securities for offer or sale under the securities laws of such jurisdiction as any holder reasonably requests in writing. Unless a holder so requests, the Registrants do not currently intend to register or qualify the sale of the New Par Securities in any such jurisdictions. See "The Exchange Offer." USE OF PROCEEDS None of the Registrants will receive any cash proceeds from the issuance of the New Par Securities offered hereby. The New Par Securities will be exchanged for Old Par Securities in like liquidation amount, which will be retired and canceled. The cash proceeds from the sale of the Old Par Securities were used to purchase the Old Debentures. ACCOUNTING TREATMENT For financial reporting purposes, the Trust will be treated as a subsidiary of the Company and, accordingly, the accounts of the Trust will be included in the consolidated financial statements of the Company. The Par Securities will be classified in the consolidated balance sheet of the Company as a liability under the caption "Guaranteed Preferred Beneficial Interests in Company's Debentures" and appropriate disclosures about the Par Securities will be included in the notes to the consolidated financial statements. For financial reporting purposes, the Company will record Distributions payable on the Par Securities as an expense in the consolidated statements of income. 31 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1997 and as adjusted to give effect to the consummation of the Offering. In addition, at March 31, 1997, the Company had other debt consisting of deposits ($1.2 billion) and FHLB borrowings ($79.5 million) incurred in the ordinary course of business. This table should be read in conjunction with the consolidated financial statements of the Company, including the related notes thereto.
AT MARCH 31, 1997 ----------------- AS ACTUAL ADJUSTED -------- -------- (DOLLARS IN THOUSANDS) Cash.................................................. $ 29,093 $ 96,418(1) Loans held for sale................................... 700,110 700,110 Other borrowings...................................... 304,902 304,902 Long-term debt: 9 3/4% Senior Notes due 2004(2)..................... $ 19,782 $ 19,782 9 7/8% Senior Notes due 2007........................ 200,000 200,000 Debentures.......................................... -- 70,000 Shareholders' equity: Preferred Stock; 8,000,000 shares authorized; none issued and outstanding............................. -- -- Common Stock, no par value; 80,000,000 shares authorized; 38,476,418 shares issued and outstanding........................................ 146,767 146,767 Retained earnings..................................... 96,014 96,014 Unrealized gain on securities available for sale, net. 4,860 4,860 -------- -------- Total shareholders' equity.......................... 247,641 247,641 -------- -------- Total capitalization.............................. $467,423 $537,423 ======== ========
- -------- (1) Reflects net proceeds to the Company of $67.3 million from the Offering. (2) Represents approximately $20.2 million of the 9 3/4% Senior Notes not tendered pursuant to the Tender Offer net of discount of $392,000. 32 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated income statement data for each of the years in the three-year period ended December 31, 1996 and the selected consolidated balance sheet data as of December 31, 1996 and 1995 have been derived from audited financial statements of the Company which, together with the notes thereto and the related report of KPMG Peat Marwick LLP, independent certified public accountants, are included in this Prospectus. The report of KPMG Peat Marwick LLP covering the December 31, 1996 consolidated financial statements contains an explanatory paragraph regarding the adoption of SFAS 122 in 1995. The selected consolidated balance sheet data as of December 31, 1994, 1993 and 1992 and the income statement data for the years ended December 31, 1992 and 1991 are derived from audited consolidated financial statements of the Company, which have been audited by KPMG Peat Marwick LLP but are not included in this Prospectus. The following selected income statement data and balance sheet data as of March 31, 1997 and for each of the three month periods ended March 31, 1997 and 1996 have been derived from the unaudited financial statements of the Company and include all adjustments, consisting only of normal recurring accruals, which management considers necessary for a fair presentation of such financial information for those periods. Results for the three months ended March 31, 1997 are not necessarily indicative of results to be expected for the year ending December 31, 1997.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- ------------------------------------------ 1997 1996 1996 1995 1994 1993 1992 --------- --------- -------- -------- ------- ------- ------- (IN THOUSANDS) INCOME STATEMENT DATA: Revenues: Gain on sale of loans.. $ 8,666 $21,711 $ 88,156 $ 39,557 $ 8,628 $18,149 $20,606 --------- --------- -------- -------- ------- ------- ------- Interest on loans...... 42,930 45,194 188,242 120,244 79,173 51,612 32,741 Interest on investments........... 5,625 2,185 10,807 6,630 3,610 1,972 1,162 Interest on other finance activities.... 657 2,141 8,422 2,608 -- -- -- --------- --------- -------- -------- ------- ------- ------- Total interest income.............. 49,212 49,520 207,471 129,482 82,783 53,584 33,903 Interest expense....... 28,404 36,783 135,036 95,728 61,674 29,811 19,959 --------- --------- -------- -------- ------- ------- ------- Net interest income.. 20,808 12,737 72,435 33,754 21,109 23,773 13,944 Provision for loan and lease losses.......... 2,870 1,500 9,773 5,450 5,150 2,350 680 --------- --------- -------- -------- ------- ------- ------- Net interest income after provision for loan and lease losses.............. 17,938 11,237 62,662 28,304 15,959 21,423 13,264 Loan servicing income.. 1,280 2,010 1,680 12,718 16,332 6,785 5,910 Gain on sale of servicing rights...... -- 8,065 7,591 3,578 30,837 23,655 6,658 Sale of SPFC stock..... 4,306 -- 82,690 -- -- -- -- Equity in net income of SPFC 6,253 -- -- -- -- -- -- Other income........... 1,852 1,202 14,154 1,152 1,048 1,414 654 --------- --------- -------- -------- ------- ------- ------- Total other income... 13,691 11,277 106,115 17,448 48,217 31,854 13,222 --------- --------- -------- -------- ------- ------- ------- Total revenues....... 40,295 44,225 256,933 85,309 72,804 71,426 47,092 Expenses: Personnel expense...... 10,671 12,435 48,355 34,053 33,477 24,520 15,678 Other expenses......... 10,463 14,733 50,694 27,127 28,037 15,433 8,190 --------- --------- -------- -------- ------- ------- ------- Total expenses....... 21,134 27,168 99,049 61,180 61,514 39,953 23,868 --------- --------- -------- -------- ------- ------- ------- Income before income taxes, minority interest and extraordinary item.. 19,161 17,057 157,884 24,129 11,290 31,473 23,224 Income taxes............ 7,976 6,901 69,874 10,144 4,685 13,055 9,583 Minority interest in income (loss) of consolidated subsidiaries........... 153 1,540 12,026 (208) -- -- -- --------- --------- -------- -------- ------- ------- ------- Income before extraordinary item.. 11,032 8,616 75,984 14,193 6,605 18,418 13,641 Extraordinary item- repurchase of 9 3/4% Senior Notes due 2004, net of income taxes.... (3,995) -- -- -- 919 -- -- --------- --------- -------- -------- ------- ------- ------- Net income........... $ 7,037 $ 8,616 $ 75,984 $ 14,193 $ 7,524 $18,418 $13,641 ========= ========= ======== ======== ======= ======= =======
33
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- --------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 --------- --------- -------- ---------- --------- ---------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME PER SHARE--FULLY DILUTED(1): Income before extraordinary item.... $ 0.27 $ 0.24 $ 1.95 $ 0.40 $ 0.19 $ 0.54 $ 0.45 Extraordinary item- repurchase of 9 3/4% Senior Notes due 2004.................. (0.10) -- -- -- 0.03 -- -- --------- --------- -------- ---------- --------- ---------- -------- Net income........... $ 0.17 $ 0.24 $ 1.95 $ 0.40 $ 0.22 $ 0.54 $ 0.45 ========= ========= ======== ========== ========= ========== ======== Weighted average fully diluted shares outstanding (000s).... 40,885 35,271 38,975 35,122 33,582 33,880 30,229 CASH FLOW DATA: Net cash provided by (used in) operating activities............ $ 357,524 $ 284,377 $199,407 $ (668,666) $ 961,579 $ (903,050) $(78,865) Net cash (used in) provided by investing activities............ (45,968) 295,771 (51,117) (364,076) (796,638) (145,701) 21,302 Net cash (used in) provided by financing activities............ (356,710) (584,368) (113,209) 1,047,004 (177,314) 1,066,584 70,216 --------- --------- -------- ---------- --------- ---------- -------- Net change in cash... $ (45,154) $ (4,220) $ 35,081 $ 14,262 $ (12,373) $ 17,833 $ 12,653 ========= ========= ======== ========== ========= ========== ======== THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- --------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 --------- --------- -------- ---------- --------- ---------- -------- (DOLLARS IN MILLIONS) OPERATING AND FINANCIAL DATA(2): Loans originated: ICII................. $ -- $ 297 $ 310 $ 1,816 $ 4,260 $ 6,019 $ 3,383 SPTL................. 96 66 531 724 NA(3) NA(3) NA(3) SPFC(4).............. -- 85 790 288 190 -- -- FMAC................. 134 101 450 164 -- -- -- IBC.................. 30 14 87 36 -- -- -- AMN(5)............... 16 -- -- -- -- -- -- --------- --------- -------- ---------- --------- ---------- -------- Total.............. $ 276 $ 563 $ 2,168 $ 3,028 $ 4,450 $ 6,019 $ 3,383 ========= ========= ======== ========== ========= ========== ======== Loans securitized: ICII................. $ -- $ -- $ -- $ 177 $ -- $ -- $ -- SPTL................. -- -- 277 511 46 -- -- SPFC(4).............. -- 103 657 165 -- -- -- FMAC................. -- -- 325 105 -- -- -- IBC.................. 98 19 87 85 -- -- -- AMN.................. -- -- -- -- -- -- -- --------- --------- -------- ---------- --------- ---------- -------- Total.............. $ 98 $ 122 $ 1,346 $ 1,043 $ 46 $ -- $ -- ========= ========= ======== ========== ========= ========== ======== Outstanding balance of loans and leases securitized (at end of period)(6)............ $373 $1,117 $2,118 $1,047 $45 $ -- $ -- SELECTED RATIOS: Ratio of earnings to fixed charges(7)...... 1.7x 1.5x 2.2x 1.3x 1.2x 2.1x 2.2x Pre-tax interest coverage ratio(8)..... 5.2 8.4 17.0 3.9 2.4 -- -- Ratio of indebtedness to total capitalization (at end of period)(9)..... 47.0% 46.1% 40.5% 46.1% 51.4% -- % -- % Average equity to average assets........ 12.45 3.78 7.27 4.72 4.86 6.71 7.71 Return on average common equity......... 11.55 39.86 45.55 17.59 10.57 31.76 37.75 Return on average assets................ 1.44 1.51 3.31 0.82 0.51 2.13 2.91 SPTL REGULATORY CAPITAL RATIOS (AT END OF PERI- OD): California leverage limitation(10)........ 11.58% 11.63% 13.50% 11.58% 11.50% 7.29% 8.73% Risk-based--Tier 1..... 8.57 8.83 9.71 11.72 14.21 10.27 14.94 Risk-based--Total...... 12.13 9.91 10.87 13.18 15.13 10.73 15.74 FDIC Leverage Ratio.... 8.61 8.02 9.35 8.04 8.08 9.47 8.78 ASSET QUALITY RATIOS (AT END OF PERIOD): Non-performing assets as a percentage of total assets.......... 3.19% 2.32% 2.64% 1.55% 1.16% 0.64% 0.79% Allowance for loan losses as a percentage of non- performing loans...... 44.47 34.63 38.94 44.30 53.83 65.91 79.10 Net charge-offs as a percentage of average total loans held for investment............ 0.67 0.90 0.94 0.36 0.23 0.89 0.18
34
AT AT DECEMBER 31, MARCH 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash................... $ 29,093 $ 74,247 $ 39,166 $ 24,904 $ 37,277 $ 19,444 Interest bearing deposits.............. 88,670 3,369 267,776 10,600 90,000 30,000 Investment securities, including FHLB Stock.. 54,444 101,448 28,713 18,817 18,000 5,000 Loans held for sale.... 700,110 940,096 1,341,810 263,807 1,238,006 328,575 Loans held for investment, net....... 1,013,359 1,068,599 668,771 1,029,556 154,595 84,843 Securitization related assets................ 33,000 159,707 58,272 4,558 529 982 Total assets........... 2,096,241 2,470,639 2,510,635 1,420,409 1,572,663 479,430 Deposits............... $1,161,357 $1,069,184 $1,092,989 $ 934,621 $1,001,468 $422,551 Borrowings from FHLB... 79,500 140,500 190,000 295,000 320,000 -- Other borrowings....... 304,902 694,352 987,810 -- 147,611 -- Senior notes (11)...... 219,782 163,209 80,472 80,343 -- -- Total liabilities...... 1,848,600 2,231,131 2,416,533 1,344,536 1,504,411 429,652 Shareholders' equity... 247,641 239,508 94,102 75,873 68,253 49,778
- -------- (1) Income per share and weighted average shares outstanding reflect 1-for- 10, 1-for-10 and 1-for-19 stock dividends paid in 1996, 1993 and 1992, respectively, a 3-for-2 stock split effected in 1995 and a 2-for-1 stock split effected in 1996. (2) Does not include loans originated or securitized by ICIFC. Commencing with the three months ended March 31, 1997, the financial statements of ICIFC are no longer consolidated with those of ICII. (3) Information not available. (4) Commencing with the three months ended March 31, 1997, the financial statements of SPFC are no longer consolidated with those of ICII. (5) Represents loans originated for the period from AMN's acquisition (March 14, 1997) through March 31, 1997. (6) Represents the outstanding balance of loans and leases securitized, excluding loans held for sale and investment. (7) For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes, plus fixed charges. Fixed charges represent interest expense on all indebtedness and the interest factor of rent expense estimated to be one-third of occupancy expense. (8) Ratio of (i) the sum of income before income taxes plus interest expense on non-funding indebtedness to (ii) interest expense on non-funding indebtedness. (9) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness plus total shareholders' equity. (10) Ratio of (i) SPTL's total shareholders' equity to (ii) total deposits. (11) At March 31, 1997, represents $200.0 million of the 9 7/8% Senior Notes and approximately $20.2 million of the 9 3/4% Senior Notes not tendered pursuant to the Tender Offer, net of discount of $392,000 related to the 9 3/4% Senior Notes. 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Organization The consolidated financial statements include Imperial Credit Industries, Inc. ("ICII") and its wholly-owned and majority-owned subsidiaries (collectively the "Company"). All material intercompany balances and transactions have been eliminated. The wholly-owned subsidiaries include Southern Pacific Thrift and Loan Association ("SPTL"), Imperial Business Credit, Inc. ("IBC"), Imperial Credit Advisors, Inc. ("ICAI") and Auto Marketing Network, Inc. ("AMN"). The majority-owned consolidated subsidiary is Franchise Mortgage Acceptance Company LLC ("FMAC"). Minority interests in these subsidiaries (other than AMN which was acquired in March 1997) are reflected in other liabilities at December 31, 1995 and in Minority Interest in Consolidated Subsidiaries at December 31, 1996 and March 31, 1997 on the Company's consolidated balance sheet. As of March 31, 1997, FMAC was owned 66.7% by ICII and 33.3% by the President of FMAC. As of March 31, 1997, ICII owned 49.4% of the outstanding capital stock of SPFC. In March 1997, the Company disposed of its common stock interest in ICIFC. As a result, commencing with the three months ended March 31, 1997, the financial statements of SPFC and ICIFC are no longer consolidated with those of ICII. See "-- Deconsolidation." General Historically, the Company's primary business was the origination and sale of conforming residential mortgage loans. This business experienced substantial growth due to high levels of mortgage loan refinancing activity in 1992 and 1993, as interest rates dropped to historically low levels. However, as interest rates increased and refinancing activity declined in 1994, conforming residential mortgage loan originations on an industry-wide basis decreased dramatically and pricing became increasingly competitive. The Company recognized that the non-conforming residential mortgage loan market provided greater opportunities for mortgage loan origination growth. As a result, during 1995 and 1996, the Company directed additional capital and resources to its non-conforming residential mortgage lending subsidiary, SPFC, and divested substantially all of its conforming mortgage lending and servicing businesses. At the same time, the Company entered or expanded its presence in higher margin commercial and consumer lending markets. 1995 marked the first year for the Company that included operations from both its historical operations and newly acquired or recently started business lines. The Company now operates as a commercial and consumer finance company providing loan and lease products in the following sectors: franchise lending, business finance lending, commercial mortgage lending, consumer lending and non-conforming residential mortgage lending. Strategic Divestitures During the fourth quarter of 1995, the Company sold its mortgage conduit operations and SPTL's warehouse lending operations to Imperial Credit Mortgage Holdings, Inc. ("IMH"), a real estate investment trust, which subsequently completed an initial public offering of its common stock. In exchange for these assets, the Company received 11.8% of the capital stock of IMH. As of March 31, 1997, the Company owned 4.9% of the capital stock of IMH. Additionally, the Company's wholly-owned subsidiary, ICAI, entered into a management agreement with IMH pursuant to which it provides management advisory services to IMH in exchange for management fees. See "Business-- Advisory, Investment and Other Activities." In the first quarter of 1996, the Company sold the majority of its wholesale mortgage origination offices related to its former conforming residential mortgage lending business. The Company's wholesale offices in Colorado, Florida, Oregon and Washington were converted to SPFC offices. The Company recognized that maintaining a mortgage loan servicing infrastructure was not economically viable in the absence of a conforming residential mortgage loan origination business. Commencing in March 1996, the Company sold substantially all of its conforming residential mortgage loan servicing rights. The Company continues servicing all loans and leases originated by its equipment leasing and franchise lending businesses, as well as all loans originated or acquired by SPTL. 36 Strategic Focus and Acquisitions Part of the Company's strategy to diversify away from the conforming residential mortgage business was to focus its residential mortgage operations, through SPFC, on the origination, purchase and sale of non- conforming residential mortgage loans secured primarily by single family residences. During 1995 and 1996, a substantial portion of the Company's operations were conducted through SPFC. In May 1995, the Company expanded its existing commercial equipment leasing business conducted by IBC through the acquisition of the assets of First Concord Acceptance Corporation ("FCAC"). This business was again expanded in October 1996 when IBC acquired substantially all of the assets of Avco Leasing Services, Inc. and all of the assets of Avco Financial Services of Southern California, Inc. related to its business of originating and servicing business equipment leases and agreed to assume certain related liabilities in connection therewith from Avco Financial Services, Inc. (the "Avco Acquisition"). IBC's lease originations were $30.1 million, $87.2 million and $36.0 million and it securitized, including leases acquired through purchase transactions, $97.9 million, $87.0 million and $85.2 million of leases during the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, respectively. In June 1995, the Company expanded into franchise lending by establishing FMAC, the assets of which were acquired from Greenwich Financial Capital Products, Inc. During the three months ended March 31, 1997, the year ended December 1996, and for the six-month period ended December 31, 1995, FMAC originated or acquired $133.4 million, $449.3 million and $163.5 million and securitized $0, $325.1 million and $105.2 million of franchise loans, respectively. In September 1995, the Company began making asset-based loans to middle market companies by acquiring CoastFed Business Credit Corporation ("CBCC") from Coast Federal Bank. This business, now a division of SPTL, was renamed Coast Business Credit ("CBC"). At March 31, 1997 and December 31, 1996 and 1995, CBC had total commitments of $589.0 million, $547.7 million and $364.2 million, respectively, of which $318.0 million of loans were outstanding at March 31, 1997. In September 1996, the Company entered into various transactions with Dabney/Resnick, Inc., subsequently renamed Dabney/Resnick/Imperial, LLC ("DRI"), and its affiliated entities. DRI engages in investment banking activities. ICII has acquired a 1% equity interest in DRI and has purchased a warrant to acquire an additional 48% interest therein. In March 1997, the Company acquired all of the outstanding shares of Auto Marketing Network, Inc. ("AMN"), a sub-prime auto lender, for $750,000. The Company then advanced AMN $11.6 million to repay amounts owed pursuant to operating lines of credit and for working capital purposes. For the period from its acquisition (March 14, 1997) through March 31, 1997, AMN originated $16.1 million of sub-prime auto loans. As a part of the Company's diversification strategy, and the related acquisitions of FMAC, FCAC and CBCC as well as the Avco Acquisition, the product mix of the Company's interest earning assets changed in 1996 to include a much larger percentage of higher-yielding loan and lease products as compared to the previous year. Deconsolidation During the three months ended March 31, 1997, ICII reduced its ownership percentage of SPFC to 49.4%. As a result, commencing with the three months ended March 31, 1997, the financial statements of SPFC are no longer consolidated with those of ICII. ICII's investment in SPFC, which is recorded on the Company's financial statements in "Investment in Southern Pacific Funding Corporation," accounted for 2.3% of the Company's total assets and contributed 15.5% to the Company's total revenue for the three months ended March 31, 1997. Of the net income or loss of SPFC, 49.4% is recognized on a pre-tax basis in the Company's financial statements. Any such recognized net loss may adversely affect the Company's ability to conduct future activities under the 37 covenants of the Indenture and otherwise. As a result of this deconsolidation, certain of the financial and operating data presented for the three months ended March 31, 1997 and thereafter will not be comparable with such data for periods prior to the deconsolidation. Prior to March 31, 1997, ICII owned 100% of the voting common stock of ICIFC which entitled it to a 1% economic interest. ICIFC is the corporation through which IMH conducts its mortgage conduit operations. Since 100% of the common stock of ICIFC was owned by ICII, ICII consolidated the financial statements of ICIFC in its financial statements. As a result, the assets and liabilities of the Company reflected on its balance sheet were greater than they would otherwise be absent such consolidation. However, since ICII only owned 1% of the economic interest of ICIFC, it considered ICIFC's operations immaterial to the Company. Therefore, to more properly reflect the Company's true financial condition, in March 1997 the Company disposed of its common stock interest in ICIFC. As a result, commencing with the three months ended March 31, 1997, the financial statements of ICIFC are no longer consolidated with those of ICII. The aforementioned deconsolidations of SPFC and ICIFC are collectively referred to as the "Deconsolidation." Securitization Related Assets During the three months ended March 31, 1997, the Company completed lease securitizations totaling $97.9 million. The Company has retained interests in loan and lease securitizations representing the excess of the total amount of loans sold in the securitization over the amounts represented by interests in the security sold to investors. The retained interests in the loan and lease securitizations were $33.0 million and $49.5 million at March 31, 1997 and December 31, 1996, respectively. At March 31, 1997 and December 31, 1996, the Company's consolidated balance sheet reflected Capitalized Excess Servicing Fees Receivable of $0 and $23.1 million, respectively. At March 31, 1997 and December 31, 1996, the Company's consolidated balance sheet reflected Interest Only and Residual Certificates of $0 and $87.0 million, respectively. The decline in Capitalized Excess Servicing Fees Receivable and Interest Only and Residual Certificates resulted from the deconsolidation of SPFC and ICIFC. Servicing Rights When the Company purchases servicing rights from others, or loans which include the associated servicing rights, the price paid for the servicing rights, net of amortization based on assumed prepayment rates, is included on the consolidated balance sheet as "Purchased and Originated Servicing Rights," ("PMSRs" and "OMSRs"). At March 31, 1997, PMSRs and OMSRs outstanding were $6.1 million, consisting of $5.5 million at SPTL and $600,000 at ICAI. At December 31, 1996, PMSRs and OMSRs were $14.9 million, consisting of $5.5 million at SPTL, $600,000 at ICAI and $8.8 million at ICIFC. During the three months ended March 31, 1997, the Company disposed of its ownership interest in ICIFC and, therefore, ICIFC is no longer consolidated. Accounting for IBC Leases For financial reporting purposes, most of the IBC leases are classified as direct financing leases. IBC accounts for its investment in direct financing leases by recording as assets the total lease receivable, plus the estimated residual value of the leased equipment, less the unearned income. The unearned lease income represents the excess of the total lease receivable, plus the estimated residual value, over the cost of the related equipment. The unearned lease income is recognized as revenue over the term of the lease by using the interest method. Upon inception of a direct financing lease, IBC estimates the residual value it expects to realize with respect to the leased equipment when the initial term expires. A substantial amount of IBC's leases have a recorded residual value. The recorded residual value will not exceed 10% of IBC's original acquisition cost. Following expiration of the initial lease term, IBC will seek to recover its recorded residual value through: (i) renewal of the original lease, (ii) sale of the leased equipment to the original lessee, (iii) trade-in of the equipment or (iv) sale or lease of the equipment to another party. 38 Following expiration of the initial term of a direct financing lease, if IBC sells or trades the leased equipment for more than the recorded residual value, it recognizes a gain. If IBC sells or trades the equipment for less than such value, it recognizes a loss. When IBC renews a lease or re-leases the equipment to another party, it records the rental payments as income when earned and depreciates the carrying value of the leased equipment over its remaining useful life. RESULTS OF OPERATIONS Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996 Income for the three months ended March 31, 1997 before extraordinary item was $11.0 million, as compared to $8.6 million for the same period in 1996. Net income, including a $4.0 million extraordinary item representing a loss on the early retirement of debt for the three months ended March 31, 1997, was $7.0 million. Total revenues for the three months ended March 31, 1997 were $40.3 million, a decrease of $3.9 million or 8.9% from the $44.2 million for the same period in 1996. Revenue for the three months ended March 31, 1997, included a pre-tax gain of $4.3 million from the sale of 370,000 shares of SPFC. As of March 31, 1997, the Company owned 49.4% of SPFC's outstanding common stock which, commencing with the three months ended March 31, 1997, is reflected on the Company's financial statements as "Investment in Southern Pacific Funding Corporation." ICII's investment in SPFC accounted for 15.5% of total revenues for the three months ended March 31, 1997. Gain on sale of loans and leases decreased $13.0 million to $8.7 million during the three months ended March 31, 1997 from $21.7 million for the same period in 1996. Gain on sale of loans consists primarily of gains recorded upon the sale of loans, net of associated expenses, and to a lesser extent, fees received on the origination of loans, and fees received for commitments to fund loans. The decrease was primarily attributable to the Deconsolidation, partially offset by an increase in gain on sale of leases for IBC. Net interest income, which consists of interest income and fees net of interest expense, increased by $8.1 million to $20.8 million for the three months ended March 31, 1997 from $12.7 million for the same period in 1996. Excluding net interest income for SPFC and ICIFC from the three months ended March 31, 1996, net interest income increased by $9.6 million for the three months ended March 31, 1997, when compared to the same period last year. Net interest margin at SPTL increased to 4.28% for the three months ended March 31, 1997, an increase of 60 basis points from the same period in 1996. The improvement in SPTL's net interest margin is primarily the result of the Company's emphasis on the origination of higher yielding loan and lease products. Interest income decreased $300,000 to $49.2 million for the three months ended March 31, 1997 from $49.5 million for the same period in 1996. The decrease was primarily attributable to the Deconsolidation. Excluding interest income for SPFC and ICIFC from the three months ended March 31, 1996, interest income increased by $13.9 million for the three months ended March 31, 1997, when compared to the same period in 1996. The increase was primarily attributable to an overall increase in the yield on outstanding loan and lease products. Interest expense decreased $8.4 million to $28.4 million for the three months ended March 31, 1997 from $36.8 million for the same period in 1996. The decrease primarily resulted from the Deconsolidation partially offset by higher borrowing costs and increased outstanding average balances of warehouse lines of credit. Excluding interest expense for SPFC and ICIFC from the first quarter of 1996, interest expense for the three months ended March 31, 1997 increased $4.3 million, when compared to the same period in 1996. Loan servicing income totaled $1.3 million for the three months ended March 31, 1997 as compared to income of $2.0 million for the same period in 1996. The decrease was primarily attributable to two factors: the sale of substantially all of the Company's residential conforming mortgage loan servicing portfolio in the first quarter of 1996, and continuing foreclosure and liquidation costs associated with servicing the remaining residential conforming mortgage loan portfolio. 39 During the three months ended March 31, 1996, mortgage loan servicing rights relating to $2.6 billion of loans were sold resulting in a gain on sale of servicing rights of $8.1 million as compared to no sale of servicing rights for the three months ended March 31, 1997. Other income totaled $2.3 million during the three months ended March 31, 1997 as compared to $1.2 million for the same period in 1996. Other income includes fee income generated from the Company's advisory contract with IMH during the first quarter of 1997. Total expenses for the Company during the three months end March 31, 1997 were $21.1 million, a decrease of $6.1 million from the $27.2 million reported for the same period in 1996. The decrease was primarily attributable to the Deconsolidation. Excluding total expenses for SPFC and ICIFC from the three months ended March 31, 1996, total expenses decreased by $1.7 million for the three months ended March 31, 1997, when compared to the same period in 1996. This decrease primarily resulted from the Company's exit from the residential mortgage banking business in 1996. Personnel expenses decreased to $10.7 million for the three months ended March 31, 1997 as compared to $12.4 million for the same period of the previous year. This decrease was primarily the result of the Deconsolidation. Excluding personnel expenses for SPFC and ICIFC from the three months ended March 31, 1996, personnel expense increased from $9.6 million to $10.7 million for the three months ended March 31, 1997. The increase, excluding SPFC and ICIFC, results from the Company's acquisition and expansion activities throughout 1996 and during the three months ended March 31, 1997. Amortization of PMSRs and OMSRs decreased to $19,000 for the three months ended March 31, 1997 as compared to $718,000 for the same period in 1996. The decrease was primarily the result of the Deconsolidation and from the sale in the quarter ended March 31, 1996 of substantially all of the Company's servicing rights on conforming residential mortgage loans generated by the former mortgage banking operations. Occupancy expense decreased to $907,000 for the three months ended March 31, 1997 as compared to $1.3 million for the same period of the previous year. The decrease primarily results from the Deconsolidation and from the Company's exit from the mortgage banking business in 1996. Net expenses of Other Real Estate Owned ("OREO") decreased to $757,000 for the three months ended March 31, 1997 as compared to $2.8 million for the same period last year. The decrease in net expense of OREO was primarily the result of reduced levels of OREO writedowns on the existing OREO properties. In the quarter ended March 31, 1996, the Company recorded a $3.8 million restructuring charge representing the costs anticipated to be incurred in connection with the Company's exit from the conforming mortgage business. For the three months ended March 31, 1997, there was no additional restructuring charge required. All other general and administrative expenses, including the Federal Deposit Insurance Corporation ("FDIC") insurance premium, data processing, professional services, and telephone and other communications expense, increased to $8.8 million for the three months ended March 31, 1997 as compared to $6.1 million for the same period in 1996. Excluding SPFC and ICIFC, such expenses were $4.9 million for the three months ended March 31, 1996. The overall increase was primarily attributable to the Company's acquisition and expansion activities throughout 1996 and during the first quarter of 1997. As a result of the growth in the loan portfolio and the change in its product mix, the Company continued to add to the allowance for loan and lease losses. The provision for loan and lease losses increased $1.4 million to $2.9 million for the three months ended March 31, 1997 from $1.5 million for the same period in 1996. The increase in the loan and lease loss provision for the three months ended March 31, 1997 was primarily the result of the continuing change in the composition of the Company's investment loan portfolio to higher yielding loan products. Nonaccrual loans and leases as of March 31, 1997 and December 31, 1996 remained essentially stable at $51.6 million and $50.1 million or 4.98% and 4.60% of gross loans held for investment, respectively. 40 The balance of nonaccrual loans relating to the Company's former mortgage banking operations included $19.6 million and $19.9 million of loans at March 31, 1997 and December 31, 1996, respectively. The Company periodically reviews the allowance for loan and lease losses in connection with the overall loan and lease portfolio. Based on the Company's charge-off experience and relatively stable nonaccrual loans, the current balance of the allowance for loan and lease losses is sufficient in relation to the amount of risk in the loan and lease portfolio. The Company believes that the allowance for loan and lease losses is adequate. Non-performing assets ("NPAs") consist of nonaccrual loans, loans with modified terms and OREO. Total NPAs increased 5% to $66.8 million at March 31, 1997, as compared to $63.6 million at December 31, 1996. The ratio of the allowance for loan and lease losses to nonaccrual loans increased to 45.2% at March 31, 1997 from 39.9% at December 31, 1996. NPAs as a percentage of total assets were 3.19% and 2.64% at March 31, 1997 and December 31, 1996, respectively. The Company believes the overall increase in NPAs was primarily a result of the acquisition of a portfolio of sub-prime residential mortgage loans by SPTL late in 1995. Nonaccrual loans in the acquired portfolio increased to $22.0 million at March 31, 1997 from $18.2 million at December 31, 1996. Although the levels of nonaccrual loans have increased, actual losses from the acquired portfolio were $29,000 and $337,000 in the three months ended March 31, 1997 and the year ended December 31, 1996, respectively. The Company considered the level of NPAs related to its other lending activities to be acceptable due to the attractive yield on these loans. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 The Company's consolidated net income for the year ended December 31, 1996 was $76.0 million as compared to $14.2 million for 1995, an increase of 435%. The increase in net income is attributable to several factors: gains on sale of SPFC stock; a 123% increase in gain on sale of loans; a 115% increase in net interest income; and an improved net interest margin. These positive factors were partially offset by an increase in total expenses and the provision for loan and lease losses. Revenues for the year ended December 31, 1996 increased 201% to $256.9 million as compared to $85.3 million for 1995. Expenses for the year ended December 31, 1996 increased 62% to $99.0 million as compared to $61.2 million for 1995. Total revenues included a pre-tax gain of $82.7 million from the sales of SPFC's common stock through an initial public offering in August 1996 and a secondary offering in November 1996. Prior to the sale of SPFC stock, SPFC was a wholly owned subsidiary of the Company. In SPFC's initial public offering, ICII sold 3.5 million shares, and recorded a gain of $30.6 million with SPFC selling 5.2 million primary shares to the public, resulting in a gain to the Company of $31.4 million. In November 1996, ICII sold an additional 1.5 million shares of SPFC common stock through a secondary offering in which ICII was the sole selling shareholder, resulting in a gain to the Company of $20.6 million, and reducing its ownership in SPFC to 51.2% at December 31, 1996. Gain on sale of loans increased 123% to $88.2 million for the year ended December 31, 1996 as compared to $39.6 million for 1995. The increase was primarily the result of substantially increased volume and profitability on the sale of various variable and fixed rate loan products through securitizations. Gain on sale of loans includes $55.4 million in gains recorded as the result of the securitization of $657.4 million of the Company's sub prime residential mortgage loans at SPFC, $11.2 million in gains resulting from the securitization of $277.0 million of commercial and multi- family loans at SPTL, $3.6 million gain on sale of the Company's retained interest in the securitization of $105.2 million of franchise loans at FMAC which were accounted for as a financing at December 31, 1995 and a gain on sale of $13.7 million resulting from the securitization of $325.1 million of franchise loans during the second and fourth quarters of 1996. During the year ended December 31, 1996, the Company wrote down the carrying value of its Capitalized Excess Servicing Fees Receivable by $4.7 million due to actual performance results differing from original excess cash flows estimated by the Company. 41 For the year ended December 31, 1996, net interest income, increased $38.6 million or 115% to $72.4 million as compared to $33.8 million for 1995. The increase in interest income was due to acquisitions completed throughout the last half of 1995, and the change in the composition of loans held for sale and investment from primarily conforming single family residential mortgage loans to a more diversified mix of loan products. The product mix of the Company's interest earning assets in 1996 includes a larger percentage of higher-yielding loan and lease products as compared to 1995. For the year ended December 31, 1996, interest income increased $78.0 million or 60% to $207.5 million from $129.5 million for 1995. The increase in interest on loans was primarily attributable to an overall increase in the yield on outstanding loan and lease products. Interest income also increased as a result of the Company's loan and lease securitizations, which contributed interest income of $8.4 million from the accretion of discounts on the Company's Capitalized Excess Servicing Fees Receivable. For the year ended December 31, 1996, interest expense increased $39.3 million or 41% to $135.0 million from $95.7 million for 1995. The increase in interest expense primarily resulted from increased outstanding average balances of warehouse lines of credit. For the year ended December 31, 1996, consolidated net interest margin increased to 3.40%, an increase of 132 basis points as compared to 2.08% for 1995. The improvement in net interest income and margin is largely the result of the Company's repositioning itself with the origination and acquisition of higher yielding loan and lease products. Acquisitions have added to the improvement in net interest income and net interest margin. For the year ended December 31, 1996, net interest margin and net income benefited from a full year of operation from CBC as well as the fourth quarter purchase of equipment leases totaling approximately $85 million with a weighted average interest rate of 15.5% from Avco Leasing Services, a division of Avco Financial Services of Southern California, Inc. Loan servicing income for the year ended December 31, 1996 decreased 87% to $1.7 million as compared to $12.7 million for 1995. The decrease in loan servicing income was primarily due to a decreased average balance of conforming residential mortgage loans serviced for others, primarily as a result of the Company's sale or transfer of substantially all of its conforming residential mortgage servicing rights in connection with the Company's exit from the conforming mortgage banking business. Additionally, loan servicing income continues to be negatively affected by increased direct servicing costs related to the loan foreclosure and property liquidation process of the remaining delinquent conforming residential mortgage servicing portfolio of the Company's former mortgage banking operations. During the years ended December 31, 1996 and 1995, the Company sold mortgage loan servicing rights relating to $3.2 billion and $957.2 million principal amount of loans, resulting in pre-tax gains of $7.6 million and $3.6 million, respectively. Gain on the sale of servicing rights consisted of the cash proceeds received on the "bulk" sale of servicing rights, net of the related capitalized purchased or originated servicing rights. The decline in profitability on the sale of the conforming residential mortgage servicing rights was due to a lower average sales price and the increased amounts of capitalized servicing rights on the portfolio sold during the year ended December 31, 1996 as compared to 1995 as a result of the Company's adoption of SFAS 122 in the first quarter of 1995. The decision to sell servicing rights was based upon the Company's plan to exit the conforming mortgage banking business. Other income, including management fees, for the year ended December 31, 1996 increased to $14.2 million as compared to $1.2 million for 1995. This increase was primarily due to fee income generated from ICAI's management contract with IMH and dividend payments received by the Company on its investment in IMH. Additionally, increasing other income was the resolution and recovery of $2.5 million of certain outstanding reconciling items at SPTL. Personnel expenses increased 42% to $48.4 million for the year ended December 31, 1996 as compared to $34.1 million for 1995. This increase was primarily the result of personnel expenses related to the Company's acquisition and expansion activities throughout the second half of 1995, partially offset by reductions in personnel expense at the Company's former mortgage banking operations. 42 Amortization of PMSRs and OMSRs decreased 72% to $1.1 million for the year ended December 31, 1996 as compared to $4.0 million for 1995. The decrease was the result of a decreased outstanding balance of PMSRs and OMSRs as a result of the Company's sale of servicing rights on conforming residential mortgage loans generated by the former mortgage banking operations. Occupancy expense increased 19% to $4.7 million for the year ended December 31, 1996 as compared to $3.9 million for 1995. The increase primarily reflected an increase in lease expenses as a result of the Company's acquisition of FMAC, FCAC and CBCC in the second half of 1995, as well as to the continued expansion of SPFC throughout 1996. Net expenses of OREO increased 267% to $7.0 million for the year ended December 31, 1996 as compared to $1.9 million for 1995. The increase in net expense of OREO was primarily the result of the increase in the volume of properties foreclosed on and liquidated by the Company's former mortgage banking operations. FDIC insurance premiums decreased 71% to $327,000 for the year ended December 31, 1996 as compared to $1.1 million for 1995. FDIC insurance premiums decreased primarily as a result of a decrease in the rate of the insurance premium charged to SPTL for FDIC deposit insurance. Restructuring charges of $3.8 million were recognized during the year ended December 31, 1996. The charge represents those costs incurred in connection with the Company's exit from the conforming mortgage banking business. During the three months ended March 31, 1996, the Company committed itself to, and began the execution of, an exit plan that specifically identified the necessary actions to be taken to complete the exit from the origination, sale and servicing of conforming residential mortgage loans. During the year ended December 31, 1996, the Company incurred actual charges of approximately $3.2 million. The Company believes that significant changes to the exit plan are not likely, and that the exit plan should be completed in the second quarter of 1997. The Company has included in the restructuring provision those costs resulting from the exit plan that are not associated with, nor would have benefit for, the continuing operations of the Company. All other general and administrative expenses, including data processing, professional services, and telephone and other communications expense, increased 109% to $33.8 million for the year ended December 31, 1996 as compared to $16.2 million for 1995. The increase in general and administrative expenses was due primarily to the Company's acquisition of FMAC, FCAC, and CBCC, as well as to the start up of ICAI in 1995, and the continued expansion of SPFC throughout 1996. As a result of the growth in the loan portfolio and the change in its product mix, the Company continued to add to the allowance for loan and lease losses. For the year ended December 31, 1996, the provision for loan losses increased $4.3 million to $9.8 million as compared to $5.5 million for 1995. The increase in the loan and lease loss provision for the year ended December 31, 1996 was primarily the result of an increase in nonaccrual loans (specifically one purchased loan portfolio) and due to the continuing change in the composition of the Company's investment loan portfolio to include higher yielding loan products. At December 31, 1996, of the $50.1 million of nonaccrual loans, 89%, 3% and 8% were single family, multi-family and non-residential loans, respectively, as compared to 76%, 18% and 6%, respectively, at December 31, 1995. The increase in nonaccrual loans represented by residential loans was due to the expansion of the investment loan portfolio with residential (one-to-four family) loans originated by the Company's former mortgage banking operations. The Company's non-residential loans were comprised of commercial mortgages, commercial loans, indirect equipment leases and consumer loans. Total NPAs increased 63% to $63.6 million at December 31, 1996, as compared to $39.0 million at December 31, 1995. The ratio of the allowance for loan and lease losses to nonaccrual loans decreased to 39.9% at December 31, 1996 from 44.3% at December 31, 1995. NPAs as a percentage of total assets were 2.64% and 1.55% at December 31, 1996 and 1995, respectively. 43 The Company believes the overall increase in NPAs was primarily a result of the acquisition of a portfolio of sub-prime residential mortgage loans by SPTL late in 1995. Nonaccrual loans in the acquired portfolio increased to $18.2 million from $0.6 million at December 31, 1996 and 1995, respectively. Although the levels of nonaccrual loans has increased, actual losses from the acquired portfolio have been minor at $337,000 and $0 in 1996 and 1995, respectively. The Company considered the level of NPAs related to its other lending activities to be acceptable due to the attractive yield on these loans. The Company evaluated expected losses on nonaccrual loans in both periods on a loan-by-loan basis and determined that the allowance was adequate to cover both expected losses on nonaccrual loans and inherent losses in the remainder of the Company's loans held for investment portfolio. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Revenues for the year ended December 31, 1995 increased 17% to $85.3 million as compared to $72.8 million for 1994. Income before extraordinary items increased 115% to $14.2 million as compared to $6.6 million for 1994. Net income for the year ended December 31, 1995 increased 89% to $14.2 million as compared to $7.5 million for 1994. The 17% increase in revenue and the relatively unchanged level of expenses accounted for the increase in the Company's net income. Gain on sale of loans increased 359% to $39.6 million for the year ended December 31, 1995 as compared to $8.6 million for 1994. The increase was primarily the result of substantially increased profitability on the sale of various servicing retained variable and fixed rate loan products through securitizations, together with an increase in the volume of loans sold on a servicing released basis. Gain on sale of loans includes $28.9 million in gains recorded as a result of the securitization of $404.9 million of the Company's sub-prime residential mortgage loans, $98.3 million of non- conforming residential mortgage loans, $290.9 million of conforming residential mortgage loans, $57.7 million of multi-family mortgage loans, and $85.2 million of gross lease receivables. Also during the year ended December 31, 1995, the Company securitized $105.2 million of franchise mortgage loans which was accounted for as a financing. Net interest income, which consists of interest and fees net of interest charges, and net interest margin for the year ended December 31, 1995 increased 60% and 32% to $33.8 million and 2.08% compared to $21.1 million and 1.57% for 1994, respectively. The increase in net interest income and net interest margin was due primarily to two factors. The Company began 1995 with a loan portfolio consisting primarily of ARMs tied to either the 11th District Cost of Funds index, or the 6 Month London Interbank Offering Rate ("LIBOR") index. These loans were originated during 1994 by the Company's mortgage lending operations, and the majority of these loans included a "teaser" period (typically three months) in which the borrower paid an interest rate to the mortgage lender that is substantially lower than the fully-indexed loan interest rate. As these loans repriced throughout 1995 out of the "teaser" period and became fully indexed, the Company's related interest income increased commensurately. Interest income also increased as a result of the Company's loan and lease securitizations, which contributed interest income of $2.6 million from the accretion of discounts on the Company's Capitalized Excess Servicing Fees Receivable. The increase in interest income due to the factors described above was partially offset by an increase in the average costs of borrowing from all sources, including warehouse lines of credit, borrowings from the FHLB, and SPTL customer deposits. Loan servicing income for the year ended December 31, 1995 decreased 22% to $12.7 million as compared to $16.3 million for 1994. The decrease in loan servicing income was primarily due to a decreased average balance of residential mortgage loans serviced for others, coupled with an increase in direct servicing costs related to the loan foreclosure and property liquidation process. As interest rates decreased throughout 1995, the prepayment rate on the Company's residential mortgage loan servicing portfolio did not increase dramatically, primarily the result of the relatively low weighted average interest rate of 8.35% on the Company's residential mortgage loan servicing portfolio. Total runoff amounted to $612.3 million or 13% of the beginning balance of the residential mortgage loan servicing portfolio for the year ended December 31, 1995 as compared to 44 $841.9 million or 22% of the beginning balance of the residential mortgage loan servicing portfolio for 1994. The residential mortgage loan servicing portfolio decreased 8% to $4.5 billion at December 31, 1995 from $4.9 billion at December 31, 1994. During the years ended December 31, 1995 and 1994, the Company sold mortgage loan servicing rights relating to $957.2 million and $2.9 billion principal amount of loans, resulting in pre-tax gains of $3.6 million and $30.8 million, respectively. During the year ended December 31, 1995, the average gain on sale of servicing rights decreased 66% to 37 basis points as compared to 108 basis points for 1994. The profitability on the sale of servicing decreased primarily as a result of the Company's adoption of SFAS 122 which required the Company to capitalize servicing rights related to loans originated. Gain on the sale of servicing rights consists of the cash proceeds received on the "bulk" sale of servicing rights, net of the related capitalized PMSRs and OMSRs. The decision to buy or sell servicing rights is based upon management's assessment of the market for and current market value of servicing rights and the Company's current and future earnings and cash flow objectives. Expenses for the year ended December 31, 1995 were substantially unchanged from the previous year at $61.2 million as compared to $61.5 million in 1994. Personnel expenses increased 1.7% to $34.1 million in 1995 as compared to $33.5 million in 1994. This increase was primarily the result of increased personnel expenses related to the Company's acquisition and expansion activities throughout 1995, partially offset by reductions in personnel expense at the Company's mortgage banking operations. Amortization of capitalized servicing rights increased 26% to $4.0 million in the year ended December 31, 1995 as compared to $3.2 million in 1994, despite the decrease in the runoff rate of the Company's residential servicing portfolio. This increase was the result of an increase in prepayments of loans in the Company's servicing portfolio with related capitalized servicing. Amortization as a result of loan prepayments increased 275% to $1.2 million in the year ended December 31, 1995, as compared to $0.3 million in 1994. Scheduled amortization of capitalized servicing rights was $2.8 million in the year ended December 31, 1995, substantially equal to the $2.9 million in 1994. Occupancy expense increased 15% to $3.9 million in the year ended December 31, 1995 as compared to $3.4 million in 1994. The increase primarily reflected an increase in lease expenses as a result of the Company's acquisition of FMAC, FCAC and CBCC in 1995. Net expenses of OREO increased 97% to $1.9 million in the year ended December 31, 1995 as compared to $1.0 million in 1994. The increase in OREO expenses in 1995 was primarily the result of an increase in OREO writedowns. OREO writedowns increased 465% to $2.1 million in the year ended December 31, 1995 as compared to $0.4 million in 1994. FDIC insurance premiums decreased 48% to $1.1 million in the year ended December 31, 1995 as compared to $2.2 million in 1994. FDIC insurance premiums decreased primarily as a result of a decrease in the premium charged for FDIC insurance in 1995. On June 1, 1995, the premium charged to SPTL decreased from 0.23% of deposits outstanding to $2,000 annually. SPTL has been considered to be well capitalized by its regulators. All other general and administrative expenses, including data processing, professional services, and telephone and other communications expense decreased 12% to $16.2 million in the year ended December 31, 1995 as compared to $18.3 million in 1994. The decrease was the result of the reversal in 1995 of $1.8 million of the $2.0 million provision established in 1994 for potential operating losses. The allowance was established as a result of the discovery of the lack of timely reconciliation of several cash and loans in process clearing accounts at the Company's principal subsidiary, SPTL. The Company corrected the accounting deficiencies at SPTL that included the use of significant Company and external resources to complete the reconciliations. At the completion of the reconciliation process, nothing came to the attention of management that caused the Company to believe any irregularities had taken place. Based on the resolution of the unidentified reconciling items at 45 December 31, 1994, $1.8 million of the remaining allowance was reversed. Excluding the establishment in 1994 and the reversal in 1995 of the provision for operating losses, general and administrative expenses as described increased 10% to $18.0 million in 1995 as compared to $16.3 million in 1994. The increase in general and administrative expenses was due primarily to the Company's acquisition of FMAC, FCAC, and CBCC, as well as to the start up of ICAI in 1995. As a result of the change in the composition of the Company's investment loan portfolio, earnings were reduced by an increase in the provision for loan losses. The provision for loan losses was $5.5 million for the year ended December 31, 1995, an increase of 6% from $5.2 million for 1994. The increase in the provision was primarily the result of the increase in nonaccrual loans, and the increase in the amount of net charge-offs. Total nonaccrual loans increased 136% to $31.0 million at December 31, 1995, as compared to $13.1 million at December 31, 1994. Total nonaccrual loans as a percentage of loans held for investment were 4.50% and 1.26% at December 31, 1995 and 1994, respectively. Net charge-offs were $3.1 million for 1995, as compared to $1.4 million for 1994. At December 31, 1995, of the $31.0 million of nonaccrual loans, 76%, 18% and 6% were single family, multi-family and non-residential loans, respectively, as compared to 74%, 9% and 17%, respectively, at December 31, 1994. The increase in nonaccrual loans represented by residential loans was due to the expansion of the investment loan portfolio with residential (one-to-four family) loans originated by the Company's former mortgage banking operations. The Company's non-residential loans were comprised of commercial mortgages, commercial loans, indirect equipment leases and consumer loans. Total NPAs increased 137% to $39.0 million at December 31, 1995, as compared to $16.4 million at December 31, 1994. The ratio of the allowance for loan losses to nonaccrual loans decreased to 44.3% at December 31, 1995 from 53.8% at December 31, 1994. NPAs as a percentage of total assets were 1.55% and 1.16% at December 31, 1995 and 1994, respectively. The Company believes the overall increase in NPAs was a result of the transfer of unsalable loans originated by the Company's former mortgage banking operations to the held for investment portfolio. The Company considered the level of NPAs related to its other lending activities to be acceptable due to the attractive yield on these loans. The ratio of the allowance for loan losses to nonaccrual loans decreased to 44.3% at December 31, 1995 from 53.8% at December 31, 1994. The Company evaluated expected losses on nonaccrual loans in both periods on a loan-by- loan basis and determined that the allowance was adequate to cover both expected losses on nonaccrual loans and inherent losses in the remainder of the Company's loans held for investment portfolio. On an ongoing basis, management monitors the loan portfolio and evaluates the adequacy of the allowance for losses considering such factors as historical loan loss experience, evaluations made by bank regulators, assessment of economic conditions and other appropriate data to identify the risks in the loan portfolio. LIQUIDITY AND CAPITAL RESOURCES General The Company has an ongoing need for capital to finance its lending activities. This need is expected to increase as the volume of the Company's loan and lease originations and acquisitions increases. The Company's primary cash requirements include the funding of (i) loan and lease originations and acquisitions pending their pooling and sale, (ii) points and expenses paid in connection with the acquisition of wholesale loans, (iii) fees and expenses incurred in connection with its securitization programs, (iv) overcollateralization or reserve account requirements in connection with loans and leases pooled and sold, (v) ongoing administrative and other operating expenses and (vi) the costs of the Company's warehouse credit and repurchase facilities with certain financial institutions. The Company has financed its activities through warehouse lines of credit and repurchase facilities with financial institutions, equity and debt offerings in the capital markets, deposits or borrowings at SPTL and securitizations. The Company believes that such sources, together with the net proceeds of the Offering, will be sufficient to fund the Company's liquidity requirements for the foreseeable future. There can be no assurance 46 that the Company will have access to the capital markets in the future or that financing will be available to satisfy the Company's operating and debt service requirements or to fund its future growth. Through the first quarter of 1995, funding for the Company's former residential mortgage banking operations was provided primarily by SPTL. In order for SPTL to provide funding for the Company's mortgage banking business, SPTL historically originated and held substantially all of the Company's mortgage loans held for sale. In accordance with a series of agreements, ICII provided loan solicitation, originations and acquisitions, and servicing to SPTL. The agreements provided for the purchase of mortgage loans by ICII concurrent with sales to outside investors. In the first quarter of 1995, the former residential mortgage banking business became self-funded by using a gestation repurchase line provided by DLJ Mortgage Capital, Inc. While the repurchase line reduced the net interest income earned on loans held for sale, holding the loans at ICII provides an additional source of cash for the parent company, and provides additional liquidity for SPTL to finance all of its other lending activities. SPTL historically obtained the liquidity necessary to fund the Company's former residential mortgage banking operations and its own investing activities through deposits and, if necessary through borrowings under lines of credit and from the FHLB. See "--Lines Of Credit and Warehouse Facilities." At March 31, 1997 and December 31, 1996 and 1995, SPTL had maximum FHLB borrowings available equal to $524.1 million, $484.4 million and $501.4 million, respectively. These borrowings must be fully collateralized by qualifying mortgage loans and may be in the form of overnight funds or term borrowings at SPTL's option. The highest FHLB advance outstanding during the year ended December 31, 1996 was $338.0 million, with an average outstanding balance of $188.8 million. The outstanding balance of FHLB advances was $140.5 million at December 31, 1996. The highest FHLB advance outstanding during the three months ended March 31, 1997 was $140.5 million, with an average outstanding balance of $98.9 million. The highest FHLB advance outstanding during the year ended December 31, 1995 was $435.0 million, with an average outstanding balance of $292.0 million. The outstanding balance of FHLB advances was $190.0 million at December 31, 1995. During 1993 and 1994, ICII contributed $26.0 million and $25.0 million, respectively, to SPTL's capital in order to provide SPTL with adequate capital to increase its deposits and borrowings. SPTL has been able to acquire new deposits through its local marketing strategies as well as domestic money markets. Additionally, SPTL maintains liquidity in the form of cash and interest bearing deposits with financial institutions. The Company tracks on a daily basis all new loan applications by office and, based on historical closing statistics, estimates expected fundings. Cash management systems at SPTL allow SPTL to anticipate both funding and sales and adjust deposit levels and short-term investments against the demands of the Company's lending activities. For a further description of SPTL's deposit generating activities and available funding, see "Business-- Funding and Securitizations." In addition to warehouse lines of credit and SPTL borrowings, the Company has also accessed the capital markets to fund its operations. In the second quarter of 1992, the Company completed its initial public offering of 8,750,211 shares, raising net proceeds of $15.9 million. In April 1996, the Company completed a stock offering of 4,879,808 shares of its common stock at $13.00 per share for net proceeds of $59.2 million. In January 1994, the Company issued $90.0 million principal amount of the 9 3/4% Senior Notes due 2004. In October 1994, the Company repurchased $8.5 million of said notes. As of December 31, 1995, the Company was not in compliance with certain debt covenants related to these notes. Subsequent to December 31, 1995, these defaults were corrected. In March 1996, the Company reissued the $8.5 million of the notes which it purchased in October 1994. At December 31, 1996, $90.0 million of these notes were outstanding. In January 1997, the Company issued $200.0 million principal amount of the 9 7/8% Senior Notes and used a portion of the proceeds to purchase approximately $69.8 million of the 9 3/4% Senior Notes. In June 1996, SPFC completed an initial public offering of its common stock pursuant to which ICII was a selling shareholder. SPFC and ICII received net proceeds from such offering of approximately $53.8 million and $35.9 million, respectively. In November 1996, (i) SPFC issued $75.0 million of convertible subordinated notes 47 due 2006 and (ii) ICII sold 1.0 million shares of SPFC common stock held by ICII for net proceeds of approximately $28.0 million. In March 1997, ICII sold an additional 370,000 shares of SPFC common stock for net proceeds of approximately $6.2 million. After the sale of such common stock by ICII, ICII owned approximately 49.4% of the issued and outstanding shares of SPFC's common stock as of March 31, 1997, excluding shares issuable upon exercise of options granted or to be granted pursuant to SPFC's stock option plans and shares issuable upon conversion of the $75.0 million of convertible subordinated notes, mentioned above. Limitations on Dividends Under the California Industrial Loan Law, a thrift and loan may declare dividends on its capital stock only if it has at least $750,000 of unimpaired capital stock plus additional capital stock of $50,000 for each branch office. In addition, no distribution of dividends is permitted unless: (i) such distribution would not exceed a thrift and loan's retained earnings, (ii) any payment would not result in a violation of the approved minimum capital to thrift and loan certificate of deposit ratio and (iii) after giving effect to the distribution, either (y) the sum of a thrift and loan's assets (net of goodwill, capitalized research and development expenses and deferred charges) would be not less than 125% of its liabilities (net of deferred taxes, deferred income and other deferred credits), and (z) current assets would be not less than current liabilities (except that if a thrift and loan's average earnings before taxes for the last two fiscal years had been less than average interest expense, current assets must be not less than 125% of current liabilities). Under California law, in order for capital (including surplus) of an institution to be included in calculating the leverage limitation described above, thrift institutions must amend their by-laws to restrict such capital from the payment of dividends. The amount of restricted capital maintained by a thrift also provides the basis for establishing the maximum amount that a thrift may lend to one single borrower. As of March 31, 1997 and December 31, 1996, $80.5 million and $80.5 million, respectively, of SPTL's capital was so restricted. The FDIC has advised insured institutions that the payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, thrift and loans may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items. Under the Financial Institutions Supervisory Act and FIRREA, federal regulators also have authority to prohibit financial institutions from engaging in business practices which are considered to be unsafe or unsound. It is possible, depending upon the financial condition of a thrift and other factors, that such regulators could assert that the payment of dividends in some circumstances might constitute unsafe or unsound practices and prohibit payment of dividends even though technically permissible. Pursuant to FDICIA, SPTL is prohibited from paying dividends if the payment of such dividends would cause the institution to become "undercapitalized." These limitations on the payment of dividends may restrict the Company's ability to utilize cash from SPTL which may have been otherwise available to the Company for working capital. Lines of Credit and Warehouse Facilities The Company is dependent upon its ability to access warehouse lines of credit and repurchase facilities, in addition to its ability to continue to pool and sell loans and leases in the secondary market, in order to fund new originations and purchases. The Company has warehouse lines of credit and repurchase facilities under which it had available an aggregate of approximately $500.0 million in financing at March 31, 1997. The Company expects to be able to maintain existing warehouse lines of credit and repurchase facilities (or to obtain replacement or additional financing) as current arrangements expire or become fully utilized; however, there can be no assurance that such financing will be obtainable on favorable terms. To the extent that the Company is unable to arrange new warehouse lines of credit and repurchase facilities, the Company may have to curtail its loan origination and purchasing activities, which could have a material adverse effect on the Company's operations and financial position. 48 ICII and its subsidiaries, as indicated in the table below, have warehouse lines of credit available where each indicated entity can close loans in its name. The loan collateral for each facility is held by an independent third- party custodian and each entity has the ability to borrow against such collateral at a percentage of the original principal balance. The following table sets forth certain terms of such lines of credit as of March 31, 1997:
SPREAD WEIGHTED TO AVERAGE PRINCIPAL LIBOR INTEREST COMMITMENT AMOUNT (BASIS RATE AMOUNT* OUTSTANDING EXPIRATION DATE POINTS) -------- ---------- ----------- ------------------ ------- (DOLLARS IN THOUSANDS) Greenwich Capital Finan- cial (AMN)............. 6.94% $125,000 $ 82,275 30 days on demand 125 Banco Santander (FMAC).. 7.94 50,000 45,577 Under extension 225 Sanwa Bank of California (FMAC)................. 7.69 15,000 6,110 September 30, 1997 200 Credit Suisse First Bos- ton (FMAC)............. 6.94 200,000 161,202 December 31, 1997 125 CoreStates Bank, N.A. (IBC).................. 7.99 10,000 7,452 November 30, 1997 230 Conti Financial Servic- es, Inc. (IBC)......... 8.19 100,000 2,286 April 10, 1997 250 -------- -------- $500,000 $304,902 ======== ========
- -------- * In the second quarter of 1997, the commitment amounts under AMN's warehouse line of credit with Greenwich Capital Financial and FMAC's line with Credit Suisse First Boston were increased to $160.0 million and $350.0 million (decreasing to $300.0 million upon FMAC's initial securitization in 1997), respectively. IBC's warehouse line of credit with Conti Financial Services, Inc. expired during the second quarter of 1997. Additionally, SPTL is currently negotiating and expects to enter into a $200.0 million line of credit with a major investment bank. Securitizations The Company currently pools and sells through securitization a substantial portion of the loans or leases which it originates or purchases, other than loans held by SPTL for investment. Accordingly, adverse changes in the securitization market could impair the Company's ability to originate, purchase and sell loans or leases on a favorable or timely basis. Any such impairment could have a material adverse effect upon the Company's business and results of operations. In addition, the securitization market for many types of assets is relatively undeveloped and may be more susceptible to market fluctuations or other adverse changes than more developed capital markets. Finally, any delay in the sale of a loan or lease pool could cause the Company's earnings to fluctuate from quarter to quarter. In a securitization, the Company recognizes a gain on sale of the loans or leases securitized upon the closing of the securitization but does not receive the cash representing such gain until it receives the excess cash flows, which are payable over the actual life of the loans or leases securitized. As a result, such transactions may not generate cash flows to the Company for an extended period. In addition, in order to gain access to the secondary market for loans and leases, the Company has relied on monoline insurance companies to provide guarantees on outstanding senior interests in the special purpose entities to which such loans and leases are sold to enable it to obtain investment grade ratings for such interests. The Company also relies on overcollateralization to support outstanding senior interests. However, any unwillingness of the monoline insurance companies to guarantee the senior interests in the Company's loan or lease pools could have a material adverse effect on the Company's financial position and results of operations. The pooling and servicing agreements that govern the distribution of cash flows from the loans included in securitizations require either (i) the establishment of a reserve account that may be funded with an initial cash deposit by the Company or (ii) the overcollateralization of the senior interests by using interest receipts on the loans to reduce the outstanding principal balance of the senior interests. The Company's interest in the 49 overcollateralized amount is reflected in the Company's financial statements as retained interest in loan and lease securitization. To the extent that a loss is realized on the loans, the loss will either be paid out of the reserve account or the overcollateralization amount. The Company may be required either to repurchase or to replace loans which do not conform to the representations and warranties made by the Company in the pooling and servicing agreements entered into when the loans are pooled and sold through securitizations. Franchise Lending. FMAC sells a majority of its loan origination volume in securitizations and to a lesser extent through whole loan sales. FMAC securitized $0, $325.1 million and $105.2 million of franchise loans during the three months ended March 31, 1997, the year ended December 31, 1996 and the period from its inception at June 30, 1995 through December 31, 1995, respectively. Business Finance Lending. IBC sells its lease originations primarily through a revolving securitization facility administered by Citicorp North America, Inc. ("CNAI"). The facility has a three-year revolving period, which expires on December 29, 1998, and a three and one-half year amortization period. The purchase limit under the facility is $110.0 million and as of March 31, 1997, there was approximately $104.0 million of commercial paper outstanding under the facility. In addition to the CNAI facility, during the three months ended March 31, 1997, IBC completed a securitization of $97.9 million of lease receivables through a term finance facility with Conti Financial Services. Commercial Mortgage Lending. During the three months ended March 31, 1997 and the year ended December 31, 1996, SPTL securitized $0 and $277.0 million, respectively, of multi-family and commercial real estate loans. SPTL retained subordinated bonds of approximately $22.0 million from the securitization and delivered the bonds into a total rate of return swap with a financial institution. The provisions of the swap entitle the Company to receive the total return on the subordinated bonds delivered in exchange for a floating payment of LIBOR plus a spread of 1.95%. The swap is an off balance sheet instrument. The following table sets forth the securitizations effected by the Company since inception:
PRINCIPAL AMOUNT ISSUE DATE ISSUANCE NAME SECURITIZED ---------- ------------- ------------- (IN MILLIONS) December 1994 Prudential Securities 1994-6................. $ 45.5 March 1995 Prudential Securities 1995-1................. 95.5 June 1995 Southern Pacific Secured Assets Corp. 55.3 ("SPSAC") 1995-1............................. August 1995 Second delivery of SPSAC 1995-1.............. 20.0 August 1995 Donaldson, Lufkin & Jenrette ("DLJ") 1995-4.. 290.9 September 1995 SPSAC 1995-2................................. 261.7 November 1995 DLJ 1995-5................................... 98.3 November 1995 Second delivery of SPSAC 1995-2.............. 28.0 December 1995 Third delivery of SPSAC 1995-2............... 2.3 December 1995 Franchise Loan Receivables Trust ("FLRT") 105.2 1995-B....................................... March 1996 SPSAC 1996-1................................. 102.4 June 1996 SPSAC 1996-2................................. 130.0 June 1996 FLRT 1996-A.................................. 167.4 July 1996 Second delivery of SPSAC 1996-2.............. 40.0 August 1996 SPSAC 1996-3................................. 150.0 September 1996 Southern Pacific Thrift & Loan 1996 C-1...... 277.0 October 1996 Second delivery of SPSAC 1996-3.............. 50.0 December 1996 SPSAC 1996-4................................. 185.0 December 1996 FLRT 1996-B.................................. 157.7 March 1997 IBCI 1997-1.................................. 97.9 -------- Total(1)..................................... $2,360.1 ========
- -------- (1) Excludes IBC's monthly deliveries to a CNAI securitization vehicle which totaled $13.3 million, $87.0 million and $85.2 million for the three months ended March 31, 1997 and the year ended December 31, 1996 and 1995, respectively 50 INFLATION The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Inflation affects the Company primarily through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease during periods of low inflation. During periods of decreasing interest rates, borrowers are more likely to refinance their existing loans which may negatively impact the Company's investments in capitalized excess servicing related assets. ASSET QUALITY As a result of the continuing change in the composition of the Company's investment loan portfolio, earnings were reduced by an increase in the provision for loan losses. The provision for loan losses increased to $2.9 million for the three months ended March 31, 1997, as compared to $1.5 million, $9.8 million, $5.5 million and $5.2 million for the three months ended March 31, 1996, and the years ended December 31, 1996, 1995 and 1994, respectively. The increase in the provision for loan losses was primarily the result of an increase in nonaccrual loans, an increase in the amount of net charge-offs, and the continuing change in the composition of the investment loan portfolio to higher-yielding loan products. NPAs consist of nonaccrual loans, loans with modified terms and OREO. The Company's policy is to place all loans 90 days or more past due on nonaccrual. Any mortgage loans held for sale originated or acquired as part of the Company's former mortgage banking operations which are held more than 90 days after origination are classified as mortgage loans held for investment and are transferred at the lower of carrying value or market value. Such loans may be unsalable for a variety of reasons, including documentation deficiencies, payment defaults or borrower misrepresentations. The former mortgage banking operations' OREO arises primarily through foreclosure on mortgage loans repurchased from investors, typically due to a breach of representations or warranties. The Company incurred losses of approximately $5 million related to the former mortgage banking OREO during the year ended December 31, 1996. During the three months ended March 31, 1997 and for year ended December 31, 1995, the impact of loans repurchased as the result of borrower misrepresentations was not material. 51 The following table sets forth the amount of NPAs attributable to the Company's former mortgage banking operations and to all of its other lending activities:
AT DECEMBER 31, ------------------------------------------------------------------- MARCH 31, 1997 1996 1995 1994 ---------------------- ---------------------- ---------------------- --------------------- FORMER FORMER FORMER FORMER ALL OTHER MORTGAGE ALL OTHER MORTGAGE ALL OTHER MORTGAGE ALL OTHER MORTGAGE LENDING BANKING LENDING BANKING LENDING BANKING LENDING BANKING ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Nonaccrual loans: One to four family..... $ 24,497 $19,616 $ 24,711 $19,928 $ 2,652 $ 20,990 $ 4,012 $ 5,697 Commercial property.... 2,153 -- 3,052 -- 1,824 -- 2,201 -- Multi-family property.. 1,967 -- 1,421 -- 5,522 -- 1,195 -- Leases................. 3,384 -- 997 -- -- -- -- -- ---------- ------- ---------- ------- ---------- -------- -------- ---------- Total nonaccrual loans.. 32,001 19,616 30,181 19,928 9,998 20,990 7,408 5,697 ---------- ------- ---------- ------- ---------- -------- -------- ---------- OREO: One to four family..... 8,840 2,601 6,639 3,508 1,937 4,173 1,217 1,277 Commercial property.... 2,436 -- 1,200 -- 211 -- 445 -- Multi-family property.. 516 -- 867 -- 858 -- 329 -- ---------- ------- ---------- ------- ---------- -------- -------- ---------- Total OREO.............. 11,792 2,601 8,706 3,508 3,006 4,173 1,991 1,277 ---------- ------- ---------- ------- ---------- -------- -------- ---------- Total loans with modified terms......... 800 -- 1,256 -- 870 -- 76 -- ---------- ------- ---------- ------- ---------- -------- -------- ---------- Total NPAs.............. $ 44,593 $22,217 $ 40,143 $23,436 $ 13,874 $ 25,163 $ 9,475 $ 6,974 ========== ======= ========== ======= ========== ======== ======== ========== Total loans and OREO.... $1,728,703 $36,325 $2,012,704 $40,955 $1,168,783 $869,463 $216,555 $1,094,144 Total NPAs as a percentage of loans and OREO................... 2.58% 61.16% 1.99% 57.22% 1.19% 2.89% 4.38% 0.64%
52 The following table summarizes certain information regarding the Company's allowance for loan and lease losses and OREO losses:
FOR THE THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------- ------------------------- 1997 1996 1996 1995 1994 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Beginning balance................. $19,999 $13,729 $13,729 $ 7,054 $ 3,255 Provision for loan and lease losses........................... 2,870 1,500 9,773 5,450 5,150 Business acquisitions............. 4,864 -- 4,500 4,320 -- Lease sales....................... (2,000) -- -- -- -- Deconsolidation of ICIFC.......... (687) -- -- -- -- ------- ------- ------- ------- ------- 25,046 15,229 28,002 16,824 8,405 ------- ------- ------- ------- ------- Loans charged off: Mortgage........................ (591) (464) (2,485) (2,024) (1,397) Multi-family.................... (161) (836) (1,095) (334) -- Commercial...................... (36) (3) (465) (169) -- Leases.......................... (677) (370) (3,465) (461) (39) Consumer........................ (557) (248) (816) (118) -- ------- ------- ------- ------- ------- Total......................... (2,022) (1,921) (8,326) (3,106) (1,436) ------- ------- ------- ------- ------- Recoveries on loans previously charged off: Mortgage........................ 61 25 -- 11 7 Leases.......................... 175 -- 323 -- 64 Consumer........................ 50 3 -- -- 14 ------- ------- ------- ------- ------- Total......................... 286 28 323 11 85 ------- ------- ------- ------- ------- Net charge-offs................... (1,736) (1,893) (8,003) (3,095) (1,351) ------- ------- ------- ------- ------- Ending balance.................... $23,310 $13,336 $19,999 $13,729 $ 7,054 ======= ======= ======= ======= ======= Ratio of allowance for loan losses to total loans held for investment....................... 2.22% 1.98% 1.82% 1.99% 0.68% Ratio of allowance for loan losses to nonaccrual loans.............. 45.2 35.9 39.9 44.3 53.8 Total nonaccrual loans as a percentage of loans held for investment....................... 4.91 5.53 4.55 4.50 1.26 OREO losses: OREO writedowns................. $ 543 $ -- $ 3,252 $ 2,085 $ 369 Loss (gain) on sale of OREO..... 956 978 2,843 (957) (119) ------- ------- ------- ------- ------- Total OREO losses............. $ 1,499 $ 978 $ 6,095 $ 1,128 $ 250 ======= ======= ======= ======= =======
The increase in the provision for loan and lease losses was primarily the result of the increase in nonaccrual loans and the increase in the amount of net charge-offs. Although nonaccrual loans increased for the three months ended March 31, 1997 from December 31, 1996, with a corresponding decrease in allowance coverage, the Company evaluated expected losses on nonaccrual loans on a loan-by-loan basis and determined that the allowance was adequate to cover both expected losses on nonaccrual loans and inherent losses in the remainder of the Company's loans held for investment portfolio. The Company considers the allowance for loan losses to be adequate. The percentage of the allowance for loan losses to nonaccrual loans does not remain constant due to the nature of the Company's portfolio of loans. The collateral for each nonperforming mortgage loan is analyzed by the Company to determine potential loss exposure, and in conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan losses. On an ongoing basis, 53 management monitors the loan portfolio and evaluates the adequacy of the allowance for loan losses. In determining the adequacy of the allowance for loan losses, management considers such factors as historical loan loss experience, underlying collateral values, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate data to identify the risks in the loan portfolio. Loans deemed by management to be uncollectible are charged to the allowance for loan losses. Recoveries on loans previously charged off are credited to the allowance. Provisions for loan losses are charged to expense and credited to the allowance in amounts deemed appropriate by management based upon its evaluation of the known and inherent risks in the loan portfolio. Future additions to the allowance for loan losses may be necessary. ASSET/LIABILITY MANAGEMENT The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest- earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of falling interest rates, the net earnings of an institution with a positive gap theoretically may be adversely affected due to its interest- earning assets repricing to a greater extent than its interest-bearing liabilities. Conversely, during a period of rising interest rates, theoretically, the net earnings of an institution with a positive gap position may increase as it is able to invest in higher yielding interest-earning assets at a more rapid rate than its interest-bearing liabilities reprice. In addition, a positive gap may not protect an institution with a large portfolio of ARMs from increases in interest rates for extended time periods as such instruments generally have periodic and lifetime interest rate caps. The Company's ARMs are predominantly tied to LIBOR. Interest rates and the resulting cost of funds increases in a rapidly increasing rate environment could exceed the cap levels on these loan products and negatively impact net interest income. The Company has managed interest rate risk through the aggressive marketing and funding of adjustable rate loans, which generally reprice at least semi- annually and are generally indexed to LIBOR. As a result of this strategy, at March 31, 1997, the Company's total interest-earning assets maturing or repricing within one year exceeded its total interest-bearing liabilities maturing or repricing in the same time by $264.6 million, representing a positive cumulative gap ratio of 118.2%. The Company closely monitors its interest rate risk as such risk relates to operational strategies. The Company's cumulative gap position is at a level satisfactory to management and the Company is currently attempting to maintain a positive gap position in light of the current interest rate environment. However, there can be no assurances that the Company will be able to maintain its positive gap position or that its strategies will not result in a negative gap position in the future. The level of the movement of interest rates, up or down, is an uncertainty and could have a negative impact on the earnings of the Company. Hedging The Company has implemented various hedging strategies with respect to its origination of loans and leases for sale. To date, this has included selling short comparable maturity United States Treasury securities and preselling loans through prefunding accounts in its securitizations. The Company is subject to the risk of rising mortgage interest rates between the time it commits to fund or purchase mortgage loans at a fixed price and the time it sells or securitizes those mortgage loans. To mitigate this risk, the Company enters into transactions designed to hedge interest rate risks, including mandatory and optional forward selling of mortgage-backed securities or United States Treasury securities, and buying and selling of futures on United States Treasury securities. The nature and quantity of these hedging transactions is and will be determined by the management of the Company based on various factors including market conditions and the expected volume of mortgage loan originations and purchases. 54 The Company believes that it has implemented a cost-effective hedging program to provide a level of protection against interest rate risks. However, an effective hedging strategy is complex and no hedging strategy can completely insulate the Company from interest rate risks. In addition, hedging involves transaction and other costs which could increase as the period covered by the hedging protection increases, such costs could also increase in periods of risk and fluctuating interest rates. Therefore, the Company may be prevented from effectively hedging its interest rate risks, without significantly reducing the Company's return on equity. The Company does not currently engage in the speculative use of trading activities, including derivatives and synthetic instruments or hedging activities, in controlling interest rate risk on its portfolio of loans held for investment. INTEREST RATE SWAPS The Company may enter into interest rate cap, floor, and swap transactions to manage its exposure to fluctuations in interest rates and market movements in securities values. These instruments involve, to varying degrees, elements of credit and interest rate risk. The contract or notional amounts do not represent exposure to credit loss. Risk originates from the inability of counterparties to meet the terms of the contracts and from market movements in securities values and interest rates. The Company controls the credit risk of its interest rate cap, floor and swap agreements through credit approvals, limits and monitoring procedures. As a part of the SPTL securitization in the third quarter of 1996 of $277.0 million of multi-family and commercial mortgage loans, the Company delivered subordinate bonds of approximately $22 million into a total rate of return swap with JP Morgan. The provisions for the swap entitle the Company to receive the total return on the subordinate bonds delivered in exchange for a floating payment of LIBOR plus a spread of 1.95%. The termination date of the swap, September 30, 1997, could be accelerated in the event the securities delivered into the swap decline in value more than $3.0 million over a three month period. In the event of the early termination of the swap, the Company would be required to pay a fee representing 1.95% of the calculated value of the underlying securities over the period from the accelerated termination date to September 30, 1997. The remaining deposit associated with the swap was $2.5 million at March 31, 1997. The swap is an off balance sheet instrument. 55 REPRICING/MATURITY OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31, 1997, which are anticipated by the Company to reprice or mature in each of the future time periods shown. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual terms of the asset or liability.
AT MARCH 31, 1997 --------------------------------------------------------------------------------------------------- MORE THAN MORE THAN MORE THAN MORE THAN MORE THAN 3 YEARS 5 YEARS NON- 3 MONTHS 3 MONTHS TO 6 MONTHS 1 YEAR TO TO 5 TO 10 MORE THAN INTEREST OR LESS 6 MONTHS TO 1 YEAR 3 YEARS YEARS YEARS 10 YEARS BEARING TOTAL ---------- ----------- --------- --------- --------- --------- --------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-earning assets: Cash................... $ 29,093 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 29,093 Other interest-bearing deposits.............. 88,670 -- -- -- -- -- -- -- 88,670 Trading securities, at market................ 23,734 -- -- -- -- -- -- -- 23,734 Securities available for sale, at market... 24,180 -- -- -- -- -- -- -- 24,180 FHLB stock............. 6,530 -- -- -- -- -- -- -- 6,530 Loans held for sale.... 700,110 -- -- -- -- -- -- -- 700,110 Loans held for investment, net of unearned discount and deferred loan fees(1)............... 548,160 177,370 124,896 46,526 2,580 48,839 88,298 -- 1,036,669 ---------- --------- --------- -------- -------- --------- -------- -------- ---------- Total interest-earning assets............... 1,420,477 177,370 124,896 46,526 2,580 48,839 88,298 -- 1,908,986 ---------- --------- --------- -------- -------- --------- -------- -------- ---------- Less: Allowance for loan and lease losses.......... -- -- -- -- -- -- -- (23,310) (23,310) ---------- --------- --------- -------- -------- --------- -------- -------- ---------- Net interest-earning assets................ 1,420,477 177,370 124,896 46,526 2,580 48,839 88,298 (23,310) 1,885,676 Non-interest-earning assets................ -- -- -- -- -- -- -- 210,565 210,565 ---------- --------- --------- -------- -------- --------- -------- -------- ---------- Total assets.......... $1,420,477 $ 177,370 $ 124,896 $ 46,526 $ 2,580 $ 48,839 $ 88,298 $187,255 $2,096,241 ========== ========= ========= ======== ======== ========= ======== ======== ========== Interest-bearing liabilities: Deposits............... $ 432,118 $ 287,735 $ 353,863 $ 87,641 $ -- $ -- $ -- $ -- $1,161,357 Borrowings from FHLB... 34,500 45,000 -- -- -- -- -- -- 79,500 Other borrowings....... 304,902 -- -- -- -- -- -- -- 304,902 Senior notes .......... -- -- -- -- -- 219,782 -- -- 219,782 Convertible notes...... -- -- -- -- -- -- -- -- -- ---------- --------- --------- -------- -------- --------- -------- -------- ---------- Total interest-bearing liabilities.......... 771,520 332,735 353,863 87,641 -- 219,782 -- -- 1,765,541 Non-interest-bearing liabilities........... -- -- -- -- -- -- -- 83,059 83,059 Shareholders' equity... -- -- -- -- -- -- -- 247,641 247,641 ---------- --------- --------- -------- -------- --------- -------- -------- ---------- Total liabilities and shareholders' equity............... $ 771,520 $ 332,735 $ 353,863 $ 87,641 $ -- $ 219,782 $ -- $330,700 $2,096,241 ========== ========= ========= ======== ======== ========= ======== ======== ========== Interest rate sensitivity gap(2).... $ 648,957 $(155,365) $(228,967) $(41,115) $ 2,580 $(170,943) $ 88,298 $ -- $ 143,445 ========== ========= ========= ======== ======== ========= ======== ======== ========== Cumulative interest sensitivity gap....... $ 648,957 $ 493,592 $ 264,625 $223,510 $226,090 $ 55,147 $143,445 $143,445 ========== ========= ========= ======== ======== ========= ======== ======== Cumulative interest sensitivity gap as a percentage of total assets................ 30.96% 23.55% 12.62% 10.66% 10.79% 2.63% 6.84% Cumulative net interest earning assets as a percent of interest bearing liabilities... 184.11% 144.70% 118.15% 114.46% 114.63% 103.12% 108.12% 108.12%
- ------- (1) For purposes of the gap analysis, unearned discount and deferred fees are pro rated for loans receivable. (2) Interest sensitivity gap represents the difference between net interest- earning assets and interest-bearing liabilities. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARMs, have features which restrict changes in interest rates on a short term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those reflected in the table. Finally, the ability of many borrowers to service their ARMs may decrease in the event of an interest rate increase. 56 ANALYSIS OF NET INTEREST INCOME Net interest income represents the difference between income on interest- earning assets and expense on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them, respectively. Rate/Volume Analysis The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's net interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), (iii) changes in interest due to both rate and volume and (iv) the net change.
THREE MONTHS ENDED YEAR ENDED MARCH 31, 1997 OVER 1996 DECEMBER 31, 1996 OVER 1995 ------------------------------------ ------------------------------------ RATE/ RATE/ VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL -------- ------- ------- -------- -------- ------- ------- -------- (IN THOUSANDS) Increase/(decrease) in: Investments and interest bearing deposits.......... $ 156 $ 3,035 $ 244 $ 3,435 $ 507 $ 3,400 $ 314 $ 4,221 FHLB stock........ (63) 91 (23) 5 (194) 185 (35) (44) Loans held for sale.............. (12,056) 5,133 (2,576) (9,499) 35,161 15,746 33,977 84,884 Loans held for investment, net... 4,997 1,799 439 7,235 (29,704) 18,010 (5,192) (16,886) Capitalized excess servicing fees receivable... (836) (1,063) 415 (1,484) 3,609 924 1,281 5,814 -------- ------- ------- -------- -------- ------- ------- -------- Total interest income.......... (7,802) 8,995 (1,501) (308) 9,379 38,265 30,345 77,989 -------- ------- ------- -------- -------- ------- ------- -------- Deposits.......... 984 780 62 1,826 11,700 (1,908) (358) 9,434 Borrowings from Imperial Bank..... (293) (293) 293 (293) 302 -- -- 302 FHLB borrowings... (202) 232 (29) 1 (6,807) (869) 311 (7,365) Other borrowings.. (11,971) (1,853) 1,285 (12,539) 25,586 3,951 6,150 35,687 Senior notes ..... 2,695 (31) (38) 2,626 706 (122) (9) 575 Convertible subordinated debentures........ -- -- -- -- 675 -- -- 675 -------- ------- ------- -------- -------- ------- ------- -------- Total interest expense......... (8,787) (1,165) 1,573 (8,379) 32,162 1,052 6,094 39,308 -------- ------- ------- -------- -------- ------- ------- -------- Change in net interest income.... $ 985 $10,160 $(3,074) $ 8,071 $(22,783) $37,213 $24,251 $ 38,681 ======== ======= ======= ======== ======== ======= ======= ======== YEAR ENDED DECEMBER 31, 1995 OVER 1994 ------------------------------------- RATE/ VOLUME RATE VOLUME TOTAL -------- -------- ------- -------- Increase/(decrease) in: Investments and interest bearing deposits.......... $ 1,302 $ 1,079 $ 503 $ 2,884 FHLB stock........ 61 70 5 136 Loans held for sale.............. (14,656) 3,022 (1,496) (13,130) Loans held for investment, net... 54,467 (156) (110) 54,201 Capitalized excess servicing fees receivable... 2,608 -- -- 2,608 -------- -------- ------- -------- Total interest income.......... 43,782 4,015 (1,098) 46,699 -------- -------- ------- -------- Deposits.......... (5,297) 17,278 (2,181) 9,800 Borrowings from Imperial Bank..... (129) -- -- (129) FHLB borrowings... 3,315 4,270 1,339 8,924 Other borrowings.. 11,664 281 3,472 15,417 Senior notes ..... 177 (136) 1 42 Convertible subordinated debentures........ -- -- -- -- -------- -------- ------- -------- Total interest expense......... 9,730 21,693 2,631 34,054 -------- -------- ------- -------- Change in net interest income.... $ 34,052 $(17,678) $(3,729) $ 12,645 ======== ======== ======= ========
57 AVERAGE BALANCE SHEET The following tables set forth certain information relating to the Company for the three months ended March 31, 1997 and the years ended December 31, 1996, 1995 and 1994. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average month-end balances. Management does not believe that the use of average monthly balances instead of average daily balances has caused any material differences in the information presented for the three months ended March 31, 1997 and the years ended December 31, 1996, 1995 and 1994. The average balance of loans receivable includes loans on which the Company has discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields.
THREE MONTHS ENDED YEAR ENDED YEAR ENDED MARCH 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 --------------------------- --------------------------- --------------------------- YIELD/ YIELD/ YIELD/ AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Investments and interest bearing deposits........ $ 150,460 $ 5,370 14.28% $ 143,067 $ 9,862 6.89% $ 131,277 $ 5,641 4.30% FHLB stock...... 13,462 255 7.58 15,853 945 5.96 19,720 989 5.02 Loans held for sale............ 563,622 14,463 10.26 1,140,790 101,170 8.87 361,156 16,286 4.51 Loans held for investment, net(1).......... 1,033,809 28,467 11.01 779,522 87,072 11.17 1,091,536 103,958 9.52 Capitalized excess servicing fees receivable. 28,635 657 9.18 53,052 8,422 15.87 22,257 2,608 11.72 ---------- ------- ---------- -------- ---------- -------- Total interest- earning assets.. 1,789,988 49,212 11.00 2,132,284 207,471 9.73 1,625,946 129,482 7.96 ---------- ------- ---------- -------- ---------- -------- Non interest- earning assets... 168,576 163,055 45,167 ---------- ---------- ---------- Total assets.... $1,958,564 $2,295,339 $1,671,113 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Deposits........ $1,145,580 $17,157 5.99% $1,063,799 $ 60,999 5.73% $ 867,162 $ 51,565 5.95% Borrowings from Imperial Bank... -- -- -- 3,311 302 9.12 -- -- -- Borrowings from FHLB............ 98,922 1,595 6.45 201,693 12,055 5.98 310,425 19,420 6.26 Other borrowings...... 269,402 4,866 7.22 645,313 52,050 8.07 251,684 16,363 6.50 Senior notes.... 184,077 4,786 10.40 88,365 8,955 10.13 81,500 8,380 10.28 Convertible subordinated debentures...... -- -- -- 10,068 675 6.70 ---------- ------- ---------- -------- ---------- -------- Total interest- bearing liabilities(2).. 1,697,981 28,404 6.69 2,012,549 135,036 6.71 1,510,771 95,728 6.34 ---------- ------- ---------- -------- ---------- -------- Non interest- bearing liabilities...... 16,786 115,962 88,306 Shareholders' equity........... 243,797 166,828 72,036 ---------- ---------- ---------- Total liabilities and shareholders' equity.......... $1,958,564 $2,295,339 $1,671,113 ========== ========== ========== Net interest rate spread........... $20,808 4.31% $ 72,435 3.02% $ 33,754 1.62% ======= ======== ======== Net interest margin(2)........ 4.65% 3.40% 2.08% Ratio of interest-earning assets to interest-bearing liabilities...... 105.42% 105.95% 107.62% YEAR ENDED DECEMBER 31, 1994 --------------------------- YIELD/ AVERAGE AVERAGE BALANCE INTEREST COST ---------- -------- ------- ASSETS: Interest-earning assets: Investments and interest bearing deposits........ $ 89,155 $ 2,757 3.09% FHLB stock...... 18,398 853 4.64 Loans held for sale............ 719,487 29,416 4.09 Loans held for investment, net(1).......... 521,200 49,757 9.55 Capitalized excess servicing fees receivable. -- -- -- ---------- ------- Total interest- earning assets.. 1,348,240 82,783 6.14 ---------- ------- Non interest- earning assets... 70,117 ---------- Total assets.... $1,418,357 ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Deposits........ $ 992,972 $41,765 4.21% Borrowings from Imperial Bank... 1,415 129 9.12 Borrowings from FHLB............ 235,922 10,496 4.45 Other borrowings...... 18,877 946 5.01 Senior notes.... 79,807 8,338 10.45 Convertible subordinated debentures...... ---------- ------- Total interest- bearing liabilities(2).. 1,328,993 61,674 4.64 ---------- ------- Non interest- bearing liabilities...... 19,025 Shareholders' equity........... 70,339 ---------- Total liabilities and shareholders' equity.......... $1,418,357 ========== Net interest rate spread........... $21,109 1.50% ======= Net interest margin(2)........ 1.57% Ratio of interest-earning assets to interest-bearing liabilities...... 101.45%
- ---- (1) Net of deferred income and the allowance for loan losses, includes nonaccrual loans. (2) Average interest cost and net interest margin excluding the interest expense from the senior notes and convertible subordinated debentures during the three months ended March 31, 1997 and the years ended December 31, 1996, 1995 and 1994 were 6.24% and 5.72%, 6.55% and 3.85%, 6.11% and 2.59%, and 4.27% and 2.18%, respectively. 58 RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 supersedes APB Opinion No. 15, "Earnings per Share" ("APB 15"), and specifies the computation, presentation, and disclosure requirements for earnings per share ("EPS") for entities with publicly held common stock or potential common stock. SFAS 128 will replace the presentation of primary EPS with a presentation of basic EPS, and fully diluted EPS with diluted EPS. SFAS 128 will also require dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator of the diluted EPS computation. This statement shall be effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. The Company has determined that this statement will have no significant impact on the financial position, results of operations, or income per share for 1997. In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"). This statement requires disclosures about capital structures that had been included in a number of previously existing separate statements and opinions. This statement shall be effective for the financial statements for both interim and annual periods ending after December 15, 1997. At this time the Company has determined that this statement will have no significant impact on its financial position or results of operations for 1997. The Company has adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). This statement specifies when financial assets and liabilities are to be removed from an entity's financial statements, the accounting for servicing assets and liabilities and the accounting for assets that can be contractually prepaid in such a way that the holder would not recover substantially all of its recorded investment. Under SFAS 125, an entity recognizes only assets it controls and liabilities it has incurred, discontinues recognition of assets only when control has been surrendered, and discontinues recognition of liabilities only when they have been extinguished. SFAS 125 requires that the selling entity continue to carry retained interests, including servicing assets, relating to assets it no longer recognizes. Such retained interests are based on the relative fair values of the retained interests of the subject assets at the date of transfer. Transfers not meeting the criteria for sale recognition are accounted for as a secured borrowing with a pledge of collateral. SFAS 125 requires an entity to recognize its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset or liability. The servicing asset or liability is to be amortized in proportion to, and over the period of, net servicing income or loss. Servicing assets and liabilities are to be assessed for impairment based on their fair value. SFAS 125 modifies the accounting for interest-only strips or retained interests in securitizations, such as capitalized servicing fees receivable, that can be contractually prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment. In this case, it requires that they be classified as available for sale or as trading securities. Interest-only strips and retained interests are to be recorded at market value. Under the provisions of SFAS 125, management has determined that mortgage backed securities retained by the Company as a result of securitization transactions will be classified as trading securities. All other retained securities will be classified as available for sale or trading as determined at the time of securitization. Changes in market value are included in operations, if classified as trading securities, or in shareholders' equity as unrealized gains or losses, net of the related tax effect, if classified as available for sale. SFAS 125 was effective for the Company on January 1, 1997. The implementation of SFAS 125 did not have a material impact on the Company's financial condition or results of operations. 59 BUSINESS The following Business section contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. GENERAL The Company is a diversified commercial and consumer finance company. In 1995, the Company began to reposition its business from originating and selling conforming residential mortgage loans to offering higher margin loan and lease products. The Company accomplished this repositioning through a business strategy that emphasizes: (i) opportunistic expansion and acquisitions of businesses in niche segments of the financial services industry, (ii) conservative and disciplined underwriting and credit risk management, (iii) loan and lease originations, where possible, on a wholesale basis, (iv) securitization or sale in the secondary market of substantially all of the Company's loans and leases, other than those held for investment by SPTL and (v) maintaining business and financial flexibility to take advantage of changing market conditions with respect to specific financial services businesses. The Company has diversified its loan and lease products by focusing on the creation and acquisition of additional finance businesses in order to reduce dependency on residential mortgage lending. When acquiring new businesses or targeting expansion opportunities, the Company seeks to retain existing management and recruit additional experienced management to increase growth and profitability and to reduce the risks associated with operating the newly acquired entity. As a result, the Company has divested substantially all of its residential mortgage lending and residential mortgage servicing businesses and expanded its presence in other specialty finance markets. Throughout this realignment, the Company's core business has remained consistent in that it originates loans and leases funded primarily by warehouse lines of credit and repurchase facilities, and securitizations and whole loan sales in the secondary market. For the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, the Company originated or acquired $275.8 million, $2.2 billion and $3.0 billion of loans and leases, respectively. In addition, during the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, the Company completed securitization transactions of $97.9 million, $1.3 billion and $1.0 billion, respectively. For the year ended December 31, 1996, a substantial portion of the Company's operations were conducted through its non-conforming residential mortgage lending subsidiary, SPFC. In June 1996, as part of the Company's repositioning, SPFC engaged in an initial public offering of its common stock pursuant to which ICII was a selling shareholder. During the fourth quarter of 1996 and the first quarter of 1997, ICII sold additional shares of its SPFC common stock reducing its ownership percentage to 49.4% as of March 31, 1997. As a result, commencing with the three months ended March 31, 1997 the financial statements of SPFC are no longer consolidated with those of ICII. As a result of this deconsolidation, certain of the financial and operating data presented for the three months ended March 31, 1997 and thereafter will not be comparable with such data for periods prior to the deconsolidation. For a further description of the effect of such deconsolidation, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- General--Deconsolidation." FRANCHISE LENDING Acquisition of FMAC In June 1995, the Company established FMAC, whose assets were acquired from a division of Greenwich Financial Capital Products, Inc. ("Greenwich"), including all of Greenwich's rights under certain servicing contracts entered into by FMAC's predecessor (the "Servicing Contracts"). The Servicing Contracts pertained to the servicing of franchise mortgage loans that were previously securitized by Greenwich through FMAC's 60 predecessor. In connection with the acquisition, the Company and its affiliates assumed certain liabilities related to the Servicing Contracts and Greenwich agreed to act as the Company's exclusive agent in connection with the securitization of franchise mortgage loans for a period of 24 months. The net purchase price for these assets was approximately $7.6 million. Concurrently with the closing of the transactions described above, the Company entered into an operating agreement with Wayne L. Knyal ("Knyal"), the former president of FMAC's predecessor, for the formation of FMAC. FMAC was formed to originate, securitize and service franchise mortgage loans. Under the terms of the operating agreement, in exchange for a 66.7% ownership interest in FMAC, the Company contributed to FMAC approximately $1.3 million in cash and all of the assets purchased from Greenwich other than the Servicing Contracts. In exchange for a 33.3% ownership interest in FMAC, Knyal caused his wholly-owned subsidiary, Franchise Mortgage Acceptance Corporation ("FMAC Corporation"), to contribute to FMAC all of its rights under a servicing contract pertaining to franchise mortgage loans that were previously securitized by FMAC Corporation. FMAC's headquarters and operations center are located in Greenwich, Connecticut. General FMAC is a full service franchise finance company engaged in the business of originating loans and equipment leases to top-tier established franchisees of national and regional franchise concepts, most of which are then securitized into investment grade structures and sold to institutional investors. During the three months ended March 31, 1997, the year ended December 31, 1996 and the six-month period ended December 31, 1995, FMAC originated or acquired $133.4 million, $449.3 million and $163.5 million and securitized $0, $325.1 million and $105.2 million of franchise mortgage loans, respectively. At March 31, 1997, the year ended December 31, 1996 and December 31, 1996, none of the loans included on the Company's consolidated balance sheet originated by FMAC were delinquent. FMAC's current product line consists of enterprise loans, which are loans to finance the operation of existing franchise units, development loans, which are loans to fund construction of new units, other real estate loans, which are loans to acquire additional units, and equipment financing, which are loans and leases for franchise equipment. To reduce credit risk, the FMAC strategically focuses on lending to established franchise owners who typically own three or more units, have three or more years of ownership experience in the concept, or have an equivalent ownership tenure in a different major concept. FMAC historically has focused on lending to national and regional franchise concepts such as Taco Bell, Burger King, Hardee's, Pizza Hut, Wendy's and KFC. FMAC intends to further expand its lending within the food service industries to casual dining and buffet style restaurant franchises. Additionally, FMAC intends to expand into other food and non-food related franchise concepts. In connection with its lending activities, FMAC has taken equity positions in borrowers and intends to expand such interests in the future to improve its returns. For example, in June 1996, FMAC provided a $40.0 million acquisition loan to Summerwood LP ("Summerwood") for the acquisition of 65 Taco Bell and six KFC restaurants in the greater Philadelphia area. The restaurant assets were comprised of a mixture of fee and leased properties, restaurant operating equipment, and the development rights for the Philadelphia markets for 34 additional Taco Bell and 10 KFC restaurants. Included in the transaction were warrants to acquire in excess of one-third of the ownership of Summerwood. Additionally, FMAC has effected three additional transactions wherein it acquired ownership interests in the borrowers. FMAC is currently expanding its marketing focus to include other food and non-food related franchise concepts. In February 1996, FMAC established a division doing business under the name Imperial Golf Finance Group, which expands FMAC's financing to owners and operators of golf courses nationwide, with a focus on lending to experienced golf course operators. For the three months ended March 31, 1997 and the year ended December 31, 1996, FMAC originated $1.3 million and $21.0 million in loans related to the golf industry. In addition, in the first quarter of 1997, FMAC established a division focusing on providing financing to energy and retail related franchisees. 61 Industry Data According to the 1996 Edition of the Franchise Opportunities Guide (the "Guide"), there are more than 550,000 domestic franchise businesses currently generating more than $800 billion in sales. According to the Guide, sales by franchised businesses now total more than one-third of the United States retail market and more than seven million people draw their paychecks from franchised businesses. FMAC believes that substantial business opportunities exist in the growing franchise finance market. Although the term franchise is typically associated with fast food restaurants, there are a multitude of franchise businesses offering a variety of products and services such as home sales, car maintenance and hair cutting. Members of FMAC's management group have gained extensive experience in the development and refinement of systems of operation, management and research which have enhanced FMAC's ability to identify, evaluate and structure new investments. FMAC's experience in the restaurant franchise industry results in efficient, in-house performance of loan origination, real estate acquisition and management. FMAC utilizes experienced loan originators recruited from banking and commercial finance companies to analyze operations data, assess real estate values, process and document loan files, and implement FMAC's business growth strategy. Loan Originations Overview Enterprise loans--Enterprise loans are fixed or variable rate loans offered to finance the value of existing franchise units. These loans are used primarily to refinance existing franchise debt of the borrower, provide business expansion proceeds based on the value of the franchise or for the franchisees' working capital needs. Enterprise loans generally have a term and amortization of up to 15 years and are partially secured by taking a first lien on all available franchise furniture, fixtures and equipment. In the origination process for enterprise loans, FMAC focuses on the cash flow of the franchise business, the continuing ability of the borrower to operate the franchise in a cash positive manner and the borrower's ability to repay the loan since neither the franchise mortgage nor the franchise agreement is generally assignable to secure the loan. Development loans--Development loans are offered to fund the development and construction of new franchise units. Development loans generally have a term and amortization of up to 16 years and are secured by the franchise mortgage or leasehold interest as well as all available franchise furniture, fixtures and equipment. Development loans may be interest only for the first year and fully amortizing for the subsequent 15 years, and may be fixed or variable rate. Other real estate loans--Other real estate loans are fixed or variable rate loans offered to acquire additional franchise units, which may include the underlying real estate interest. Other real estate loans generally have a term and amortization of up to 15 years and are secured by the franchise mortgage or leasehold interest as well as all available franchise furniture, fixtures and equipment. Equipment financing--FMAC offers both equipment loans and equipment leases to finance the acquisition of franchise concept equipment. Equipment loans and leases generally have a term and amortization of up to seven years and are secured by the underlying financed equipment. 62 The following table sets forth FMAC's loan originations by type of loans for the periods presented.
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------------------------- ------------------------------------------- WEIGHTED WEIGHTED NUMBER OF PRINCIPAL AVERAGE NUMBER OF PRINCIPAL AVERAGE LOANS AMOUNT % OF TOTAL INTEREST LOANS AMOUNT % OF TOTAL INTEREST ORIGINATED ORIGINATED ORIGINATIONS RATE ORIGINATED ORIGINATED ORIGINATIONS RATE ---------- ---------- ------------ -------- ---------- ---------- ------------ -------- (DOLLARS IN THOUSANDS) Enterprise Loans Fixed rate loans....... 118 $ 63,357 14.1% 10.30% 82 $ 52,740 32.3% 10.11% Variable rate loans.... 74 43,606 9.7 8.96% 30 12,377 7.6 8.53% --- -------- ----- --- -------- ----- Total.................. 192 106,963 23.8 9.75% 112 65,117 39.9 9.81% --- -------- ----- --- -------- ----- Development Loans Fixed rate loans ...... -- -- -- -- % -- -- -- -- Variable rate loans.... 103 105,706 23.5 9.50% 6 5,955 3.6 9.38% --- -------- ----- --- -------- ----- Total.................. 103 105,706 23.5 9.50% 6 5,955 3.6 9.38% --- -------- ----- --- -------- ----- Other Real Estate Loans Fixed rate loans....... 175 163,737 36.5 10.30% 84 73,643 45.0 9.97% Variable rate loans.... 83 72,904 16.2 9.05% 20 18,784 11.5 8.57% --- -------- ----- --- -------- ----- Total.................. 258 236,641 52.7 9.92% 104 92,427 56.5 9.69% --- -------- ----- --- -------- ----- Total(1).............. 553 $449,310 100.0% 9.78% 222 $163,499 100.0% 9.72% === ======== ===== === ======== =====
- -------- (1) Excludes $3.2 million of equipment leases originated during the year ended December 31, 1996. There were no equipment leases originated during the period from June 30, 1995 through December 31, 1995. All of FMAC's borrowers must have a franchise agreement in place with an approved concept franchisor. The following table sets forth FMAC's loan originations by franchise concept.
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ---------------------------------- ---------------------------------- NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL LOANS AMOUNT % OF TOTAL LOANS AMOUNT % OF TOTAL ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS ---------- ---------- ------------ ---------- ---------- ------------ (DOLLARS IN THOUSANDS) Taco Bell............... 233 $167,544 37.3% 44 $ 33,599 20.6% Burger King............. 116 109,782 24.4 54 38,503 23.6 Hardee's................ 57 40,586 9.0 39 33,447 20.4 Wendy's................. 41 32,905 7.3 22 16,769 10.3 Pizza Hut............... 16 8,093 1.8 44 27,925 17.0 TGI Friday's............ 4 9.120 2.0 1 2,550 1.6 Long John Silvers....... 15 6,850 1.5 -- -- -- KFC..................... 21 13,411 3.0 18 10,706 6.5 Other................... 50 61,019 13.7 -- -- -- --- -------- ----- --- -------- ----- Total................ 553 $449,310 100.0% 222 $163,499 100.0% === ======== ===== === ======== =====
63 Geographic Distribution--The following table sets forth by state the number of loans originated by FMAC for the periods presented.
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ---------------------------------- ---------------------------------- NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL LOANS AMOUNT % OF TOTAL LOANS AMOUNT % OF TOTAL ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS ---------- ---------- ------------ ---------- ---------- ------------ (DOLLARS IN THOUSANDS) Pennsylvania............ 59 $ 35,693 7.9% -- $ -- --% Connecticut............. 36 34,620 7.7 14 7,859 4.8 California.............. 40 32,871 7.3 16 10,475 6.4 New Jersey.............. 32 31,031 6.9 6 6,258 3.8 Texas................... 41 29,189 6.5 16 13,445 8.2 Virginia................ 14 24,724 5.5 25 18,819 11.5 North Carolina.......... 21 23,106 5.1 17 9,588 5.9 Maryland................ 20 22,343 5.0 2 1,407 0.9 Alabama................. 20 18,480 4.1 -- -- -- South Carolina.......... 20 16,927 3.8 8 5,391 3.3 New York................ 21 13,500 3.0 9 6,464 4.0 Wisconsin............... 14 11,868 2.6 13 9,327 5.7 Nevada.................. 18 11,284 2.5 -- -- -- Georgia................. 11 11,052 2.5 16 11,583 7.1 Tennessee............... 15 10,980 2.4 -- -- -- New Hampshire........... 13 9,780 2.2 -- -- -- Delaware................ 13 8,685 1.9 -- -- -- Minnesota............... 8 8,650 1.9 7 5,781 3.4 New Mexico.............. 20 8,623 1.9 1 189 0.1 Massachusetts........... 11 8,003 1.8 4 4,197 2.6 Utah.................... 5 7,482 1.7 -- -- -- Ohio.................... 9 6,395 1.4 7 8,192 5.0 Illinois................ 10 5,855 1.3 6 4,986 3.1 Mississippi............. 8 5,270 1.2 -- -- -- Michigan................ 7 4,848 1.1 6 4,828 3.0 West Virginia........... 5 4,274 1.0 -- -- -- Louisiana............... 5 4,243 0.9 -- -- -- Florida................. 7 4,168 0.9 6 4,634 2.8 Oregon.................. 6 3,910 0.9 -- -- -- Oklahoma................ 13 3,445 0.8 9 1,929 1.2 Maine................... 3 3,300 0.7 -- -- -- Indiana................. 5 3,257 0.7 -- -- -- Kansas.................. 1 3,029 0.7 3 1,927 1.2 Colorado................ 5 2,790 0.6 6 3,807 2.3 Montana................. 2 2,661 0.6 -- -- -- Rhode Island............ 4 2,100 0.5 -- -- -- Wyoming................. 2 1,850 0.4 -- -- -- Washington.............. 2 1,647 0.4 -- -- -- Arkansas................ 1 1,600 0.3 -- -- -- Washington, D.C......... 1 1,250 0.3 -- -- -- Kentucky................ 1 1,177 0.3 4 5,423 3.3 Idaho................... 1 1,170 0.3 -- -- -- Iowa.................... 1 800 0.2 2 1,954 1.2 Alaska.................. 1 750 0.2 11 8,259 5.1 Nebraska................ 1 630 0.1 -- -- -- Missouri................ -- -- -- 4 3,884 2.4 Other................... -- -- -- 4 2,893 1.7 --- -------- ----- --- -------- ----- Total................ 553 $449,310 100.0% 222 $163,499 100.0% === ======== ===== === ======== =====
Underwriting Under FMAC's current underwriting guidelines, each franchisee loan is originated after a review of the following criteria: (i) the applicant's ability to repay the franchisee loan, (ii) the adequacy of the cash flow of both the franchise unit and the borrower, and (iii) the real and tangible personal property that serves as collateral for such franchisee loan. FMAC has created an underwriting model which incorporates management's assumptions, which are based upon industry statistics, into an underwriting formula. Loan officers input data provided by potential borrowers and determine whether or not a loan would qualify under FMAC's underwriting guidelines. FMAC's loan originations typically range in size from $250,000 to $2.0 million for each franchise location. The majority of borrowers are multiple unit operators. 64 For all loans, the borrower completes an environmental questionnaire and FMAC obtains a report from a third party service which identifies environmental risks in the vicinity. Certificates of occupancy are requested on all units. Additionally, Uniform Commercial Code searches are conducted for all borrowers before and after origination of a loan. FMAC prefers franchisees to pay off all existing loans and equipment leases with FMAC loan proceeds. For cases in which encumbrances will survive the funding of the franchisee loan, FMAC reviews all such notes, pledge and security agreements, and loan documents. Although the franchise agreement is not assigned to secure the franchisee loan, the continued ability of the borrower to operate the franchise is essential to ensure the borrower's ability to repay the franchisee loan. FMAC reviews a copy of the executed franchise agreement to verify (i) that the borrower is the franchisee or has been granted an assignment of franchisee rights from the franchisor, (ii) that the duration of the franchise term is as reported by the borrower and (iii) that the renewal section of the agreement provides for renewals of the franchise term, particularly when the franchise term does not exceed the loan term. In the event a loan term exceeds the term of a borrower's franchise agreement, the loan documentation provides that it is an event of default (entitling FMAC to accelerate the loan at a premium) if the franchise agreement is not renewed. If a franchise agreement is not renewed, FMAC can permit a borrower to provide substitute collateral satisfying FMAC's underwriting guidelines. Additionally, a certificate of good standing is required from the franchisor. Units must meet minimum seasoning requirements which are typically 12 months of operation. The amount of seasoning generally required is three years for single unit borrowers and three to 12 months for multi-unit borrowers. FMAC reviews the organizational documents of borrowers which are business entities and reviews the personal net worth of borrowers who are individuals. Business credit reports are obtained for all borrowers. Personal credit reports are obtained for majority owners of all borrowers. For borrowers organized as sole proprietorships (other than multi-unit borrowers) and in certain other cases, personal guarantees are required from the principals. All former bankruptcies must be discharged and the time since discharge must be at least five years except in extraordinary circumstances. Three years of historical operating statements, if available, are required of all borrowers. FMAC analyzes the revenue and expense numbers to determine the ability of the unit to support the repayment of a prospective franchisee loan. Two measures are calculated for this purpose: fixed charge coverage ratio, i.e., the ratio of cash flow to fixed charges of both the borrower and the unit, which is generally required to be 1.15x to 1.25x and loan-to- business value of the unit. The "business value" of a franchise unit is derived from a formula based upon the franchise concept and the revenues (sales) and cash flow generated by the franchise unit through its operations, which in turn is dependent upon and derived from a borrower's franchise agreement with (or license from) the franchisor. In the case of development loans, the maximum loan-to-business value is 70% and, in the case of enterprise loans, the maximum loan-to-business value is 65%. Exceptions to these maximum loan-to-business values may be made in certain circumstances and with respect to single-unit borrowers more stringent loan-to-business value standards are required. Marketing FMAC originates the majority of its loans through its marketing department, comprised of account executives located in seven offices that have established relationships with franchise operators located in all 50 states. FMAC's offices are in Alabama, California, Colorado, Connecticut, Georgia, Nebraska and Washington. FMAC is actively seeking to expand and diversify its financing operations pursuant to selected franchise operating statistics and other criteria developed by FMAC, which are intended to identify attractive markets for FMAC's products. Applicants are identified through direct solicitation, targeted mailings, phone solicitations, participation at franchisee conventions, and through existing customer contacts. Prospective borrowers are contacted by a lending officer and complete an application for each franchisee location. In addition to an application, FMAC reviews substantial required documentation depending on the nature of the borrower and the collateral securing the loan. 65 If a borrower meets FMAC's underwriting criteria, the account executive uses the FMAC underwriting model to generate a loan proposal. FMAC funds over 90% of all loan proposals generated by its underwriting model. FMAC's databases include specific franchise location data for over 20 franchise concepts, including demographic information, traffic volumes and information about surrounding retail and other commercial development that generate customer traffic for franchise establishments. FMAC also maintains a database of approximately 3,000 chain restaurant industry participants, as well as databases of unit-level financial performance for existing and prospective clients. FMAC has the ability to integrate information collected on sales performance and restaurant location with a mapping system which contains demographic, retail space, traffic count and street location information for every significant market in the United States. FMAC also has collected extensive data regarding management practices within several franchised industries, franchisor practices and industry trends. The information collected by FMAC is actively used to assess lending opportunities, measure prospective credit risk, evaluate portfolio performance and manage underperforming assets. FMAC intends to continually develop, improve and use its knowledge of franchised enterprises through research and broader application of information technology to lower portfolio risk, improve performance, expand into other franchise concepts and improve its competitive advantage. BUSINESS FINANCE LENDING The Company, through IBC, and SPTL's CBC, LPIG and Auto Lend divisions, engages in business finance lending, which consists of commercial equipment leasing, asset-based lending, loan participations and automobile inventory financing for automobile dealers. ASSET-BASED LENDING Acquisition of CBC On September 30, 1995, as part of the Company's strategy to diversify its lending operations, the Company acquired from Coast Federal Bank, all of the outstanding capital stock of CoastFed Business Credit Corporation ("CBCC"), a financial services company engaged primarily in the asset-based commercial lending business. The purchase price was approximately $150.0 million. Concurrently with the closing of the transaction described above, CBCC was merged with and into SPTL. Upon consummation of the merger, CBCC became the Coast Business Credit operating division of SPTL ("CBC"). General CBC is a senior secured asset-based lender located in West Los Angeles, California which has historically conducted its lending business activities primarily with California-based companies. During 1996, CBC executed an expansion plan which has increased its customer base outside of California. CBC now operates three loan production centers in California and additional loan production centers in Boston, Minneapolis, Atlanta, Portland, Chicago and Seattle. At March 31, 1997, and December 31, 1996, CBC had outstanding loans totaling $318.0 million and $288.5 million, respectively. CBC had unused loan commitments of $271.0 million at March 31, 1997. CBC's principal business is asset-based lending to small- to medium-sized businesses with annual revenues ranging from approximately $10 million to $100 million. Generally, such businesses are constrained from obtaining financing from more traditional credit sources such as commercial banks due to inadequate equity capitalization, limited operating history, lack of profitability or financing needs below commercial bank minimum size requirements. CBC has focused its lending activities on high technology businesses engaged in the computer industry, many of which are backed by venture capital investors. At March 31, 1997, CBC had outstanding loans totaling $125.3 million to technology companies. 66 At March 31, 1997, CBC's loan portfolio represented lending relationships with 111 customers, with an average total loan per customer of $2.9 million. The Company believes that CBC's relationships with venture capital investors and its industry expertise contribute to CBC's ability to distinguish itself from its competitors and grow its lending relationships. The Company believes that CBC's pricing is competitive with pricing charged by other commercial finance companies. In addition, CBC attempts to be flexible in the structuring of its revolving credit lines and to provide prompt service in order to gain an advantage over its competitors. When CBC competes against more traditional lenders, it competes less on price and more on flexibility, speed of funding and the relative simplicity of its documentation. CBC strives to fund its initial advance under a loan to an approved client within three weeks of CBC's receipt of required information with respect to the client, and strives to fund future advances generally by the next business day after CBC's receipt of required documentation. Loan Products and Originations CBC's loans are categorized based on the type of collateral securing the loan. CBC makes revolving loans primarily secured by accounts receivable and secondarily by inventory. It also makes term loans secured by real property, equipment or other fixed assets. CBC also periodically enters into participations with other commercial finance companies. CBC's loans typically have maturities of two to five years, providing borrowers with greater flexibility to manage their borrowing needs. These loans have an automatic renewal for a one year period at the end of such contract term unless terminated by either party (usually requiring 60 days written notice prior to the end of such term). Equipment loans are term loans typically with three- to five-year amortization periods, but are due and payable upon termination of the master loan and security agreement. The principal types of loans made by CBC are as follows: Accounts Receivable Loans--These loans are revolving lines of credit that are collateralized principally by accounts receivable. Borrowers normally remit their customer accounts receivable payments directly to CBC, usually on a daily basis. CBC deposits the payments daily and applies the funds to the borrowers' loan balances. CBC typically lends up to 80% of the principal balance of accounts receivable that meet CBC's eligibility requirements. CBC's auditors conduct quarterly audits of the collateral and financial condition of each borrower. Inventory Loans--These loans are revolving lines of credit that are collateralized by eligible inventory that is restricted to raw materials and finished goods. Inventory loans are generally made in conjunction with accounts receivable loans to qualifying borrowers. Borrowers are required to provide CBC with monthly inventory designations that are supported by a physical listing or a copy of a perpetual computer listing. These reports are compared to the borrower's financial statements for accuracy and CBC advances the loan proceeds as a percentage of the eligible inventory value. Inventory loans are primarily structured as revolving lines of credit, but under certain circumstances may be structured to incorporate monthly amortization. Participation Loans--These loans consist of term loans or revolving lines of credit in which CBC and other lenders (banks or other asset-based lenders) jointly lend to borrowers when the loan amount exceeds the lending limits of an individual lender. 67 Set forth below is a table showing the principal amount of CBC's loans outstanding as of March 31, 1997, December 31, 1996, and 1995, and the percentage of CBC's portfolio comprised of each loan type as of such date.
AT DECEMBER 31, AT MARCH 31, ------------------------------------ 1997 1996 1995 ----------------- ----------------- ----------------- OUTSTANDING % OF OUTSTANDING % OF OUTSTANDING % OF BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL ----------- ----- ----------- ----- ----------- ----- (DOLLARS IN THOUSANDS) Accounts receivable loans.................. $235.9 74.2% $208.1 72.1% $127.3 82.6% Inventory loans......... 36.3 11.4 34.9 12.1 18.9 12.3 Participation loans(1).. 45.8 14.4 45.5 15.8 8.0 5.1 ------ ----- ------ ----- ------ ----- Total................. $318.0 100.0% $288.5 100.0% $154.2 100.0% ====== ===== ====== ===== ====== =====
- -------- (1) Participation loans include $48.6 million, $48.4 million and $10.3 million purchased and $2.7 million, $2.9 million and $2.3 million sold at March 31, 1997 and December 31, 1996 and 1995, respectively. The weighted average yield on CBC's loans outstanding was 12.45%, 12.41% and 13.25% at March 31, 1997 and December 31, 1996 and 1995, respectively. CBC had commitments to make additional fundings on lines of credit with existing borrowers totaling approximately $271.0 million, $259.2 million and $209.9 million at March 31, 1997 and December 31, 1996 and 1995, respectively; however, each additional funding is contingent upon the borrower's maintaining both sufficient collateral and compliance with the terms and conditions of the loan documents. Underwriting Before a credit line is established, CBC policy requires a review of the prospective client, its principals, business and customer base, including a review of financial statements and other financial information, legal documentation, samples of invoices and related documentation, operational matters and accounts receivable and payable. Following this review, CBC confirms certain matters with respect to the prospective client's business and the collectibility of the client's commercial receivables and other potential collateral by conducting public record searches for liens, conducting credit reviews of the prospective client and its principals, contacting major customers and suppliers to identify potential problems, and conducting an on- site audit of the prospective client's invoice, bookkeeping and collection procedures to verify that they are properly conducted and operationally compatible with CBC's operations. For high technology borrowers, particular emphasis is placed on comprehending the underlying value of the technology itself, including the value of the borrowers' intangible assets. After the preliminary review and diligence, CBC requires the prospective borrower to provide a deposit for fees, orders appraisals if lending against inventory, equipment or real estate and schedules an audit. CBC's audit staff conducts an audit generally consisting of a due diligence review of the prospective borrower's accounting and financial records, including a statistical review of accounts receivable and charge-off history. CBC auditors then submit their audit reports and work papers to CBC's credit committee for review prior to the extension of credit. In making a decision to approve a credit line, CBC establishes credit limits under the revolving credit line and analyzes the prospective client's customer base to assure compliance with CBC's policies generally limiting CBC's overall exposure to individual borrowers, especially with respect to privately held or non-investment grade borrowers. When deemed necessary for credit approval, CBC may obtain guaranties or other security from a client or its affiliates and may also obtain subordination and intercreditor agreements from the borrower's other lenders. Although CBC's underwriting guidelines specify a review of the factors described above, CBC does not apply a rigid scoring system to prospective borrowers and decisions to enter into a relationship with a prospective client are made on a case-by-case basis. 68 CBC's underwriting guidelines and policies provide that, prior to each funding of a loan, the account executive assigned to the borrower (i) obtains the original or a copy of the invoice to be sent to the borrower and the purchase order (if one is required by CBC) related to such invoice, (ii) confirms the validity and accuracy of a representative sampling of invoices and (iii) mails a letter, on the borrower's letterhead, to the new borrower's customer which introduces CBC and requests that payment be made directly to CBC. Credit Monitoring and Controls An assigned CBC account executive monitors each borrower's credit, collateral and advances. All account executives are required to meet with each of their assigned borrowers at least quarterly to monitor the borrower's business, physically inspect the borrower's facilities and equipment and discuss problems the borrower may be experiencing. CBC monitors borrowers' accounts receivable using three forms. The first form is an accounts receivable aging analysis report prepared monthly by the loan processor and reviewed by the account executive, and which includes, among other things, details pertaining to account concentrations and aging trends. The second is an accounts receivable activity summary prepared weekly by the loan processor and reviewed by the account executive, summarizing borrowings, repayments and pledged collateral. The third is a daily report prepared by the borrower and reviewed by the account executive to determine credit availability for a particular day. In addition to the foregoing monitoring procedures, interim audits of all borrowers are scheduled as deemed appropriate. Also, each account is reviewed on its anniversary date and revolving lines are reviewed and reconciled on a monthly basis. Where liquidation is required for repayment of an outstanding loan, CBC attempts to effect a consensual possession of the subject collateral property and joint collection of accounts receivable. In certain instances, court action may be required to ensure collection of receivables and possession of pledged assets. CBC has not experienced any loan losses since its acquisition by the Company. Marketing CBC obtains business through referrals from banks, venture capitalists, accounting firms, management consultants, existing borrowers, other finance companies and independent brokers. CBC's marketing officers call on CBC's referral sources to identify and receive introductions to potential clients and to identify potential clients from database searches. CBC currently compensates its marketing personnel with what it believes are competitive base salaries and commissions based on funded transactions in order to motivate and reward the creation of new business and the renewal of existing business. Such commissions can be a significant portion of the total compensation paid to CBC's marketing personnel. CBC's marketing personnel have no credit decision authority. The Company believes that CBC's marketing strengths are its rapid response time and high level of service. The Company believes that, based on CBC's experience with technology credits and valuation of their associated tangible and intangible assets, CBC is able to quickly evaluate potential borrowers, providing it with a competitive advantage over other lenders with less experience lending to high technology companies. The Company also believes that CBC's ability to quickly evaluate credit decisions and provide loans to borrowers who, for various reason, have not established relationships with traditional lenders, has resulted in a loyal customer base. COMMERCIAL EQUIPMENT LEASING In May 1995, the Company expanded its existing commercial equipment leasing business conducted by its wholly-owned subsidiary, Imperial Business Credit, Inc. ("IBC"), through the acquisition of the assets and the assumption of certain liabilities of First Concord Acceptance Corporation ("FCAC"), a Colorado corporation 69 engaged in the origination, acquisition and servicing of business equipment leases. The sale was effectuated pursuant to an asset purchase agreement among the Company, FCAC and Oren L. Benton, FCAC's majority shareholder ("Benton"). In connection with the purchase of FCAC's assets, the Company or its affiliates also purchased 100% of the partnership interests of three partnerships controlled by Benton that were formed for the purpose of securitizing certain of FCAC's lease receivables. The net purchase price for FCAC's assets and the partnership interests was approximately $21 million. In October 1996, IBC acquired substantially all of the assets of Avco Leasing Services, Inc. and all of the assets of Avco Financial Services of Southern California, Inc. related to its business of originating and servicing business equipment leases and agreed to assume certain related liabilities in connection therewith from Avco Financial Services, Inc. The net purchase price for the Avco Acquisition was approximately $94.8 million. General IBC's corporate headquarters are located in San Diego, California. IBC carries out its business equipment leasing operations from both its headquarters and its sales offices in Irvine, California, Denver, Colorado and Atlanta, Georgia. IBC's lease originations totaled $30.1 million, $87.2 million and $36.0 million for the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, respectively. During the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, IBC securitized $97.9 million, $87.0 million and $85.2 million of leases, respectively. Lease Finance Operations IBC is in the business of leasing equipment, including copying, data processing, communication, printing and manufacturing equipment, exclusively to business users. Initial lease terms typically range from 24 months to 60 months. IBC will commit to purchase this equipment only when it has a signed lease with a lessee who satisfies its credit and funding requirements. Substantially all the leases written by IBC are full-payout ("direct financing") leases that allow IBC to sell or re-lease the equipment upon termination of the lease. IBC also purchases small portfolios of existing equipment leases from brokers with whom it has established relationships. These portfolios are evaluated on an individual basis according to IBC's established credit policy. The Company believes that these acquisitions allow IBC to grow with greater efficiency than usual at a level of decreased risk due to the portfolio aging that has occurred on the books of the originating broker. IBC uses an established computer system and related software systems to process lease applications, book leases and post lease payments and closely monitor credit processing and collections. These systems have in part been developed by IBC management. Upon expiration of the initial lease terms of its direct-financing leases, IBC expects, on average, to realize slightly more than the "residual value" at which the leased equipment is carried on IBC's books. IBC's ability to recover the recorded estimated residual value depends on the accuracy of initial estimates of the equipment's useful life, the market conditions for used equipment when leases expire, and the effectiveness of IBC's program for re- leasing or otherwise disposing of leased equipment. Residual recovery, however, is not required for IBC to achieve a profitable return on its investment. The residual is usually worth 1% to 2% of the gross yield depending upon the original lease term, further mitigating against the residual risk inherent in the portfolio. 70 The following table sets forth IBC's lease originations by equipment type for the period presented.
THREE MONTHS ENDED YEAR ENDED MARCH 31, 1997 DECEMBER 31, 1996 ---------------------------------- ---------------------------------- NUMBER PRINCIPAL NUMBER PRINCIPAL OF LEASES AMOUNT % OF TOTAL OF LEASES AMOUNT % OF TOTAL ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS ---------- ---------- ------------ ---------- ---------- ------------ (DOLLARS IN THOUSANDS) Computers............... 548 $ 9,459 31.5% 857 $21,331 24.5% Automotive.............. 358 2,675 8.9 475 4,279 4.9 Restaurant.............. 222 2,652 8.8 395 6,238 7.2 Furniture and fixtures.. 204 2,649 8.8 242 5,963 6.8 Manufacturing/Machine work................... 121 2,905 9.7 380 11,289 13.0 Radio television production equipment... 60 1,081 3.6 202 3,838 4.4 Heavy equipment......... 38 689 2.3 163 3,938 4.5 Health/Sports equipment. 36 1,028 3.4 125 3,069 3.5 Print/Typeset equipment. 27 710 2.4 141 3,251 3.7 Dry cleaning/Washing.... 18 313 1.0 102 2,387 2.7 Clothing manufacture.... 10 430 1.4 59 2,373 2.7 Other................... 304 5,418 18.2 1,204 19,251 22.1 ----- ------- ----- ----- ------- ----- Total................. 1,946 $30,009 100.0% 4,345 $87,207 100.0% ===== ======= ===== ===== ======= =====
IBC uses a non-cancelable lease, the terms and conditions of which vary only slightly from transaction to transaction. In substantially all of the leases, lessees are obligated to: (i) remit all rents due, regardless of the performance of the equipment, (ii) operate the equipment in a careful and proper manner and in compliance with governmental rules and regulations, (iii) maintain and service the equipment, (iv) insure the equipment against casualty losses and public liability, bodily injury and property damage and (v) pay directly, or reimburse IBC for, any taxes associated with the equipment, its use, possession or lease, except those relating to net income derived by IBC therefrom. The lease provides that IBC, in the event of a default by a lessee, may declare the entire unpaid balance of rentals due and payable immediately, and may seize and remove the equipment for subsequent sale, re-lease or other disposition. Underwriting IBC maintains written credit policies that IBC believes are prudent and customary within the lease finance industry. Such policies form the basis for IBC's standardized lease forms and approval processes. On occasion, IBC will make exceptions to its written credit policy for lease brokers with whom IBC has had past positive experience. In general, IBC's credit policies encourage leasing of income-generating equipment. Within these guidelines, there are few specific equipment or industry prohibitions. IBC's credit policies allow it to accept credit investigations provided by select brokers and has generated a database about the brokers with whom it does business. IBC also maintains a written collection policy to provide standard collection guidelines. In those instances when a portfolio of leases is acquired, documentation provided by the originating lessor is checked for compliance with IBC's documentation standards before accepting the portfolio for purchase. Marketing IBC markets its equipment lease products through its own in-house sales force and through its network of professional equipment lease brokers. IBC's 20 person in-house sales force calls end user customers and vendors to solicit their equipment lease transactions. IBC intends to expand its marketing efforts to include more vendors. The sales force also calls on IBC's network of professional equipment lease brokers to solicit these professionals to send their lease transactions to IBC. 71 IBC's broker advisory panel consists of a group of its most productive brokers brought together on an annual basis, so that they may have an open interchange of ideas and information regarding IBC and the leasing marketplace. IBC believes the advisory panel serves a multi-purpose function by allowing IBC to reward those brokers that provide a profitable base of business to IBC, and also providing IBC the opportunity to market new ideas and concepts to those brokers before a general release to the leasing community. IBC believes that it benefits by obtaining information on how the brokers work with IBC's competitors (such as special programs and market trends), and this information can then be used to drive future marketing plans. LOAN PARTICIPATION AND INVESTMENT GROUP SPTL's Loan Participation and Investment Group ("LPIG") was formed in September 1995 to invest in and purchase syndicated commercial loan participations in the primary and secondary market originated by commercial banks. During the three months ended March 31, 1997 and the year ended December 31, 1996, LPIG purchased senior secured loan participations with outstanding loan commitments totaling $276.4 million and $267.1 million, respectively. Loans outstanding under commitments as of March 31, 1997 were $161.2 million. At March 31, 1997, none of LPIG's loans were 30 days or more delinquent. The principal types of loans acquired by LPIG are senior secured bank loans consisting of: (i) revolving lines of credit which allow the borrower to borrow and repay proceeds as needed for working capital purposes, (ii) long- term loans with a specific amortization schedule which requires the borrower to repay the borrowed loans over time, usually on a quarterly basis or (iii) letters of credit which are normally funded as a sublimit under the revolving line of credit commitment. The loans are generally secured by a first priority lien on all of the borrower's property including accounts receivable, inventory and furniture, fixtures and equipment, as well as liens on owned real estate. At March 31, 1997, loan participations held by LPIG ranged in size from approximately $850,000 to approximately $15.0 million. LPIG believes that its purchase of senior secured loan participations allows it to build and maintain a loan portfolio without costly direct customer loan servicing and loan origination costs. In addition, such purchases facilitate the maintenance of a portfolio which is diversified both geographically and by industry. LPIG's loan underwriting policy requires an analysis of the borrower's ability to repay its debts, as well as an evaluation of the effects of general economic and industry trends and various competitive factors affecting the borrower. 72 LPIG's commitments/outstandings by industry type at March 31, 1997 and December 31, 1996:
AT MARCH 31, 1997 AT DECEMBER 31, 1996 ---------------------------------------------- ---------------------------------------------- % OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL COMMITMENT COMMITMENT OUTSTANDING OUTSTANDING COMMITMENT COMMITMENT OUTSTANDING OUTSTANDING AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT ---------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Manufacturing (all segments).............. $ 69,171 25.3% $ 46,734 29.0% $ 69,893 26.2% $ 43,865 27.3% Hotels.................. 33,720 12.2 15,660 9.7 33,942 12.7 14,436 9.0 Broadcasting (TV)....... 24,465 8.8 13,890 8.6 24,625 9.2 15,040 9.4 Broadcasting (Radio).... 20,000 7.2 7,744 4.8 -- -- -- -- Outdoor advertising..... 19,000 6.9 11,110 6.9 19,000 7.1 6,479 4.0 Supermarkets............ 16,950 6.1 13,895 8.6 14,474 5.4 10,784 6.7 Defense................. -- -- -- -- 4,643 1.7 1,427 .9 Office products distributor............ 15,000 5.4 2,708 1.7 15,000 5.6 9,205 5.7 Air carrier (cargo)..... 15,000 5.4 6,711 4.2 -- -- -- -- Cable television........ -- -- -- -- 10,000 3.8 6,937 4.3 Paper (all segments).... 14,851 5.3 7,690 4.8 15,195 5.7 7,670 4.8 Collection Services..... 10,819 3.9 6,299 3.9 11,000 4.1 6,054 3.8 Waste disposal services. 10,127 3.7 4,940 3.1 10,000 3.8 6,129 3.8 Air carrier (passenger). 8,833 3.2 8,833 5.5 20,000 7.5 16,484 10.2 Food distribution....... 4,917 1.8 4,917 3.0 4,917 1.8 4,917 3.1 Direct mail advertising. 4,705 1.7 2,486 1.5 4,758 1.8 2,664 1.7 Park management......... 4,620 1.6 3,420 2.1 4,620 1.7 3,580 2.2 Restaurants............. 4,179 1.5 4,179 2.6 5,000 1.9 5,000 3.1 -------- ----- -------- ----- -------- ----- -------- ----- Total................. $276,357 100.0% $161,216 100.0% $267,067 100.0% $160,671 100.0% ======== ===== ======== ===== ======== ===== ======== =====
AUTO LEND GROUP SPTL's Auto Lend Group ("Auto Lend") was established in September 1996, to provide automobile inventory financing for automobile dealers. The principal types of loans originated are fixed-rate lines of credit. Auto Lend had $9.4 million of loans outstanding at March 31, 1997. SPTL believes that Auto Lend's products offer synergistic opportunities, when offered in connection with SPTL's sub-prime auto lending ability, to provide car dealers a complete financing package. See "--Consumer Lending--Auto Lending Division." COMMERCIAL MORTGAGE LENDING SPTL's Income Property Lending Division ("IPLD") was formed in February 1994 to expand the Company's apartment and commercial property lending business. For the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, IPLD funded approximately $75.9 million, $260.9 million and $160.0 million in loans, respectively. During the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, SPTL completed securitizations of $0, and approximately $277.0 million and $57.7 million of multi-family and commercial mortgage loans originated or purchased by IPLD, respectively. At March 31, 1997 and December 31, 1996 and 1995 $2.4 million, $1.9 million and $0.4 million or 1.0% and 1.1% and 0.04%, respectively, of IPLD's outstanding loans were 30 days or more delinquent. At March 31, 1997 and December 31, 1996 and 1995, $4.5 million, $4.4 million and $0.4 million, respectively, of IPLD originated loans were held for investment by SPTL. IPLD generally seeks to make 70% of its loans secured by apartment buildings and 30% of its loans secured by other commercial properties. Most of IPLD's business is generated through in-house loan representatives who market the loans directly to mortgage brokers and borrowers. Most of IPLD's loans have been secured by properties in California. The focus of IPLD's lending activity is the small loan market for apartments and commercial loans and its maximum loan amount is $2.5 million. SPTL believes that IPLD employs conservative underwriting criteria, which include a maximum loan-to-value ratio of 70% and minimum debt coverage ratio of 1.2x on all loans. Loans secured by income properties entail additional risk as compared to single family residential lending. The payment experience 73 on such loans is generally dependent on the successful operation of the related commercial or multi-family property and can be greatly impacted by adverse conditions in local real estate markets or in the economy. All of IPLD's loan programs include 30-year adjustable rate loans tied to the 6-month LIBOR, 1-year Treasury, or Bank of America prime indexes. Margins vary depending on product type, property location and credit history of the borrower. With respect to apartment loans, IPLD uses standard government agency documentation and approved independent appraisers. CONSUMER LENDING Through AMN and the Auto Lending Division of SPTL, the Company makes sub- prime automobile finance loans. The Company also makes home improvement loans and other consumer credit available through the Consumer Credit Division of SPTL. AUTO MARKETING NETWORK, INC. In March 1997, the Company acquired all of the outstanding shares of AMN for $750,000 and advanced AMN $11.6 million to repay amounts owed pursuant to operating lines of credit and for working capital purposes. AMN is headquartered in Boca Raton, Florida and offers loans to finance the purchase of new and used automobiles primarily to sub-prime borrowers. At March 31, 1997, AMN had regional offices in Texas, Virginia, Tennessee, and operations facilities in Oklahoma and is currently licensed in 45 states. Automobile finance contracts are acquired principally from an active dealer base of approximately 900 franchised automobile dealers. AMN provides its dealers with training and support designed to allow dealers to accelerate underwriting and final loan approval. For the period from its acquisition (March 14, 1997) through March 31, 1997, AMN originated $16.1 million in sub-prime auto loans. At March 31, 1997, $5.0 million or 6.4% of AMN's outstanding loans were 30 days or more delinquent. AUTO LENDING DIVISION ALD was formed in October 1994 to finance new and used automobile purchase contracts. ALD's borrowers are generally credit-impaired and therefore are unable to access alternative sources of financing from banks and captive automobile finance companies. ALD seeks to offset the increased risk of default in its portfolio with higher yields and aggressive servicing and collection activities. During the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, ALD originated approximately $16.3 million, $35.0 million and $19.0 million, respectively, in automobile loans. SPTL currently generates automobile loans through three Northern California retail offices and anticipates expanding its activities within California. HOME IMPROVEMENT LOANS AND OTHER CONSUMER CREDIT CCD was formed in early 1994 to offer loans primarily to finance home improvements and consumer goods. CCD's business is developed through a network of retailers and contractors throughout California. All loans are centrally processed, approved and funded at CCD's headquarters in Irvine, California. Home improvement loans offered by CCD range from $5,000 to $350,000 and include major remodeling projects that are sometimes coupled with refinancings. CCD's typical loan is secured by a junior lien. In addition, CCD purchases unsecured installment sales contracts to finance certain home improvements such as air conditioning, roofing and kitchen and bathroom remodeling. During the three months ended March 31, 1997 and the year ended December 31, 1996, CCD originated $4.0 million and $22.0 million in loans, respectively, all of which are held for investment. At March 31, 1997 and December 31, 1996, $1.0 million and $0.9 million or 2.4% and 2.4%, respectively, of CCD's outstanding loans were 30 days or more delinquent. 74 ADVISORY, INVESTMENT AND OTHER ACTIVITIES The Company conducts advisory services through its Imperial Credit Advisors, Inc. ("ICAI") subsidiary and has substantial investments in Southern Pacific Funding Corporation ("SPFC"), a publicly traded non-conforming residential mortgage lender, Dabney/Resnick/Imperial, LLC, ("DRI"), an investment banking firm and Imperial Credit Mortgage Holdings, Inc. ("IMH"), a publicly traded real estate investment trust engaged in mortgage finance activities. IMPERIAL CREDIT ADVISORS, INC. ICAI oversees the day-to-day operations of IMH pursuant to a management agreement more fully described in "Certain Transactions--Relationships with IMH--Other Transactions--General." For the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, ICAI earned $1.6 million, $3.3 million and $37,888 in management fees and incentive payments pursuant to the management agreement. SOUTHERN PACIFIC FUNDING CORPORATION SPFC is a publicly traded specialty finance company (NYSE Symbol: "SFC") which originates, purchases and sells high yielding, single family non- conforming mortgage loans. Substantially all of SPFC's loans are secured by first or second mortgages on owner occupied single family residences. The majority of the originated and purchased loans are made to borrowers who do not qualify for or are unwilling to obtain financing from conventional mortgage sources. As of March 31, 1997, ICII owned 10,242,500 shares of SPFC common stock, representing 49.4% of the outstanding common stock of SPFC which, commencing with the three months ended March 31, 1997, is reflected on the Company's financial statements as "Investment in Southern Pacific Funding Corporation." ICII's investment in SPFC constituted 2.3% of the Company's total assets and contributed 15.5% of the Company's total revenue for the three months ended March 31, 1997. DABNEY/RESNICK/IMPERIAL, LLC In September 1996, the Company entered into various transactions with Dabney/Resnick, Inc. subsequently renamed Dabney/Resnick/Imperial, LLC ("DRI"). ICII has acquired a 1% equity interest in DRI and has purchased a warrant to acquire an additional 48% interest therein. DRI is an investment bank that serves institutional, high net worth, and corporate clients. DRI's services include securities underwriting, sales and trading, financial advisory services, investment research, and asset management. DRI manages and underwrites public offerings and securities, arranges private placements and provides advisory and other services in connection with mergers, acquisitions, restructurings, and other financial transactions. IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. Simultaneously with IMH's initial public offering in November 1995, the Company contributed certain operating assets of ICII's mortgage conduit operations and SPTL's warehouse lending operations for 500,000 shares of IMH's common stock. IMH is a publicly traded specialty finance company (AMEX Symbol: "IMH") which operated three businesses: (i) the long-term investment operations which invests primarily in nonconforming residential mortgage loans and securities backed by such loans, (ii) the conduit operations which primarily purchases and sells or securitizes non-conforming mortgage loans and (iii) the warehouse lending operations which provides short-term lines of credit to originators of mortgage loans. As of March 31, 1997, the Company owned 462,269 shares of IMH common stock, representing 4.9% of the outstanding common stock of IMH. 75 LOANS HELD FOR INVESTMENT The following table sets forth certain information regarding the Company's loans held for investment. Substantially all of the Company's loans held for investment are held by SPTL:
AT DECEMBER 31, AT MARCH 31, -------------------------------- 1997 1996 1995 1994 ------------ ---------- -------- ---------- (IN THOUSANDS) Loans secured by real estate: One to four family......... $ 339,597 $ 375,476 $228,721 $ 897,494 Multi-family............... -- 2,527 7,028 82,004 Commercial................. 4,522 11,011 133,189 30,287 ---------- ---------- -------- ---------- 344,119 389,014 368,938 1,009,785 ---------- ---------- -------- ---------- Leases..................... 9,548 99,717 7,297 23,667 Installment loans.......... 59,517 34,248 1,900 4,290 Franchise loans............ 118,385 115,910 46,766 -- Asset-based loans.......... 314,063 288,528 154,252 -- Commercial loans........... 204,893 173,932 110,104 5,882 ---------- ---------- -------- ---------- 1,050,525 1,101,349 689,257 1,043,624 ---------- ---------- -------- ---------- Unearned income............ (7,305) (6,336) (5,217) (5,900) Deferred loan fees......... (6,551) (6,415) (1,540) (1,115) ---------- ---------- -------- ---------- 1,036,669 1,088,598 682,500 1,036,609 Allowance for loan losses.. (23,310) (19,999) (13,729) (7,054) ---------- ---------- -------- ---------- Total.................. $1,013,359 $1,068,599 $668,771 $1,029,555 ========== ========== ======== ==========
The Company's loans held for investment are primarily comprised of first and second lien mortgages secured by residential and income producing real property in California, leases secured by equipment, asset-based loans to middle market companies mainly in California, and loans to experienced franchisees of national and regional restaurant franchises. As a result, the loan portfolio has a high concentration in the same geographic region. Although the Company has a diversified portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economy of California. With respect to loans held for investment at SPTL, a continuing decline in California real estate values may adversely affect the underlying loan collateral. In order to reduce the Company's risk of loss on any one credit, the Company has historically sought to maintain a fairly low average loan size within the portfolio of loans held for investment. The average loan size and single largest loan, excluding loans originated by CBC, of the loans originated by and held for investment at SPTL at March 31, 1997 and December 31, 1996 and 1995 were $45,000, $0.1 million and $11.0 million, and $11.0 million, $0.1 million and $3.4 million, respectively. The largest loan held for investment at September 30, 1996 and December 31, 1996 and 1995 was a performing loan secured by a first deed of trust. FUNDING AND SECURITIZATIONS The Company's liquidity requirements are met primarily by repurchase facilities, warehouse lines of credit from financial institutions, securitizations, whole loan sales, SPTL customer deposits and FHLB and commercial borrowings. The Company has also accessed the capital markets through equity and debt offerings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Lines of Credit and Warehouse Facilities" and "--Securitizations." 76 SPTL Deposits SPTL obtains its funds from depositors by issuing FDIC insured passbook accounts and term certificates of deposit. SPTL solicits both individual and institutional depositors for new accounts through print advertisements and computerized referral networks. SPTL currently maintains two deposit gathering facilities in Southern California. At such facilities, tellers provide banking services to customers such as accepting deposits and permitting withdrawals. However, customers are not offered check writing services or offered demand deposit accounts. Generally, certificates of deposit are offered for terms of one to 12 months. See "Thrift and Loan Operations--Limitations on Types of Deposits" for a description of limitations on types of deposits that SPTL, as a thrift and loan, can accept. The following table sets forth the distribution of SPTL's deposit accounts (prior to intercompany elimination), and the weighted average nominal interest rates on each category of deposits:
AT DECEMBER 31, --------------------------------------------------------- AT MARCH 31, 1997 1996 1995 ---------------------------- ---------------------------- ---------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE % OF INTEREST % OF INTEREST % OF INTEREST AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE ---------- -------- -------- ---------- -------- -------- ---------- -------- -------- (DOLLARS IN THOUSANDS) Passbook accounts....... $ 72,453 6.0% 5.03% $ 47,890 4.5% 4.73% $ 51,146 4.7% 1.27% Time deposits of less than $100,000.......... 889,994 73.6 5.87 803,556 74.9 5.84 755,499 69.1 5.67 Time deposits of $100,000 and over...... 247,354 20.4 5.76 220,820 20.6 5.74 286,794 26.2 5.97 ---------- ----- ---------- ----- ---------- ----- Total................. $1,209,801 100.0% 5.80% $1,072,266 100.0% 5.77% $1,093,439 100.0% 5.54% ========== ===== ========== ===== ========== =====
The following table sets forth the dollar amount of deposits by time remaining to maturity:
AT DECEMBER 31, --------------------------------------- AT MARCH 31, 1997 1996 1995 ------------------- ------------------- ------------------- % OF % OF % OF AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS ---------- -------- ---------- -------- ---------- -------- (DOLLARS IN THOUSANDS) Three months or less.... $ 480,562 39.7% $ 404,565 37.7% $ 356,353 32.6% Over three months through six months..... 287,735 23.8 279,397 26.1 259,300 23.7 Over six months through twelve months.......... 353,863 29.3 311,862 29.1 367,285 33.6 Over twelve months...... 87,641 7.2 76,442 7.1 110,501 10.1 ---------- ----- ---------- ----- ---------- ----- Total................. $1,209,801 100.0% $1,072,266 100.0% $1,093,439 100.0% ========== ===== ========== ===== ========== =====
Certificates of deposit of $100,000 and over totaled approximately $247.4 million, $220.8 million and $286.8 million at March 31, 1997 and December 31, 1996 and 1995, respectively. Interest expense associated with certificates of deposit of $100,000 and over was approximately $3.6 million, $13.6 million and $15.4 million for the three months ended March 31, 1997, the years ended December 31, 1996 and 1995, respectively. Since December 31, 1991, SPTL has increased its deposits as necessary so that deposits together with cash, liquid assets and FHLB borrowings, have been sufficient to provide SPTL funding for its lending activities. The weighted average interest rate of the deposit accounts was 5.80% at March 31, 1997 as compared to 5.77% at December 31, 1996 and 5.54% at December 31, 1995. The Company believes that SPTL's local marketing strategies, as well as its utilization of domestic money markets, have been the basis by which SPTL has been able to acquire new deposits at levels consistent with management's financial targets. Certain levels of growth of SPTL's assets and deposits require notice to the FDIC. 77 As an additional source of funds, SPTL was approved in 1991 to become a member of the FHLB. Currently, SPTL is approved for borrowings from the FHLB pursuant to a secured line of credit that is automatically adjusted subject to applicable FHLB regulations and available pledged collateral. At March 31, 1997, $79.5 million was outstanding bearing an average interest rate of 6.21%. COMPETITION The businesses in which the Company operates are highly competitive. The Company faces significant competition from other commercial and consumer finance lenders, commercial banks, credit unions, thrift institutions and securities firms, among others. Many of these competitors are substantially larger and have more capital and other resources than the Company. Competition can take many forms, including convenience in obtaining a loan or lease, customer service, marketing and distribution channels and interest rates charged to borrowers. In addition, the current level of gains realized by the Company and its competitors on the sale of their loans and leases could attract additional competitors into these markets, with the possible effect of lowering gains that may be realized on the Company's future loan and lease sales. Wholesale originations are expected to remain a significant part of the Company's loan and lease production programs. As a wholesale purchaser of loans and leases, the Company is exposed to fluctuations in the volume and cost of wholesale loans and leases resulting from competition with other purchasers of such loans and leases, market conditions and other factors. Management believes that SPTL's most direct competition for deposits comes from savings and loan associations, other thrift and loan companies, commercial banks and credit unions. The Company's cost of funds fluctuates with general market interest rates. During certain interest rate environments, additional significant competition for deposits may be expected from corporate and governmental debt securities as well as money market mutual funds. REGULATION The Company's businesses are subject to extensive regulation in the United States at both the federal and state level. In the Company's home equity loan and financing businesses, regulated matters include loan origination, credit activities, maximum interest rates and finance and other charges, disclosure to customers, the terms of secured transactions, the collection, repossession and claims handling procedures utilized by the Company, multiple qualification and licensing requirements for doing business in various jurisdictions and other trade practices. As a part of the financing and asset securitization business, the Company is required to register as a broker-dealer with certain Federal and state securities regulatory agencies and is a member of the NASD. Truth in Lending The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder contain disclosure requirements designed to provide consumers with uniform, understandable information with respect to the terms and conditions of loans and credit transactions in order to give them the ability to compare credit terms. TILA also guarantees consumers a three day right to cancel certain credit transactions including loans of the type originated by the Company. The Company believes that it is in compliance with TILA in all material respects. The enforcement provisions applicable to TILA grant broad powers to the appropriate federal regulatory agencies or the Federal Trade Commission to enforce TILA with respect to those entities not otherwise subject to federal regulations, such as the Company. TILA also contains criminal penalties for wilful violations and grants a private right of action with specified statutory damage rewards for certain violations. If the Company were found not to be in compliance with TILA with respect to certain loans, aggrieved borrowers could have the right to rescind their mortgage loan transactions and to demand the return of finance charges paid to the Company, and other damages provided under TILA. The Board of Governors of the Federal Reserve System recently amended Regulation Z to add rescission "tolerances" to the rule to limit the rule's rescission remedy to disclosure 78 inaccuracies of the finance charge which amount to over one percent of the face amount of the note. The new rule also implements amendments to TILA which provide for rescission after the initiation of foreclosure proceedings under certain circumstances. TILA applies to all individuals and businesses that regularly extend consumer credit which is subject to a finance charge or is payable by a written agreement in more than four installments and is primarily for personal, family or household purposes. As such, TILA is applicable to the Company and its subsidiaries. Generally, TILA requires a creditor to make certain disclosures to the consumer concerning, among other things, finance charges and annual percentage rates. In addition to these general requirements, recent amendments to TILA require additional disclosures in connection with certain types of mortgage loans. These additional disclosure requirements apply to loans (other than mortgage loans to finance the acquisition or initial construction of a dwelling) with (i) total points and fees upon origination in excess of eight percent of the loan amount or $400, whichever is greater or (ii) an annual percentage rate of more than ten percentage points higher than comparably maturing United States Treasury securities ("Covered Loans"). Effective January 1, 1996, the $400 figure was adjusted by the Board of Governors of the Federal Reserve System to $412, in accordance with Regulation Z. These TILA provisions prohibit lenders from originating Covered Loans that are underwritten solely on the basis of the borrower's home equity without regard to the borrower's ability to repay the loan. The Company believes that only a small portion of loans originated in 1995 are of the type that, unless modified, are prohibited by TILA. It is the Company's policy to apply to all Covered Loans underwriting criteria that take into consideration the borrower's ability to repay. TILA also prohibits lenders from including prepayment fee clauses in Covered Loans to borrowers except in cases in which the penalty can be exercised only during the first five years following consummation of the loan, the consumer's total monthly debt-to-income ratio does not exceed 50% and the Covered Loans are not used to refinance existing loans originated by the same lender. The Company will continue to collect prepayment fees on loans originated prior to October 1995 (the effective date of the prepayment provision of TILA) and on non-Covered Loans, as well as on Covered Loans in permitted circumstances, but the level of prepayment fee revenue may decline in future years. TILA imposes other restrictions on Covered Loans, including restrictions on balloon payments and negative amortization features, which the Company does not believe will have a material impact on its operations. Other Lending Laws The Company and its subsidiaries are also required to comply with the Equal Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors from discriminating against applicants on the basis of race, color, religion, sex, age or marital status. The ECOA also prohibits discrimination in the extension of credit based on the fact that all or part of the applicant's income derives from a public assistance program or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. Regulation B promulgated under ECOA restricts creditors from obtaining certain types of information from loan applicants. It also requires certain disclosures by the lender regarding consumer rights and requires lenders to advise applicants of the reasons for any credit denial. In instances where the applicant is denied credit or the rate or charge for loans increases as a result of information obtained from a consumer credit agency, another statute, the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply the applicant with the name and address of the reporting agency. The Company is also subject to the Real Estate Settlement Procedures Act of 1974, as amended, and is required to file an annual report with the Department of Housing and Urban Development pursuant to the Home Mortgage Disclosure Act. In addition, the Company is subject to various other Federal and state laws, rules and regulations governing, among other things, the licensing of, and procedures which must be followed by, mortgage lenders and servicers, and disclosures which must be made to consumer borrowers. Failure to comply with such laws may result in civil and criminal liability and may, in some cases, give consumer borrowers the right to rescind their mortgage loans and to demand the return of finance charges paid to the Company. 79 In addition, certain of the loans originated or purchased by the Company, such as Title I home improvement loans, are insured by an agency of the Federal government. Such loans are subject to extensive government regulation. Environmental Liability In the course of its business, the Company may foreclose on properties securing loans that are in default. There is a risk that hazardous or toxic substances or petroleum constituents could be on such properties. In such event, it is possible that the Company could be held responsible for the cost of cleaning up or removing such waste depending upon the lender's activities, and such cost could exceed the value of the underlying properties. Under the laws of certain states, contaminated property may be subject to a lien on the property to assure payment for cleanup costs. In several states, such a lien has priority over the lien of an existing mortgage or owner's interest. In addition, under the laws of some states and under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), a lender may become liable for cleanup of a property and adjacent properties that are contaminated by releases from the mortgaged property if the lender engages in certain activities. In 1996 CERCLA was amended to eliminate federal lender liability under CERCLA in certain circumstances, including foreclosure if the lender resells the property at the earliest practicable, commercially reasonable time on commercially reasonable terms. In addition, the amendments defined the term participation in management, which provided some guidance to lenders about the nature of activities that would and would not give rise to liability under CERCLA. These amendments do not apply to state Superfund laws. Also, foreclosure and other activities on contaminated property may subject a lender to state tort liability. Future Laws Because each of the Company's businesses is highly regulated, the laws, rules and regulations applicable to the Company are subject to modification and change. There are currently proposed various laws, rules and regulations which, if adopted, could impact the Company. There can be no assurance that these proposed laws, rules and regulations, or other such laws, rules or regulations will not be adopted in the future which could make compliance more difficult or expensive, restrict the Company's ability to originate, broker, purchase or sell loans, further limit or restrict the amount of commissions, interest and other charges earned on loans originated, brokered, purchased or sold by the Company, or otherwise adversely affect the business or prospects of the Company. THRIFT AND LOAN OPERATIONS SPTL is subject to regulation, supervision and examination under both Federal and California law. SPTL is subject to supervision and regulation by the California Commissioner of Corporations (the "Commissioner") and, by the FDIC. Neither the Company's mortgage banking operations nor SPTL's thrift business is regulated or supervised by the Office of Thrift Supervision, which regulates savings and loan institutions. ICII is not directly regulated or supervised by the Commissioner, the FDIC, the Federal Reserve Board or any other bank regulatory authority, except with respect to the general regulatory and enforcement authority of the Commissioner and the FDIC over transactions and dealings between ICII or any of its other subsidiaries and SPTL, and except with respect to both the specific limitations regarding ownership of the capital stock of a parent company of any thrift and loan association and the specific limitations regarding the payment of dividends from SPTL discussed below. General SPTL is governed by the California Industrial Loan Law and the rules and regulations of the Commissioner that, among other things, regulate in certain limited circumstances the maximum interest rates payable on, and the terms of, certain thrift deposits as well as the collateral requirements and maximum maturities of the various types of loans that are permitted to be made by California chartered industrial loan companies, also known as 80 thrift and loan companies or thrifts. As SPTL's primary regulator, the Commissioner has broad supervisory and enforcement authority with respect to SPTL and its affiliates. The enforcement authority of the Commissioner over thrift and loan companies includes the ability to impose penalties for and to seek correction of violations of laws or regulations or unsafe or unsound practices by assessing monetary penalties, issuing cease and desist or removal and prohibition orders against a company, its directors, officers or employees and other persons, initiating injunctive actions or even taking possession of the business and property of a thrift and loan company. In general, such enforcement actions may be initiated for violations of laws, regulations, cease and desist orders or the thrift and loan company's articles of incorporation or for unsafe or unsound conditions or practices. Certain provisions of the California Industrial Loan Law also provide for the institution of civil or criminal actions against thrift and loan companies and their officers, directors, employees and affiliates with respect to violations of the law and related regulations. SPTL's deposits are insured by the Bank Insurance Fund of the FDIC to the full extent permissible by law. As an insurer of deposits, the FDIC issues regulations, conducts examinations, requires the filing of reports and generally regulates the operations of institutions to which it provides deposit insurance. SPTL is subject to the rules and regulations of the FDIC to the same extent as other state financial institutions that are insured by that entity. This regulation is intended primarily for the protection of depositors, and to ensure services for the public's convenience and advantage and to ensure the safety and soundness of the regulated institution. The approvals of the FDIC and the Commissioner are required before any merger, consolidation or change in control, or the establishment, relocation or closure of an office facility of SPTL. However, only the Commissioner's approval is required to establish a loan production office limited to the solicitation of loans. The FDIC, as insurer of SPTL's deposits, also has broad enforcement authority over state-chartered thrift and loan companies, including the power in appropriate circumstances to issue cease-and-desist orders and removal and prohibition orders and to terminate the insurance of their insured accounts. The FDIC is required to notify the Commissioner of its intent to take certain types of enforcement actions with respect to a California chartered, FDIC insured thrift and loan company and of the grounds therefor. If satisfactory corrective action is not effectuated within an appropriate time, the FDIC may proceed with its enforcement action. The FDIC may also terminate the deposit insurance of any insured depository institution if it determines that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed by in writing by the FDIC. The Commissioner also has the authority, independent of the FDIC, to issue cease and desist orders, impose operating restrictions, and take other actions to assure the safety and soundness of the institution. In September 1996, President Clinton signed into law, as part of a 1997 omnibus spending bill, the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which simplifies and streamlines across a broad spectrum the regulation of federally-insured depository institutions in diverse areas including consumer credit, truth-in-lending, real estate residential lending, regulatory applications, branching, disclosures and advertising, regulatory examinations, insider lending and lender and fiduciary exposure for environmental contamination under the Comprehensive Environmental Response, Compensation and Liability Act (i.e., "Superfund" Liability) and the Solid Waste Disposal Act, and the elimination (after five years) of civil liability under the Truth in Savings Act. In January 1996, the California Department of Corporations and the FDIC conducted a joint examination of SPTL. As a result of such examination, SPTL entered into a joint memorandum of understanding with the FDIC and the California Department of Corporations. The memorandum of understanding requires certain measures to be taken in the areas of: (i) hiring and retention of management, (ii) adoption of systems to monitor and control risk, (iii) correction of certain violations of law, (iv) credit review and (v) enhancement of other operational policies. SPTL does not believe that this informal agreement has had or will have a material adverse effect on the Company. In the event that SPTL fails to comply with the memorandum of understanding, SPTL and its affiliates, officers and directors could be subject to various enforcement actions, including cease and desist orders, criminal and civil penalties, removal from office, termination of deposit insurance or the revocation of SPTL's charter. Any such enforcement action could have a material adverse effect on the Company. 81 Limitations on Investments Subject to restrictions imposed by California law, SPTL is permitted to make secured and unsecured consumer and non-consumer loans. The maximum term for repayment of loans made by thrift and loan companies may be as long as 40 years and 30 days depending upon collateral and priority of the lender's lien on the collateral, except that loans with repayment terms in excess of 30 years and 30 days may not in the aggregate exceed five percent of total outstanding loans and obligations of the thrift. Although secured loans may generally be repayable in unequal periodic payments during their respective terms, consumer loans secured by real property with terms in excess of three years must be repayable in substantially equal periodic payments unless such loans were made or purchased by the thrift and loan under the Garn-St. Germain Depository Institutions Act of 1982 (which applies primarily to one to four unit single family residential loans). California law limits lending activities outside of California by thrift and loan companies to no more than 20% of total assets or 40% with the approval of the Commissioner. California law contains requirements for the diversification of the loan portfolios of thrift and loan companies. A thrift and loan with outstanding certificates of deposit may not, among other things: (i) place more than 25% of its loans or other obligations in loans or obligations that are secured only partially, but not primarily, by real property; (ii) make any loan secured primarily by improved real property that exceeds 20% of its paid- up and unimpaired capital stock and surplus not available for dividends; (iii) make any loan secured primarily by unimproved real property in an amount in excess of 10% of its unimpaired capital stock and surplus not available for dividends; (iv) lend an amount in excess of five percent of its paid-up and unimpaired capital stock and surplus not available for dividends upon the security of the stock of any one corporation; (v) make loans to, or hold the obligations of, any one person as primary obligor in an aggregate principal amount exceeding 20% of its paid-up and unimpaired capital stock and surplus not available for dividends; and (vi) have more than 70% of its total assets in loans that have remaining terms to maturity in excess of seven years and are secured solely or primarily by real property. SPTL had paid-up and unimpaired capital stock and surplus not available for dividends of $80.5 million at each of March 31, 1997 and December 31, 1996 and 1995. At March 31, 1997 and December 31, 1996 and 1995, SPTL was in compliance with its California investment law restrictions. SPTL originates and holds a portion of the Company's loans held for sale, of which a majority have a maturity of greater than seven years. SPTL believes that it will be able to continue to meet its requirements by managing the types of loans originated and where the loans are domiciled. Under California law, thrift and loan companies are generally limited to investments that are legal investments for commercial banks. A thrift and loan company may acquire real property only in satisfaction of debts previously contracted, pursuant to certain foreclosure transactions, or as may be necessary as premises for the transaction of its business, in which case such investment is limited to one-third of a thrift and loan's paid-in capital stock and surplus not available for dividends. Effective January 1, 1997, as a result of changes in the California Industrial Loan Law passed in 1996, SPTL may invest in the capital stock, obligations, or other securities of one or more corporations, subject to rules or orders prescribed by the Commissioner, if such investment would be lawful for commercial banks. California chartered commercial banks may invest in equity securities of one or more corporations upon receiving either general authorization or specific authorization from the California Superintendent of Banks. General authorization is available for the investment in the equity securities of one corporation in an amount not exceeding 10% of the gross capital of the bank, provided that such investments in all corporations do not exceed 25% of the gross capital of the bank. Specific authorization is not subject to such investment limits. Under federal law, SPTL is considered an insured state bank, and as such, it may make any equity investment, including an investment in the equity securities of an operating subsidiary, that is permissible for a national bank. Operating subsidiaries include corporations, limited liability companies or similar entities. Operating subsidiaries of national banks may engage in activities that are part of, or incidental to the business of banking, as determined by the Office of the Comptroller of the Currency (the "OCC"). Recently revised regulations of the OCC define certain activities that are currently permissible for operating subsidiaries of national banks. In addition, SPTL's 82 purchase of loan originations from an operating subsidiary may not be subject to the limitations on "covered transactions" under federal banking law. See "--Transactions with Affiliates." Transactions With Affiliates Under California law, a thrift and loan generally may not make any loan to, or hold an obligation of, any of its directors or officers or any director or officer of its holding company or affiliates, except in specified cases and subject to regulation by the Commissioner. In addition, a thrift and loan may not make any loan to, or hold an obligation of, any of its shareholders or any shareholder of its holding company or affiliates, except that this prohibition does not apply to persons who own less than 10% of the stock of a holding company or an affiliate that is listed on a national securities exchange. As a result of these requirements, SPTL may not make loans to ICII or other affiliates or purchase a contract, loan or chose in action of ICII or other affiliates. Subject to prior approval of the Commissioner, exemptions from these restrictions are available for purchase of loans from affiliates which are licensed mortgage brokers (such as ICII) or other certain types of licensed lenders. However, these purchases would be subject to strict limitations under federal law. Federal law also limits transactions between SPTL and its affiliates. Generally, such transactions must be on terms and under conditions, including credit standards, that are substantially the same, or at least as favorable to SPTL, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies. In addition, SPTL is prohibited from engaging in "covered transactions" with an affiliate if the aggregate amount of such transactions with such affiliate would exceed 10% of SPTL's capital stock and surplus, or in the case of all affiliates, if the aggregate amount of such transactions exceeds 20% of SPTL's capital stock and surplus. "Covered transactions" include loans or extensions of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate (subject to certain exemptions), the acceptance of securities issued by an affiliate as collateral security for a loan or extension of credit to any person or company, or the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. For certain "covered transactions," collateral requirements in specified amounts will be applicable. SPTL also is prohibited from purchasing low-quality assets from its affiliates, except under limited circumstances. SPTL engages in many transactions which involve its affiliates, including ICII and its other subsidiaries. As such, many of the transactions between the Company and SPTL are subject to federal and state affiliate transaction regulations. Under the California Industrial Loan Law, it is unlawful for SPTL to offer or sell any security in an issuer transaction unless the sale has been qualified under applicable provisions of the California Corporate Securities Act of 1968, as amended. The Commissioner, however, has authority to exempt any such transaction which the Commissioner determines is not comprehended within the purposes of the qualification requirements and which the Commissioner finds not necessary or appropriate in the public interest or for the protection of investors, investment certificate holders, and the industrial loan company industry as a whole. The Commissioner also has authority to restrict, limit, prohibit or otherwise condition the uses of proceeds from the sale of securities, the extent to which a security may be included within the definition of capital, or the extent to which the proceeds from the sale of securities may be included in the investment certificate ratio or used to increase outstanding investment certificates. SPTL reasonably believes that it would qualify for an exemption from qualification and has no reason to believe it would not have full use of the proceeds as intended as well as full leverage authority as defined under the Industrial Loan Law. Capital; Limitations on Borrowings Under California law, a thrift and loan is subject to certain leverage limitations that are not generally applicable to commercial banks or savings and loan associations. In particular, a thrift and loan institution that has been in operation in excess of 60 months may have outstanding at any time deposits not to exceed 20 times paid-up and unimpaired capital and surplus as restricted in its by-laws as not available for dividends, with the exact limitation subject to order by the Commissioner. The Commissioner has issued an order to SPTL authorizing the maximum 20 times leverage standard. 83 Thrift and loan companies are not permitted to borrow, except by the issuance of certificates of deposit, in an amount exceeding 300% of outstanding capital stock, surplus and undivided profits, without the Commissioner's prior consent. All sums borrowed in excess of 150% of outstanding capital stock, surplus and undivided profits must be unsecured borrowings or, if secured, approved in advance by the Commissioner, and be included as certificates of deposit for purposes of computing the above ratios; however, collateralized FHLB advances are excluded for this test of secured borrowings and are not specifically limited by California law. In 1989, the FDIC and the other federal regulatory agencies adopted final risk-based capital adequacy standards applicable to financial institutions like SPTL whose deposits are insured by the FDIC. These guidelines provide a measure of capital adequacy and are intended to reflect the degree of risk associated with both on and off balance sheet items, including residential loans sold with recourse, legally binding loan commitments and standby letters of credit. Under these regulations, financial institutions such as SPTL are required to maintain capital to support activities that in the past did not require capital. Because ICII, unlike SPTL, is not directly regulated by any bank regulatory agency, it is not subject to any minimum capital requirements. See "--Holding Company Regulations." A financial institution's risk-based capital ratio is calculated by dividing its qualifying capital by its risk-weighted assets. Financial institutions generally are expected to meet a minimum ratio of qualifying total capital to risk-weighted assets of 8%, of which at least 50% of qualifying total capital must be in the form of core capital (Tier 1), which includes common stock, noncumulative perpetual preferred stock, minority interests in equity capital accounts of combined subsidiaries and allowed mortgage servicing rights less all intangible assets other than allowed mortgage servicing rights and purchased credit card relationships, subject to certain amount limitations. Supplementary capital (Tier 2) consists of the allowance for loan losses up to 1.25% of risk-weighted assets, cumulative preferred stock, intermediate-term preferred stock, hybrid capital instruments and term subordinated debt. The maximum amount of Tier 2 capital that may be recognized for risk-based capital purposes is limited to 100% of Tier 1 capital (after any deductions for disallowed intangibles). The aggregate amount of term subordinated debt and intermediate term preferred stock that may be treated as Tier 2 capital is limited to 50% of Tier 1 capital. Certain other limitations and restrictions apply as well. At March 31, 1997, the Tier 2 capital of SPTL consisted of its allowance for loan losses and $35 million in term subordinated indebtedness. The FDIC has adopted a 3% minimum leverage ratio that is intended to supplement risk-based capital requirements and to ensure that all financial institutions, even those that invest predominantly in low risk assets, continue to maintain a minimum level of core capital. A financial institution's minimum leverage ratio is determined by dividing its Tier 1 capital by its quarterly average total assets, less intangibles not includable in Tier 1 capital. The FDIC rules provide that a minimum leverage ratio of 3% is required for institutions that have been determined to be in the highest category used by regulators to rate financial institutions. All other organizations are required to maintain leverage ratios of at least 100 to 200 basis points above the 3% minimum. At March 31, 1997, SPTL was in compliance with all of its capital requirements. Prompt Corrective Action The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires the federal banking regulators to take "prompt corrective action" with respect to banks that do not meet minimum capital requirements. In response to this requirement, the FDIC adopted final rules based upon FDICIA's five capital tiers. The FDIC's rules provide that an institution is "well capitalized" if its risk-based capital ratio is 10% or greater; its Tier 1 risk-based capital ratio is 6% or greater; its leverage ratio is 5% or greater; and the institution is not subject to a capital directive of a federal bank regulatory agency. A bank is "adequately capitalized" if its risk-based capital ratio is 8% or greater; its Tier 1 risk-based capital ratio is 4% or greater; and its leverage ratio is 4% or greater (3% or greater for the highest rated institutions). An institution is considered "undercapitalized" if its risk-based capital ratio is less than 8%; its Tier 1 risk-based capital ratio is less than 4%, or its leverage ratio is 4% or less (less than 3% for the highest rated institutions). An institution is "significantly undercapitalized" if its risk-based capital ratio is less than 6%; its Tier 1 risk-based capital ratio is less than 3%; 84 or its leverage ratio is less than 3%. A bank is deemed to be "critically undercapitalized" if its ratio of tangible equity (Tier 1 capital) to total assets is equal to or less than 2%. An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it engages in unsafe or unsound banking practices. Under this standard, SPTL is currently "well capitalized"; this classification, however, is a regulatory capital classification used for internal regulatory purposes, and is not necessarily indicative of SPTL's financial condition and operations. Undercapitalized institutions are required to submit a capital restoration plan for improving capital. In order to be accepted, such plan must include a financial guaranty from the institution's holding company that the institution will return to capital compliance. If such a guarantee were deemed to be a commitment to maintain capital under the Federal Bankruptcy Code, a claim for a subsequent breach of the obligations under such guarantee in a bankruptcy proceeding involving the holding company would be entitled to a priority over third party general unsecured creditors of the holding company. Undercapitalized institutions: are prohibited from making capital distributions or paying management fees to controlling persons; may be subject to growth limitations; acquisitions, branching and entering into new lines of business are restricted, and transactions with affiliates or the appointment of additional directors or senior executive officers are restricted. Finally, the institution's regulatory agency has discretion to impose certain of the restrictions generally applicable to significantly undercapitalized institutions. In the event an institution is deemed to be significantly undercapitalized, it may be required to: sell stock; merge or be acquired; restrict transactions with affiliates; restrict interest rates paid; divest a subsidiary; or dismiss specified directors or officers. If the institution is a bank holding company, it may be prohibited from making any capital distributions without prior approval of the Federal Reserve Board and may be required to divest a subsidiary. A critically undercapitalized institution is generally prohibited from making payments on subordinated debt and may not, without the approval of its principal bank supervisory agency, enter into a material transaction other than in the ordinary course of business; engage in any covered transaction; or pay excessive compensation or bonuses. Critically undercapitalized institutions are subject to appointment of a receiver or conservator. Effectively, the FDIC would have general enforcement powers over SPTL and the Company in the event that SPTL is deemed undercapitalized. SPTL's Capital Ratios. The following tables indicate SPTL's capital ratios under (i) the California leverage limitation, (ii) the FDIC risk-based capital requirements, and (iii) FDIC minimum leverage ratio, at each of March 31, 1997 and December 31, 1996.
AT MARCH 31, 1997 AT DECEMBER 31, 1996 ------------------------------------------------- ------------------------------------------------- MINIMUM WELL CAPITALIZED MINIMUM WELL CAPITALIZED ACTUAL REQUIREMENT REQUIREMENT ACTUAL REQUIREMENTS REQUIREMENT -------------- -------------- ----------------- -------------- -------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- --------- ------- -------- ----- -------- ----- --------- ------- (DOLLARS IN THOUSANDS) California Leverage Limitation.......... $140,069 11.58% $ 60,490 5.00% $ -- -- % $144,798 13.50% $ 53,613 5.00% $ -- -- Risk-Based Capital... 176,987 12.13 116,759 8.00 145,949 10.00 145,018 10.87 106,715 8.00 133,393 10.00% Risk-based Tier 1 Capital ............ 125,047 8.57 58,380 4.00 87,569 6.00 129,497 9.71 53,357 4.00 80,036 6.00 FDIC Leverage Ratio.. 125,047 8.61 58,065 4.00 72,581 5.00 129,497 9.35 55,397 4.00 69,247 5.00
Limitations on Types of Deposits Because of the limitations described in "--Holding Company Regulations" below, SPTL currently offers only passbook accounts and certificates of deposit and does not offer NOW accounts, checking accounts or similar demand accounts. 85 Insurance Premiums The FDIC administers two separate deposit insurance funds, the Bank Insurance Fund ("BIF"), which insures the deposits of institutions which were insured by the FDIC prior to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), and the Savings Association Insurance Fund ("SAIF"), which insures the deposits of institutions which were insured by the Federal Savings and Loan Insurance Corporation prior to the enactment of FIRREA. SPTL's insurance premium for the first quarter of 1997 was approximately $115,000. As required by FDICIA, the FDIC has established a risk-based system for setting deposit insurance assessments. Under the risk-based assessment system, an institution's insurance assessments vary depending on the level of capital the institution holds and the degree to which it is of supervisory concern to the FDIC. Once an insurance fund has reached its designated reserve ratio of 1.25%, and as long as there are no outstanding borrowings by the FDIC from the United States Treasury, the FDIC is not permitted to charge assessment premiums that would increase the reserve ratio of the insurance fund above its designated reserve ratio. The BIF reached its designated reserve ratio in 1995. Recent Legislation A new California state regulatory agency was created in 1996 to be known as the Department of Financial Institutions ("DFI"). The DFI will become effective July 1, 1997. All state chartered depository institutions will be licensed and regulated after July 1, 1997 by the DFI, which includes banks, savings associations, credit unions, and industrial loan companies. SPTL, an industrial loan company, will be subject to the jurisdiction of the DFI as its state regulator. Currently SPTL is regulated by the Commissioner. It is anticipated that the same administrative and examination staffs will transfer to the DFI from the Commissioner's office, thereby ensuring continuity of regulatory personnel familiar with the administration of the Industrial Loan Law; however, no assurance can be given that this will occur. Persons who are unfamiliar with the Industrial Loan Law and the scope of operations of industrial loan companies, such as SPTL, will be interpreting the Industrial Loan Law in the office of general counsel and office of policy of the DFI. It is expected that this will not have any material effect on SPTL. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act") was enacted which, among other things, imposes on BIF-insured deposits a special premium assessment on domestic deposits at one-fifth the premium rate imposed on SAIF-insured deposits, which will be used to pay the interest on Financial Corporation ("FICO") bonds issued by the federal government as part of the savings association bailout provisions of the 1989 FIRREA legislation. In the year 2000, however, the Funds Act requires BIF-insured institutions to share in the payment of the FICO obligations on a pro-rata basis with all savings institutions, with annual assessments expected to equal approximately 2.4 basis points until the year 2017, and to be completely phased out by 2019. The Funds Act also prohibits the merger of the BIF and SAIF insurance funds unless the savings institution charter has been eliminated on January 1, 1999. The 1996 legislation that created the DFI also authorized the use of the word "bank" by thrift and loan companies, such as SPTL, in their names. SPTL has reserved the name "Southern Pacific Bank" and after July 1, 1997, may change its name to that or another "bank" name. That legislation also granted the DFI jurisdiction over the issuance of securities by a thrift and loan company requiring application and permit unless otherwise exempt. In addition, on December 6, 1996, the FDIC determined to continue the current downward adjustment to the assessment rate schedule applicable to deposits of BIF institutions for the semi-annual assessment period beginning January 1, 1997. For such period, the BIF assessment rates will range from 0 to 27 basis points. In addition, in accordance with the Funds Act, the FDIC eliminated the minimum assessment amount for BIF-insured institutions. SPTL has been notified that its combined FDIC and FICO assessment rate for 1997 will be approximately 4.3 cents per $100 of deposits. 86 Safety and Soundness Guidelines In July 1995, certain federal bank regulatory agencies, including the FDIC, adopted Interagency Guidelines establishing standards for safety and soundness as required by the FDICIA. In accordance with these Guidelines, institutions are required to establish policies and procedures regarding: (i) internal controls and information; (ii) internal audit systems; (iii) loan documentation; (iv) credit underwriting; (v) interest rate exposure; and (vi) asset growth. In addition, under these Guidelines institutions must maintain safeguards to prevent the payment of compensation and fees which are excessive or could lead to a material loss for the institution. The federal bank regulatory agencies recently amended the Interagency Guidelines to include asset quality and earnings standards. The new guidelines require an institution to identify problem assets and estimate inherent losses. The earnings standards under the revised guidelines require an institution to establish monitoring and reporting systems. Holding Company Regulations The Competitive Equality Banking Act of 1987 ("CEBA") subjected certain previously unregulated companies to regulation as bank holding companies by expanding the definition of the term "bank" in the BHCA. SPTL remained exempt from the definition of "bank" under the BHCA, and therefore ICII was exempt from regulation as a bank holding company. SPTL may cease to fall within those exceptions if it engages in certain operational practices, including accepting demand deposit accounts. SPTL currently has no plans to engage in any operational practice that would cause it to fall outside of one or more of the exceptions to the term "bank" as defined by CEBA. Pursuant to CEBA, ICII and its affiliates are treated as if ICII were a bank holding company for the limited purposes of applying certain restrictions on loans to insiders and anti-tying provisions. Limitations on Dividends Under the California Industrial Loan Law, a thrift and loan may declare dividends on its capital stock only if it has at least $750,000 of unimpaired capital stock plus additional capital stock of $50,000 for each branch office. In addition, no distribution of dividends is permitted unless: (i) such distribution would not exceed a thrift and loan's retained earnings, (ii) any payment would not result in a violation of the approved minimum capital to thrift and loan certificate of deposit ratio and (iii) after giving effect to the distribution, either (y) the sum of a thrift and loan's assets (net of goodwill, capitalized research and development expenses and deferred charges) would be not less than 125% of its liabilities (net of deferred taxes, deferred income and other deferred credits), and (z) current assets would be not less than current liabilities (except that if a thrift and loan's average earnings before taxes for the last two fiscal years had been less than average interest expense, current assets must be not less than 125% of current liabilities). Under California law, in order for capital (including surplus) of an institution to be included in calculating the leverage limitation described above, thrift institutions must amend their by-laws to restrict such capital from the payment of dividends. The amount of restricted capital maintained by a thrift also provides the basis for establishing the maximum amount that a thrift may lend to one single borrower. As of March 31, 1997 and December 31, 1996, $80.5 million of SPTL's capital was so restricted. The FDIC has advised insured institutions that the payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, thrift and loans may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items. Under the Financial Institutions Supervisory Act and FIRREA, federal regulators also have authority to prohibit financial institutions from engaging in business practices which are considered to be unsafe or unsound. It is possible, depending upon the financial condition of a thrift and other factors, that such regulators could assert that the payment of dividends in some circumstances might constitute unsafe or unsound practices and prohibit payment of dividends even though technically permissible. Pursuant to FDICIA, SPTL is prohibited from paying dividends if the payment of such dividends would cause the institution to become "undercapitalized." These limitations on the payment of dividends may restrict 87 the Company's ability to utilize cash from SPTL which may have been otherwise available to the Company for working capital. Limitations on Acquisitions of Voting Stock of the Company Any person who wishes to acquire 10% or more of the capital stock or capital of a California thrift and loan company or 10% or more of the voting capital stock or other securities giving control over management of its parent company must obtain the prior written approval of the Commissioner. Similarly, the federal Change in Bank Control Act of 1978 requires any person or company that wishes to obtain "control" of an insured depository institution to notify the appropriate Federal banking agency, which would be the FDIC in the case of SPTL, 60 days prior to the proposed acquisition. If the FDIC has not issued a notice disapproving the proposed acquisition within that time period (including a possible 90 day extension), the person may acquire such institution. For purposes of the statute, "control" is defined as the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of an insured depository institution. RESTRICTION ON INVESTMENTS BY IMPERIAL BANK At March 31, 1997, Imperial Bank owned 9,261,106 shares of Common Stock, or 24.1% of the Company. Imperial Bancorp ("Bancorp") is the owner of all of the outstanding capital stock of Imperial Bank. FDICIA restricts the ability of state chartered banks, such as Imperial Bank, to hold equity securities and requires impermissible investments to be disposed of before December 19, 1996. Imperial Bank acquired its interest in the Company at its formation, which interest has been reduced by the Company's sale of Common Stock to third parties, as well as through a sale of stock by Imperial Bank subsequent to the initial public offering of the Company. The 9.4 million shares of the Company's Common Stock held by Imperial Bank may be subject to divestiture under FDICIA. Imperial Bank has requested approval from the FDIC to retain its investment in the Company and the FDIC has extended the FDICIA-imposed deadline pending a decision on Imperial Bank's application. The regional office of the FDIC has acknowledged the request and requested and received additional information on the Company, and has recommended to its Washington, D.C. headquarters that Imperial Bank be allowed to retain its stock ownership in the Company subject to certain conditions. The Federal Reserve Bank of San Francisco has requested that Bancorp make an application under Section 4 of the Bank Holding Company Act for approval for Imperial Bank to retain the Company's stock. Bancorp has deferred any application pending the results of the FDIC application. Because Imperial Bank owns less than 50% of the outstanding shares of the Company and the Company is operated as a company independent of Imperial Bank and Bancorp, the Company believes that, in the event of an insolvency, bankruptcy or receivership proceeding involving Imperial Bank or Bancorp, a court, exercising reasonable judgment after full consideration of all relevant factors, would not order the substantive consolidation of the assets and liabilities of the Company with either Imperial Bank or Bancorp. Two directors of the Company also serve on the board of directors of Imperial Bank or its parent, Imperial Bancorp. See "Management." Imperial Financial Group In February 1997, the board of directors of Bancorp approved a plan to spin off a portion of its specialty lending and finance businesses, including Imperial Bank's common stock interest in ICII, to Imperial Financial Group, Inc. ("IFG"), a recently created subsidiary of Imperial Bank formed to hold various business assets of Bancorp and its subsidiaries. Two directors of the Company also serve on the board of directors of IFG. EMPLOYEES As of March 31, 1997, the Company had 647 employees, (47 at ICII, 227 at SPTL, 82 at IBC, 90 at FMAC, three at ICAI and 201 at AMN). Management believes that its relations with these employees are satisfactory. Neither ICII nor any of its subsidiaries is a party to any collective bargaining agreement. 88 PROPERTIES The Company's executive offices occupy 22,070 square feet of space in Torrance, California at a current monthly rental of approximately $31,420. The Company leases approximately 25,000 square feet of space in Santa Ana Heights, California. The Company leases these facilities pursuant to a 10 year lease, commencing September 1, 1992 and subleases the majority of these premises to IMH at a monthly rental of approximately $33,936. See "Certain Transactions-- Relationships with IMH." The Company currently leases offices in San Diego, Walnut Creek, Newport Beach, Woodland Hills, Sacramento, San Jose and Irvine, California, as well as in Parsippany, New Jersey; Greenville, Delaware; Bellevue, Washington; Denver, Colorado; Boca Raton, Florida; Allentown, Pennsylvania; and Lake Oswego and Grants Pass, Oregon. SPTL operates in California through branches and loan production offices and in other states through loan production offices and representatives. LEGAL PROCEEDINGS The Company is a defendant in Fortune Mortgage Corporation et al. vs. ICII et al., originally filed in Orange County Superior Court on March 5, 1997 and recently ordered removed to arbitration. The complaint alleges breach of contract, breach of implied covenant of good faith and fair dealing, negligent misrepresentation, fraud, conspiracy to commit fraud, aiding and abetting fraud, contractual indemnity and reimbursement, money had and received, and unjust enrichment arising from the Company's sale of a group of loan production offices to plaintiffs. The plaintiffs seek rescission, restitution and general, special and/or consequential damages, and also exemplary and punitive damages as relate to the claims regarding fraud. In Agoura Willow Creek, Ltd. vs. SPTL, filed on February 27, 1997, in Los Angeles County Superior Court the plaintiff seeks damages from SPTL for alleged breach of written contract and breach of fiduciary duty arising out of a loan commitment agreement. The predecessor entity to FMAC, and an officer of such entity and of FMAC, among others, are named as defendants in De Wald et al. vs. Knyal et al. filed on November 15, 1996 in the Los Angeles Superior Court. The complaint seeks an accounting, monetary and punitive damages for alleged breach of contract, breach of fiduciary duty, breach of implied covenant of good faith and fair dealing and fraud arising from an alleged business relationship. The Company has not been named as a defendant in this lawsuit. The Company, in Gibson vs. ICII, filed on October 5, 1994 in U.S. District Court, Southern District Florida, is a defendant against complaints of violation of the Federal Real Estate Settlement Procedures Act ("RESPA"). The dispute arises out of a Truth in Lending Disclosure Statement received by the plaintiff relating to a refinance of their residence in which charges were allegedly mischaracterized or concealed. The Company was served with an amended class action complaint on January 11, 1995 and a second amendment on October 12, 1995. The trial court dismissed the case on February 20, 1997, and plaintiff has filed an appeal. A nearly identical RESPA class action complaint was filed in the U.S. District Court for the District Massachusetts in Jereidini vs. ICII on February 21, 1997. All of the above referenced actions are being actively defended. 89 MANAGEMENT The following table sets forth certain information with respect to the directors and executive officers of the Company.
NAME AGE POSITION WITH COMPANY ---- --- --------------------- H. Wayne Snavely(1)(2)...... 56 Chairman of the Board, President and Chief Executive Officer Kevin E. Villani............ 49 Executive Vice President, Chief Financial Officer and a Director Irwin L. Gubman............. 55 General Counsel and Secretary Paul B. Lasiter............. 31 Senior Vice President and Controller Stephen J. Shugerman(1)..... 50 President of SPTL and a Director Joseph R. Tomkinson(1)...... 49 Director Robert S. Muehlenbeck....... 49 Director G. Louis Graziadio, III(2).. 47 Director Perry A. Lerner(2)(3)....... 54 Director James Clayburn LaForce, Jr.(2)(3).................. 67 Director
- -------- (1) Member of Executive Committee. (2) Member of Compensation Committee. (3) Member of Audit Committee. H. WAYNE SNAVELY has been Chairman of the Board and Chief Executive Officer of the Company since December 1991 and President since February 1996. From 1986 to February 1992, Mr. Snavely served as Executive Vice President of Imperial Bancorp and Imperial Bank with direct management responsibility for the following bank subsidiaries and divisions: Imperial Bank Mortgage, SPTL, Imperial Trust Company, Wm. Mason & Company, Imperial Ventures, Inc. and The Lewis Horwitz Organization. From 1983 through 1986, Mr. Snavely was employed as Chief Financial Officer of Imperial Bancorp and Imperial Bank. Mr. Snavely served as a director of Imperial Bank from 1975 to 1983 and currently serves as a director. Mr. Snavely is Chairman of the Board of SPFC and IMH. KEVIN E. VILLANI has been the Executive Vice President and Chief Financial Officer of the Company since September 1995 and a Director since June 1997. From 1993 to 1996, Mr. Villani was the Associate Professor of Clinical Finance and Real Estate for the University of Southern California. From 1985 to 1990, he was the Executive Vice President and Chief Financial Officer for Imperial Corporation of America. From 1982 to 1985, he served in various senior executive capacities at the Federal Home Loan Mortgage Corporation. From 1975 to 1982, he served as the Financial Economist, The Director for the Division of Housing Finance Analysis and The Deputy Assistant Secretary for the Office of Economic Affairs and Chief Economist for the Department of Housing and Urban Development. From 1974 to 1975, he was an economist for the Federal Reserve Bank of Cleveland. Mr. Villani has also served as a consultant to the World Bank and USAID on banking, housing, finance, and privatization. IRWIN L. GUBMAN has been the General Counsel and Secretary of ICII since October 1996. From February 1992 to September 1996, Mr. Gubman was a partner at Coudert Brothers serving in various capacities including syndicated lending, structured finance, and regulatory matters. From December 1970 to September 1991, Mr. Gubman served in various capacities at Bank of America, most recently as Senior Vice President and Associate General Counsel. From March 1968 to October 1970, Mr. Gubman was an Attorney Advisor for the U.S. Arms Control and Disarmament Agency. From September 1967 to March 1968, Mr. Gubman was a Legal Advisor to the Government of Liberia. PAUL B. LASITER has been Senior Vice President and Controller of the Company since November 1992. From June 1988 to November 1992, Mr. Lasiter was a Supervising Senior Accountant for KPMG Peat Marwick, specializing in the financial institutions industry. Mr. Lasiter is a Certified Public Accountant. 90 STEPHEN J. SHUGERMAN has been President of SPTL since June 1987 and has been a Director of the Company since December 1991. From June 1985 to May 1987, Mr. Shugerman was President of ATI Thrift & Loan Association, a privately owned thrift and loan association, and, from 1979 to 1985, he was Senior Vice President of Imperial Thrift and Loan Association, a former subsidiary of Imperial Bank. Mr. Shugerman has recently served as President of the California Association of Thrift & Loan Companies. Mr. Shugerman is a director of SPFC. JOSEPH R. TOMKINSON has been a Director of the Company since December 1991. Mr. Tomkinson has been the Vice Chairman of the Board and Chief Executive Officer of IMH since August 1995. Mr. Tomkinson served as President of the Company from January 1992 to February 1996 and from 1986 to January 1992, he was President of Imperial Bank Mortgage, a subsidiary of Imperial Bank, one of the companies combined to become ICII in 1992. From 1984 to 1986, he was employed as Executive Vice President of Loan Production for American Mortgage Network, a privately owned mortgage bank. ROBERT S. MUEHLENBECK has been a Director of the Company since December 1991. Mr. Muehlenbeck is also an Executive Vice President of Imperial Bank. Mr. Muehlenbeck was formerly the President of Seaborg, Incorporated and has been involved in commercial and residential real estate development and finance activities. G. LOUIS GRAZIADIO, III has been a Director of the Company since February 1992. Mr. Graziadio has been Chairman of the Board and Chief Executive Officer of Ginarra Holdings, Inc. (as well as predecessor and affiliated companies) since 1979. Ginarra Holdings, Inc. is a privately held California corporation engaged in a wide range of investment activities. Mr. Graziadio has been actively involved, since 1972, in real estate development, construction and home building. Mr. Graziadio is a Director of Imperial Bancorp and Imperial Trust Company, an indirect subsidiary of Imperial Bancorp. PERRY A. LERNER has been a Director of the Company since May 1992. He has been a principal in the investment firm of Crown Capital Group, Inc. since 1996. Mr. Lerner was with the law firm of O'Melveny & Myers from 1982 through 1996, having been a partner with the firm from 1984 through 1996. Mr. Lerner was an Attorney-Advisor of the International Tax Counsel of the United States Treasury Department from 1973 to 1976. JAMES CLAYBURN LAFORCE, JR. has been a Director of the Company since May 1992. From July 1978 to July 1993, Mr. LaForce was the Dean of The Anderson School, University of California at Los Angeles. In addition, Mr. LaForce was appointed in January 1991 to the position of Acting Dean of the Hong Kong University of Science and Technology, Hong Kong. Directors of the Company hold office until the next annual meeting of shareholders and until their successors are elected and qualified, or until their earlier resignation or removal. All officers are appointed by and serve at the discretion of the Board of Directors, subject to employment agreements, where applicable. There are no family relationships between any directors or officers of the Company. George L. Graziadio, Jr., the President, Chief Executive Officer and the Chairman of the board of directors of Bancorp, is the father of G. Louis Graziadio, III. The Graziadio family and related entities are significant shareholders of Bancorp. 91 EXECUTIVE COMPENSATION The following table provides information concerning the cash and non-cash compensation earned and received by the Company's Chief Executive Officer and its most highly compensated executive officers (the "Named Executive Officers") whose salary and bonus during the fiscal year ended December 31, 1996 exceeded $100,000: SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------- ------------ NAME AND PRINCIPAL FISCAL OTHER ANNUAL OPTIONS POSITION YEAR SALARY(1) BONUS(1) COMPENSATION GRANTED ------------------ ------ --------- -------- ------------- ------------ H. Wayne Snavely......... 1996 $300,000 $700,000 $28,564(2) 400,000(3) President and Chief Executive Officer 1995 300,000 252,603 32,960(2) -- 1994 256,398 125,621 23,782(2) -- Kevin E. Villani......... 1996 200,000 200,000 12,986(4) 84,000(3) Chief Financial Officer 1995 59,103 25,000 2,295(4) 66,000 1994 -- -- -- -- Paul B. Lasiter.......... 1996 87,500 50,000 6,886(5) 20,000(3) Senior Vice President 1995 67,500 30,000 5,459(5) -- and Controller 1994 60,000 5,000 4,998(5) 16,500 Stephen J. Shugerman..... 1996 200,000 400,000 20,963(6) 100,000(3) President of SPTL 1995 200,000 166,027 16,372(6) -- 1994 166,500 81,531 16,702(6) --
- -------- (1) The Company is currently negotiating employment agreements with each of Messrs. Snavely, Villani and Shugerman. The final terms of these agreements are subject to agreement between the Company and said persons. The proposed annual salary to be paid to Messrs. Snavely, Villani and Shugerman pursuant to these agreements, and that which has been paid to them since January 1997, is $450,000, $300,000 and $250,000, respectively. The proposed annual bonus pursuant to these agreements is not to exceed approximately $1.0 million, $400,000 and $500,000, respectively. (2) In 1996, 1995 and 1994, consists of (i) a car allowance paid by the Company of $18,000, $18,000 and $18,000, respectively, and (ii) aggregate contributions paid by the Company of $10,564, $14,960 and $5,782 respectively, under employee benefit plans. (3) See "--Stock Option Plans" for details regarding the terms of such options. (4) In 1996, 1995 and 1994, consists of (i) a car allowance paid by the Company of $6,000, $1,773 and $0, respectively, and (ii) aggregate contributions paid by the Company of $6,986, $522 and $0, respectively. Under employee benefit plans. (5) In 1996, 1995 and 1994, consists of $6,886, $5,459 and $4,998, respectively, under employee benefit plans. (6) In 1996, 1995 and 1994, consists of (i) a car allowance paid by the Company of $10,800, $10,800 and $10,800, respectively, and (ii) aggregate contributions paid by the Company of $10,163, $5,572 and $5,902, respectively. OPTION GRANTS AND EXERCISES
POTENTIAL REALIZED VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR 1996 PERCENTAGE EXERCISE OPTION TERM OPTIONS OF TOTAL PRICE PER EXPIRATION ----------------------- NAME GRANTED GRANTS OPTION DATE 5% 10% ---- ------- ---------- --------- ---------- ----------- ----------- H. Wayne Snavely........ 400,000 24.86% $13.6875 7/24/01 $1,512,642 $3,342,542 Kevin E. Villani........ 84,000 5.22% 10.5625 4/1/01 245,131 541,675 Paul B. Lasiter......... 20,000 1.24% 10.5625 4/1/01 58,364 128,970 Stephen J. Shugerman.... 100,000 6.21% 13.6875 7/24/01 378,160 835,636
92 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF NUMBER OF UNEXERCISED VALUE OF ALL UNEXERCISED SENIOR UNEXERCISED OPTIONS AT FY- MANAGEMENT IN-THE-MONEY SHARES END UNDER THE OPTIONS AT OPTIONS AT ACQUIRED OPTION PLAN FY-END FY-END ON VALUE EXERCISABLE/ EXERCISABLE/ EXERCISABLE/ NAME EXERCISE REALIZED UNEXERCISABLE(1) UNEXERCISABLE(2) UNEXERCISABLE(3) ---- -------- --------- ---------------- ---------------- -------------------- H. Wayne Snavely........ 61,137 1,408,885 --/415,285 917,052/-- 18,210,475/3,838,983 Kevin E. Villani........ 13,200 183,500 --/136,800 --/-- --/1,557,299 Stephen J. Shugerman.... 300,000 4,305,651 61,137/115,285 158,524/-- 4,262,921/1,020,233 Paul B. Lasiter......... 14,190 170,463 3,300/37,160 --/-- 60,800/521,610
- -------- (1) For a description of the terms of such options, see "--Stock Option Plans--1992 Stock Option Plan." (2) For a description of the terms of such options, see "--Senior Management Stock Options." (3) Based on a price per share of $21.00, which was the price of a share of Common Stock as quoted on the Nasdaq National Market at the close of business on December 31, 1996. EMPLOYMENT AGREEMENTS As of January 1, 1997, Mr. Snavely entered into a five-year employment agreement at an annual base salary of $450,000, subject to adjustment, plus an annual bonus based on attainment of performance objectives, including the Company's return on equity, earnings per share and increase in the price of the Company's common stock. Mr. Snavely's total cash compensation may not exceed $1.5 million annually. As of January 1, 1997, Mr. Villani entered into a five-year employment agreement at an annual base salary of $300,000, subject to adjustment, plus an annual bonus based on attainment of performance objectives identical to the objectives established for Mr. Snavely. Mr. Villani's total cash compensation may not exceed $700,000 annually. As of January 1, 1997, Mr. Shugerman entered into a five-year employment agreement at an annual base salary of $250,000, subject to adjustment, plus an annual bonus based on attainment of performance objectives, including the Company's earnings per share and certain qualitative objectives with respect to the performance of SPTL. Mr. Shugerman's total cash compensation may not exceed $750,000 annually. Pursuant to the employment agreements with Messrs. Snavely, Villani and Shugerman, they are each entitled to receive compensation following their termination, as follows: (i) with cause: base salary shall be paid through the date on which termination occurs, or (ii) without cause (or for "good reason" as defined in the employment agreement), base salary shall be paid through the date of termination together with the pro-rata portion of any cash bonus award the employee would be entitled to receive at year end and a severance amount equal to base salary reduced by the employee's projected primary social security benefit. The severance amount shall be further reduced if the executive becomes employed by another company or becomes an independent contractor of another company and shall be eliminated entirely if such other company is determined by the Board of Directors to compete with the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's Compensation Committee consists of Messrs. Muehlenbeck, Graziadio, Lerner and LaForce. Mr. Muehlenbeck is an Executive Vice President of Imperial Bank. Mr. Graziado is a Director of Imperial Bancorp and Imperial Trust Company. 93 SENIOR MANAGEMENT STOCK OPTIONS Effective January 1992, members of senior management of the Company received ten year options to purchase shares of the Company's common stock (the "Common Stock"). Such options are not covered by the Company's option plans described below. The exercise price of these options is $0.88 per share for one-half of the options, with the other half exercisable at $1.40 per share. These options are currently exercisable. H. Wayne Snavely, Joseph R. Tomkinson, and Stephen J. Shugerman were granted 917,053, 917,053 and 458,526 of such options, respectively. In April 1996, Mr. Tomkinson sold 750,000 shares of Common Stock he acquired under the option agreement described above. In November 1996, Mr. Shugerman sold 300,000 shares of Common Stock he acquired under the option agreement described above. The Company recognizes compensation expense with respect to the senior management stock options because they were granted at less than the estimated market value of the Company's Common Stock. The total compensation expense was $2.2 million, all of which was recognized as of December 31, 1996. See Note 22 of Notes to Consolidated Financial Statements. STOCK OPTION PLANS 1992 STOCK OPTION PLAN A total of 2,292,632 shares of the Company's Common Stock has been reserved for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own terms in 2002. A total of 1,550,673 options were outstanding at December 31, 1996. The 1992 Stock Option Plan provides for the grant of "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options ("NQSOs") to employees, officers, directors and consultants of the Company. Incentive stock options may be granted only to employees. The 1992 Stock Option Plan is administered by the Board of Directors or a committee appointed by the Board, which determines the terms of options granted, including the exercise price, the number of shares subject to the option, and the option's exercisability. The exercise price of all options granted under the 1992 Stock Option Plan must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the 1992 Stock Option Plan is 10 years. With respect to any participant who owns stock representing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price of any option must be at least equal to 110% of the fair market value on the date of grant. 1996 STOCK OPTION PLAN The Company has adopted the 1996 Stock Option, Deferred Stock and Restricted Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards consisting of deferred stock, restricted stock, stock appreciation rights and limited stock appreciation rights ("Awards"). The 1996 Stock Option Plan is administered by a committee of directors appointed by the Board of Directors (the "Committee"). ISOs may be granted to the officers and key employees of the Company or any of its subsidiaries. The exercise price for any option granted under the 1996 Stock Option Plan may not be less than 100% (110% in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the outstanding Common Stock) of the fair market value of the shares of Common Stock at the time the option is granted. The purpose of the 1996 Stock Option Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to those whose job performance affects the Company. The effective date of the 1996 Stock Option Plan was June 21, 1996. A total of 3,000,000 shares of the Company's Common Stock has been reserved for issuance under the 1996 Stock Option Plan and a total of 1,038,200 options were outstanding at December 31, 1996. 94 If an option granted under the 1996 Stock Option Plan expires or terminates, or an Award is forfeited, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the 1996 Stock Option Plan. Unless previously terminated by the Board of Directors, no options or Awards may be granted under the 1996 Stock Option Plan after June 21, 2006. Options granted under the 1996 Stock Option Plan will become exercisable upon the terms of the grant made by the Committee. Awards will be subject to the terms and restrictions of the Award made by the Committee. The Committee has discretionary authority to select participants from among eligible persons and to determine at the time an option or Award is granted and in the case of options, whether it is intended to be an ISO or a NQSO. Under current law, ISOs may not be granted to any individual who is not also an officer or employee of the Company or any subsidiary. Each option must terminate no more than 10 years from the date it is granted (or five years in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the combined voting power of the Company's outstanding Common Stock). Options may be granted on terms providing for exercise in whole or in part at any time or times during their respective terms, or only in specified percentages at stated time periods or intervals during the term of the option, as determined by the Committee. The exercise price of any option granted under the 1996 Stock Option Plan is payable in full (i) in cash, (ii) by surrender of shares of the Company's Common Stock already owned by the option holder having a market value equal to the aggregate exercise price of all shares to be purchased including, in the case of the exercise of NQSOs, restricted stock subject to an Award under the 1996 Stock Option Plan, (iii) by cancellation of indebtedness owed by the Company to the optionholder, or (iv) by any combination of the foregoing. The Board of Directors may from time to time revise or amend the 1996 Stock Option Plan, and may suspend or discontinue it at any time. However, no such revision or amendment may impair the rights of any participant under any outstanding options or Award without such participant's consent or may, without shareholder approval, increase the number of shares subject to the 1996 Stock Option Plan or decrease the exercise price of a stock option to less than 100% of fair market value on the date of grant (with the exception of adjustments resulting from changes in capitalization), materially modify the class of participants eligible to receive options or Awards under the 1996 Stock Option Plan, materially increase the benefits accruing to participants under the 1996 Stock Option Plan or extend the maximum option term under the 1996 Stock Option Plan. PROFIT SHARING AND 401(k) PLAN On July 1, 1993, the Company terminated its participation in Imperial Bancorp's 401(k) and profit sharing plans, establishing its own 401(k) plan. On September 30, 1993, Imperial Bancorp transferred all plan assets to the Company. Under the Company's 401(k) plan, employees may elect to enroll on the 1st of any month, provided that they have been employed for at least six months. Employees may contribute up to 14% of their salaries. The Company will match 50% of the first 4% of employee contributions. The Company recorded 401(k) matching expense of $0.1 million, $0.3 million and $0.2 million for the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, respectively. An additional Company contribution may be made, at the discretion of the Company. Should a discretionary contribution be made, the contribution would first be allocated to those employees deferring salaries in excess of 4%. The matching contribution would be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. 95 Should discretionary contribution funds remain following the allocation outlined above, any remaining Company discretionary contributions would be allocated as a 50% match of employee contributions, on the first 4% of the employee's deferrals. Discretionary contributions of $350,000 and $200,000 were charged to operations in 1996 and 1995. Company matching contributions are made as of December 31st each year. LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION The Company's and the Subsidiary Guarantors' Articles of Incorporation and Bylaws provide for indemnification of the officers and directors of the Company to the full extent permitted by law. The General Corporation Law of the State of California and the State of Florida, as applicable, permit a corporation to limit, under certain circumstances, a director's liability for monetary damages in actions brought by or in the right of the corporation. The Company's and the Subsidiary Guarantors' Articles of Incorporation also provide for the elimination of the liability of directors for monetary damages to the full extent permitted by law. The Company has entered into agreements to indemnify its directors and officers in addition to the indemnification provided for in the Articles of Incorporation and Bylaws. These agreements, among other things, indemnify the Company's directors and officers for certain expenses (including attorneys' fees), judgments, fines, and settlement amounts incurred in any action or proceeding, including any action by or in the right of the Company, on account of services as a director or officer of the Company, as a director or officer of any subsidiary of the Company, or as a director or officer of any other enterprise to which the person provides services at the request of the Company. The Company believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. The Company has $10.0 million of directors' and officers' liability insurance. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Company as to which indemnification is sought, nor is the Company aware of any threatened litigation or proceeding that may result in claims for indemnification, except as set forth in "Business--Legal Proceedings." 96 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to the Company with respect to the beneficial ownership of the Company's Common Stock as of May 31, 1997, by (i) each director of the Company, (ii) each executive officer whose salary exceeded $100,000 for the year ended December 31, 1996, (iii) each person who is known to the Company to own beneficially more than 5% of the Common Stock, and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
NUMBER OF SHARES BENEFICIALLY % OF TOTAL BENEFICIAL OWNER(1) OWNED OUTSTANDING(2) ------------------- ------------ -------------- Imperial Bank(3)............................. 9,261,106 23.0% Wellington Management Co.(4)................. 3,009,182 7.5 Nicholas-Applegate Capital Management(4)..... 1,956,180 4.9 H. Wayne Snavely(5).......................... 1,357,901 3.4 Joseph R. Tomkinson(6)....................... 154,422 * Stephen J. Shugerman(7)...................... 258,768 * G. Louis Graziadio, III(8)................... 133,018 * Robert S. Muehlenbeck(9)..................... 77,792 * Perry A. Lerner(10).......................... 89,722 * J. Clayburn LaForce(10)...................... 86,422 * Paul Lasiter(11)............................. 26,176 * Kevin E. Villani(12)......................... 16,800 * All Directors and Officers as a Group (10 persons)(13)................................ 2,201,521 5.5
- -------- * Less than 1%. (1) Each of such persons may be reached through the Company at 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance, California 90505, telephone (310) 373-1704. (2) Beneficial ownership is based on 40,288,738 shares of Common Stock as of May 31, 1997. (3) Imperial Bank, headquartered in Los Angeles, California, is a California chartered bank whose deposits are insured by the FDIC. The address of Imperial Bank is 9920 La Cienega Boulevard, Inglewood, California 90301. In February 1997, the board of directors of Bancorp approved a plan to spin off a portion of its specialty lending and finance business, including Imperial Bank's common stock interest in ICII, to IFG, a recently created subsidiary of Imperial Bank formed to hold various business assets of Bancorp and its subsidiaries. (4) Based upon a Schedule 13G filed with the Company reflecting beneficial ownership as of March 31, 1997. The shares are owned by various investment advisory clients of Wellington Management Company (or of Wellington Trust Company, National Association, WMC's wholly-owned subsidiary) and Nicholas-Applegate Capital Management, which are deemed beneficial owners of the shares only by virtue of the direct or indirect investment and/or voting discretion they possess pursuant to the provisions of investment advisory agreements with such clients. (5) Includes 1,012,237 shares subject to stock options exercisable within 60 days of May 31, 1997. (6) Includes 153,474 shares subject to stock options exercisable within 60 days of May 31, 1997. Mr. Tomkinson resigned as an officer of the Company in February 1996 but remains a Director. (7) Includes 254,946 shares subject to stock options exercisable within 60 days of May 31, 1997. (8) Includes 119,422 shares subject to stock options exercisable within 60 days of May 31, 1997. (9) Includes 70,022 shares subject to stock options exercisable within 60 days of May 31, 1997. (10) Includes 86,422 shares subject to stock options exercisable within 60 days of May 31, 1997. (11) Includes 10,930 shares subject to stock options exercisable within 60 days of May 31, 1997. (12) Includes 16,800 shares subject to stock options exercisable within 60 days of May 31, 1997. (13) Includes 1,810,775 shares subject to stock options exercisable within 60 days of May 31, 1997. 97 CERTAIN TRANSACTIONS PRINCIPAL SHAREHOLDER; LIMITATIONS ON INVESTMENT; CONFLICTS OF INTEREST At March 31, 1997, Imperial Bank owned 9,261,106 shares of Common Stock, or 24.1% of the Company. Bancorp is the owner of all of the outstanding capital stock of Imperial Bank. FDICIA restricts the ability of state chartered banks, such as Imperial Bank, to hold equity securities and requires impermissible investments to be disposed of before December 19, 1996. Imperial Bank acquired its interest in the Company at its formation, which interest has been reduced by the Company's sale of Common Stock to third parties, as well as through a sale of stock by Imperial Bank subsequent to the initial public offering of the Company. The 9.4 million shares of the Company's Common Stock held by Imperial Bank may be subject to divestiture under FDICIA. Imperial Bank has requested approval from the FDIC to retain its investment in the Company and the FDIC has extended the FDICIA-imposed deadline pending a decision on Imperial Bank's application. The regional office of the FDIC has acknowledged the request and requested and received additional information on the Company, and has recommended to its Washington, D.C. headquarters that Imperial Bank be allowed to retain its stock ownership in the Company subject to certain conditions. The Federal Reserve Bank of San Francisco has requested that Bancorp make an application under Section 4 of the Bank Holding Company Act for approval for Imperial Bank to retain the Company's stock. Bancorp has deferred any application pending the results of the FDIC application. Because Imperial Bank owns less than 50% of the outstanding shares of the Company and the Company is operated as a company independent of Imperial Bank and Bancorp, the Company believes that, in the event of an insolvency, bankruptcy or receivership proceeding involving Imperial Bank or Bancorp, a court, exercising reasonable judgment after full consideration of all relevant factors, would not order the substantive consolidation of the assets and liabilities of the Company with either Imperial Bank or Bancorp. In February 1997, the board of directors of Bancorp approved a plan to spin off a portion of its specialty lending and finance business, including Imperial Bank's common stock interest in ICII, to IFG, a recently created subsidiary of Bancorp formed to hold various business assets of Bancorp. Two directors of the Company also serve on the Board of Directors of Imperial Bank, IFG or their parent, Imperial Bancorp. See "Management." PAYMENT AND TERMINATION AGREEMENT On January 1, 1992, Mr. Tomkinson entered into a five-year employment agreement at an annual salary of $200,000, subject to adjustment for inflation, plus an annual bonus to be paid out of a "bonus pool" in an amount determined by the Board of Directors, but in no event to exceed his base salary. Effective July 1, 1994, Mr. Tomkinson's employment agreement was amended to reflect an annual salary of $300,000, plus a bonus based on 1.0% of the Company's pre-tax profits in excess of $10.0 million and the attainment of defined Company goals. Mr. Tomkinson's total compensation did not exceed $750,000 annually. Mr. Tomkinson resigned as an officer of the Company in February 1996. In February 1996, the Company entered into a Payment and Termination Agreement with Mr. Tomkinson. Under the terms of this agreement, Mr. Tomkinson received, as settlement for termination of Mr. Tomkinson's employment with the Company on November 20, 1995 (the "Termination Date"), the following: (i) the amount by which (A) the aggregate of all compensation Mr. Tomkinson would have been entitled to receive under his employment agreement with the Company from the Termination Date through the original termination date of the employment agreement on December 31, 1996, exceeds (B) the aggregate Mr. Tomkinson was entitled to receive from IMH under his employment agreement with IMH during such period, (ii) all accrued but unpaid compensation due Mr. Tomkinson under his employment agreement with the Company through the Termination Date and (iii) the full and immediate vesting of all stock options held by Mr. Tomkinson covering shares of the capital stock of the Company. Mr. Tomkinson received $28,650 under this agreement. 98 BANK DEPOSITS The Company had deposits (including escrow balances) with SPTL which were approximately $48.4 million, $4.5 million and $36.0 million at March 31, 1997, December 31, 1996 and 1995, respectively. BORROWING ARRANGEMENTS In October 1995, Imperial Bank extended ICII a $10.0 million revolving line of credit bearing interest at the prime rate (8.50% at December 31, 1995). All amounts outstanding under this line were repaid in May 1996. Additional or modified arrangements and transactions may be entered into by the Company, Imperial Bank, and their respective subsidiaries, after the date hereof. Any such future arrangements and transactions will be determined through negotiation between the Company and Imperial Bank, and it is possible that conflicts of interest will be involved. The Audit Committee of the Board of Directors of the Company, consisting of directors independent of both management and Imperial Bank, must independently approve all transactions by and between the Company and Imperial Bank. RELATIONSHIPS WITH SPFC THE CONTRIBUTION TRANSACTION In October 1994, ICII incorporated SPFC as part of a strategic decision to form a separate subsidiary through which to operate SPTL's residential lending division. To further this strategy, in December 1994, ICII made a capital contribution of $250,000 to SPFC in exchange for 100% of its outstanding capital stock, and in April 1995, ICII caused SPTL to contribute to SPFC certain customer list~s of SPTL's residential lending division relating to the ongoing operations of such division. In addition, in April 1996 all employees of SPTL's residential lending division became employees of SPFC. SPTL retained all other assets and all liabilities related to the contributed operations including all residual interests generated in connection with securitizations effected by SPTL's residential lending division. ARRANGEMENTS WITH ICII AND ITS AFFILIATES The Company and SPFC have entered into agreements for the purpose of defining their ongoing relationship. The agreements have been developed in the context of a parent/subsidiary relationship and therefore are not the result of arm's length negotiations between independent parties. It is the intention of the Company and SPFC that such agreements and the transactions provided for therein, taken as a whole, are fair to both parties, while continuing certain mutually beneficial arrangements. However, there can be no assurance that each of such agreements, or the transactions provided for therein, have been effected on terms at least as favorable to the Company or to SPFC as could have been obtained from unaffiliated parties. Additional or modified arrangements and transactions may be entered into by the Company, SPFC and their respective affiliates. Any such future arrangements and transactions will be determined through negotiations between the Company and SPFC, and it is possible that conflicts of interest will develop. The unaffiliated directors of SPFC, consisting of directors independent of the Company and SPFC, must independently approve all transactions between the Company and SPFC. The following is a summary of certain arrangements and transactions between the Company and SPFC. TAX AGREEMENT The Company entered into an agreement (the "SPFC Tax Agreement") with SPFC for the purposes of (i) providing for filing certain tax returns, (ii) allocating certain tax liability and (iii) establishing procedures for certain audits and contests of tax liabilities. 99 Under the SPFC Tax Agreement, ICII agreed to indemnify and hold SPFC harmless from any tax liability attributable to periods ending on or before June 1996 in excess of such taxes as SPFC has already paid or provided for. For periods ending after June 1996, SPFC will pay its tax liability directly to the appropriate taxing authorities. To the extent that (i) there are audit adjustments that result in a tax detriment to SPFC or (ii) SPFC incurs losses that are carried back to an earlier period and such adjustment described in (i) or loss described in (ii) results in a tax benefit to ICII or its affiliates, then ICII will pay to SPFC an amount equal to the tax benefit as that benefit is realized. ICII also agreed to indemnify SPFC for any liability arising out of the filing of federal consolidated returns by ICII or any return filed with any state or local taxing authority. To the extent there are audit adjustments that result in any tax detriment to ICII or any of its affiliates with respect to any period ending on or before June 1996 and, as a result thereof, SPFC for any taxable period after June 1996 realizes a tax benefit, then SPFC shall pay to ICII the amount of such benefit at such time or times as SPFC actually realizes such benefit. ICII generally will control audits and administrative and judicial proceedings with respect to periods ending on or before June 1996, although ICII cannot compromise or settle any issue that increases SPFC's liability without first obtaining the consent of SPFC. SPFC generally controls all other audits and administrative and judicial proceedings. SERVICES PROVIDED BY ICII SPFC has been historically allocated expenses of various administrative services provided to it by ICII. The costs of such services were not directly attributable to a specific division or subsidiary and primarily included general corporate overhead, such as accounting and cash management services, human resources and other administrative functions. These expenses were calculated as a pro rata share of certain administrative costs based on relative number of employees and assets and liabilities of the division or subsidiary, which management believed was a reasonable method of allocation. The allocation of expenses for the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995 were approximately $34,000, $713,000 and $256,000, respectively. SPFC intends to provide by itself many of the services previously provided by ICII. ICII currently provides to SPFC mortgage loan production software and hardware and data communications management, the managing of the 401(k) plan in which SPFC participates, and insurance coverage, including health insurance. OTHER ARRANGEMENTS From the point of commencement of operations until March 1994, SPTL served as the servicer of SPFC's loans. From March 1994 through September 1995, SPFC subcontracted all of its servicing obligations under mortgage loans originated or acquired on a servicing released basis to ICII pursuant to a servicing agreement containing fees and other terms that were comparable to industry standards. In addition, ICII was the servicer of loans securitized by SPFC in 1994 and 1995 under the respective pooling and servicing agreements. Effective May 1, 1996, ICII transferred the servicing for all of SPFC's loans it serviced to Advanta Mortgage Corp. USA ("Advanta") or subcontracted with Advanta to perform such servicing functions. In February and March 1996, certain of ICII's residential mortgage origination offices were transferred to SPFC. In March 1996, SPFC entered into a $10.0 million revolving credit and term loan agreement with SPTL. Advances under this agreement were collateralized by the Company's interest-only and residual certificates (other than those retained by SPTL pursuant to the Contribution Transaction) at an interest rate of 2% above LIBOR. In April 1996, the loan was repaid and the agreement was canceled. During 1995, SPFC borrowed approximately $1.5 million from ICII, such sum bearing interest at approximately 10.3% per annum. At June 18, 1996 the amount owed to ICII was approximately $17.0 million. As of March 31, 1997, all amounts owed to ICII had been repaid. 100 SPFC has entered into a registration rights agreement with ICII, pursuant to which SPFC has agreed to register for sale under the Securities Act in the future all of ICII's remaining shares of SPFC's common stock, subject to certain conditions. Lehman Commercial Paper, Inc. ("LCPI") has agreed to make available repurchase lines to SPFC in an amount equal to $200.0 million. LCPI has provided SPFC with these funding capabilities for its mortgage banking operations, where SPFC can close loans in its name. The loan collateral is held by an independent third-party custodian and SPFC has the ability to borrow against that collateral at a percentage of the original principal balance. The rate charged is LIBOR plus 30 basis points. Until the first quarter of 1997, this line was guaranteed by ICII. The line has an expiration date of April 1, 1997. As of March 31, 1997, SPFC had an outstanding balance of $52.4 million with respect to this facility. The guarantee expired on April 1, 1997. ICII does not intend to guarantee any other indebtedness of SPFC. RELATIONSHIPS WITH IMH THE CONTRIBUTION TRANSACTION On November 20, 1995, the effective date of IMH's initial public stock offering (the "Effective Date"), the Company contributed to ICIFC certain of the operating assets and certain customer lists of the Company's mortgage conduit operations including all of ICII's mortgage conduit operations' commitments to purchase mortgage loans subject to rate locks from correspondents (having a principal balance of $44.3 million at November 20, 1995), in exchange for shares representing 100% of the common stock and 100% of the outstanding non-voting preferred stock of ICIFC. Simultaneously, on the Effective Date, in exchange for 500,000 shares of IMH common stock, the Company (i) contributed to IMH all of the outstanding non-voting preferred stock of ICIFC, which represents 99% of the economic interest in ICIFC, (ii) caused SPTL to contribute to IMH certain of the operating assets and certain customer lists of SPTL's warehouse lending division and (iii) executed a non- compete agreement (the "Non-Compete Agreement") and a right of first refusal agreement (the "Right of First Refusal Agreement"), each having a term of two years from the Effective Date. Of the 500,000 shares issued pursuant to the contribution, 450,000 shares were issued to ICII and 50,000 shares were issued to SPTL. All of the outstanding shares of common stock of ICIFC were retained by ICII. Lastly, IMH contributed all of the aforementioned operating assets of SPTL's warehouse lending operations contributed to it by SPTL to IWLG in exchange for shares representing 100% of the common stock of IWLG thereby forming it as a wholly owned subsidiary. At November 20, 1995, the net tangible book value of the assets to be contributed pursuant to the contribution was $525,000. The Company and SPTL retained all other assets and liabilities related to the contributed operations which at November 20, 1995 consisted mostly of $11.7 million of PMSRs, $22.4 million of finance receivables and $26.6 million in advances made by the Company and SPTL to fund mortgage conduit loan acquisitions and to fund finance receivables, respectively. Pursuant to the Non-Compete Agreement, the Company, except as set forth below, and any 25% entity may not compete with IMH's Warehouse Lending Operations and may not establish a network of third party correspondent loan originators or another end-investor in non-conforming mortgage loans. The Company has also agreed that (i) in addition to any other remedy that may be available to IMH, it will sell all of the outstanding shares of common stock of ICIFC to be retained by the Company pursuant to the contribution to any third party reasonably acceptable to IMH in the event that ICII or a 25% entity establishes a network of third party correspondent loan originators during the term of the Non-Compete Agreement and (ii) any sale by ICIFC of shares of its capital stock or sale or transfer by the Company of any shares of the common stock of ICIFC which the Company owns may only be made to a party reasonably acceptable to IMH. Pursuant to the Non-Compete Agreement, SPTL may continue to act as an end-investor in non-conforming mortgage loans and SPFC may continue its business, which is primarily to act as a wholesale originator and bulk purchaser of non-conforming mortgage loans. Pursuant to the Right of First Refusal Agreement, the Company will grant ICIFC a right of first refusal to purchase all non-conforming mortgage loans that ICII or any 25% entity originates or acquires and subsequently offers for sale and ICIFC will grant the Company, or any 25% entity designated by the Company, a right of first refusal to purchase all conforming mortgage loans that ICIFC acquires and subsequently offers for sale. 101 OTHER ARRANGEMENTS AND TRANSACTIONS WITH IMH The Company and IMH have entered into agreements for the purpose of defining their ongoing relationships. These agreements have been developed in the context of a parent/subsidiary relationship and therefore are not the result of arm's-length negotiations between independent parties. It is the intention of the Company and IMH that such agreements and the transactions provided for therein, taken as a whole, are fair to both parties, while continuing certain mutually beneficial arrangements. IMH has entered into a sublease with the Company to lease a portion of its facilities as IMH's executive offices and administrative facilities at an aggregate monthly rental of approximately $33,936. The sublease expires in 1999. The following is a summary of certain arrangements and transactions between and the Company and IMH. Tax Agreement IMH has entered into an agreement (the "IMH Tax Agreement") effective as of the Effective Date with the Company for the purposes of (i) providing for filing certain tax returns, (ii) allocating certain tax liability and (iii) establishing procedures for certain audits and contests of tax liability. Under the IMH Tax Agreement, the Company has agreed to indemnify and hold IMH harmless from any tax liability attributable to periods ending on or before November 20, 1995 in excess of such taxes as IMH has already paid or provided for. For periods ending after the November 20, 1995, IMH will pay its tax liability directly to the appropriate taxing authorities. To the extent (i) there are audit adjustments that result in a tax detriment to IMH or (ii) IMH incurs losses that are carried back to an earlier year and any such adjustment described in (i) or loss described in (ii) results in a tax benefit to ICII or its affiliates, then the Company will pay to IMH an amount equal to the tax benefit as that benefit is realized. ICII will also agree to indemnify IMH for any liability associated with the contribution of the preferred stock of ICIFC and certain operational assets of SPTL's warehouse lending division or any liability arising out of the filing of a federal consolidated return by the Company or any return filed with any state or local taxing authority. To the extent there are audit adjustments that result in any tax detriment to the Company or any of its affiliates with respect to any period ending on or before November 20, 1995, and, as a result thereof, IMH for any taxable period after the Effective Date realizes a tax benefit, then IMH shall pay to the Company the amount of such benefit at such time or times as IMH actually realizes such benefit. ICII generally controls audits and administrative and judicial proceedings with respect to periods ending on or before the November 20, 1995, although ICII cannot compromise or settle any issue that increases IMH's liability without first obtaining the consent of IMH. IMH generally controls all other audits and administrative and judicial proceedings. Services Agreement Prior to March 31, 1997, ICIFC was allocated expenses of various administrative services provided by ICII. IWLG was also allocated expenses prior to the contribution transaction referenced above. The costs of such services were not directly attributable to a specific division or subsidiary and primarily included general corporate overhead, such as data processing, accounting and cash management services, human resources and other administrative functions. These expenses were calculated as a pro rata share of certain administrative costs based on relative assets and liabilities of the division or subsidiary, which management believed was a reasonable method of allocation. In connection with IMH's initial public offering in November 1995, IMH and ICII entered into a services agreement (the "IMH Services Agreement") under which ICII provided similar general corporate overhead services to IMH and its affiliates, including ICIFC and IWLG. The Company charged fees for each of the services which it provides under the IMH Services Agreement based upon usage. The IMH Services Agreement expired on December 31, 1996. The allocation of expenses to ICIFC and IWLG and amounts paid to ICII under the IMH Services Agreement for the three months ended March 31, 1997 and for the years ended December 31, 1996, and 1995 aggregated $0, $518,000, and $269,000, respectively. 102 OTHER TRANSACTIONS General ICAI, a wholly-owned subsidiary of the Company, oversees the day-to-day operations of IMH, subject to the supervision of IMH's Board of Directors, pursuant to a management agreement (the "Management Agreement") effective as of November 20, 1995, for an initial term that expired on January 31, 1997. ICAI and IMH have concluded a five-year extension to the Management Agreement whereby amounts payable thereunder would be subordinated to a specified rate of return payable to IMH stockholders. ICAI is entitled to receive a per annum base management fee payable monthly in arrears of an amount equal to 75% of (i) 3/8 of 1% of gross mortgage assets of IMH composed of other than agency certificates, conforming mortgage loans or mortgage-backed securities secured by or representing interests in conforming mortgage loans, plus (ii) 1/8 of 1% of the remainder of gross mortgage assets of IMH plus (iii) 1/5 of 1% of the average daily asset balance of the outstanding amounts under IWLG's warehouse lending facilities. The term "gross mortgage assets" means for any month the weighted average book value of IMH's Mortgage Assets (as defined in the Management Agreement), before reserves for depreciation or bad debts or other similar noncash reserves, computed at the end of such month. During the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, ICAI earned $929,000, $2.0 million and $37,888 in management fees, respectively. ICAI is entitled to receive as incentive compensation for each fiscal quarter, an amount equal to 75% of 25% of the net income of IMH, before deduction of such incentive compensation, in excess of the amount that would produce an annualized Return on Equity (as defined in the Management Agreement) equal to the ten-year United States Treasury rate plus 2%. Return on Equity is calculated for any quarter by dividing IMH's net income for the quarter by its average net worth for the quarter. For such calculations, the "net income" of IMH means the income of IMH determined in accordance with GAAP before ICAI's incentive compensation, the deduction for dividends paid and any net operating loss deductions arising from losses in prior periods. A deduction for all of IMH's interest expenses for borrowed money is also taken in calculating net income. "Average net worth" for any period means the arithmetic average of the sum of the gross proceeds from any offering of its equity securities by IMH, before deducting any underwriting discounts and commissions and other expenses and costs relating to such offering, plus IMH's retained earnings (without taking into account any losses incurred in prior periods) computed by taking the daily average of such values during such period. The definition Return on Equity is only for purposes of calculating the incentive compensation payable, and is not related to the actual distributions received by IMH's stockholders. The incentive payment to ICAI is calculated quarterly in arrears before any income distributions are made to stockholders for the corresponding period. During the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, ICAI earned $649,000, $1.3 million and $0, respectively, for ICAI's incentive payment. The remaining 25% of the base management fee and of the incentive compensation fee are payable to participants in IMH's executive bonus pool as determined by the chief executive officer of IMH. Pursuant to the Management Agreement, IMH also pays all operating expenses except those specifically required to be borne by ICAI under the Management Agreement. The operating expenses generally required to be borne by ICAI include the compensation and other employment costs of ICAI's officers in their capacities as such and the cost of office space and out-of-pocket costs, equipment and other personnel required for oversight of IMH's operations. The expenses that are paid by IMH include issuance and transaction costs incident to the acquisition, disposition and financing of investments, regular legal and auditing fees and expenses of IMH, the fees and expenses of IMH's directors, premiums for directors' and officers' liability insurance, premiums for fidelity and errors and omissions insurance, servicing and subservicing expenses, the costs of printing and mailing proxies and reports to stockholders, and the fees and expenses of IMH's custodian and transfer agent, if any. In addition, ICAI provides various administrative services to IMH such as human resource and management information services. ICAI has subcontracted with ICII and certain of its affiliates to provide certain of such administrative services required under the Management Agreement. Reimbursements of expenses incurred by ICAI which are the responsibility of IMH are made monthly. During the three months ended March 31, 1997 and the years ended December 31, 1996 and 1995, there were no monies paid to ICAI as reimbursement of expenses. 103 Purchase of Residual Interests Effective December 31, 1996, ICII sold $46.9 million of residual interests to ICIFC. In connection therewith, ICII lent ICIFC 100% of the purchase price. This loan bore interest at a rate of 12% per annum, and was secured by the residual interests. On March 31, 1997, ICIFC renegotiated the loan, paying it down by $9.5 million and setting a term of ten years. Bulk Mortgage Loan Purchases In December 1995, ICIFC entered into a number of agreements with the Company and SPTL to purchase bulk mortgage loan packages. All mortgage loan purchase agreements were entered into under the following terms. On December 5, 1995 and December 13, 1995, ICIFC purchased from the Company bulk mortgage loan packages of 30-year fully amortized six-month adjustable LIBOR and one-year adjustable United States Treasury Bill rate loans and 30- and 15-year fixed rate second trust deed mortgages with servicing rights on all mortgage loans released to ICIFC. The principal balances of the mortgages at the time of purchase was $106.7 million and $66.2 million, respectively, with a premium paid of $2.1 million and $1.6 million, respectively. On December 29, 1995, ICIFC purchased from SPTL two bulk mortgage loan packages of 30-year fully amortized six-month adjustable LIBOR and one-year adjustable United States Treasury Bill rate loans. The principal balances of the loans in the servicing released and servicing retained bulk package at the time of purchase was $300.0 million and $28.5 million with premiums paid of $3.4 million and $142,395, respectively. Purchase of Mortgage-Backed Securities On December 29, 1995, IMH purchased, from SPTL, DLJ Mortgage Acceptance Corp. Pass-Through Certificates Series 1995-4, Class B-1 and Class B-2 issued August 29, 1995. These certificates consist primarily of a pool of certain conventional, 11th District Cost of Funds adjustable rate, one-to-four family, first lien mortgage loans, with terms to maturity of not more than 30 years. The mortgage loans underlying the certificates were originated or acquired by ICII. All of the mortgage loans are serviced by ICII in its capacity as master servicer. IMH purchased Class B-1 certificates having an initial certificate principal balance of $4.8 million and the Class B-2 certificates having an initial certificate principal balance of $2.2 million for a price of 78.54 or $4.8 million and for a price of 70.01 or $2.3 million, respectively, equating to a discount of $1.0 million and $0.7 million, respectively. The Class B-1 certificates are single "B" rated mortgage securities and the Class B-2 are double "BB" rated mortgage securities. There was no gain or loss recorded by either party as a result of this transaction. Purchase of Subordinated Lease Receivables On December 29, 1995, IMH purchased a subordinated interest in a lease receivable securitization from IBC. The lease receivables underlying the security were originated by IBC. IMH purchased the subordinated lease receivable based on the present value of estimated cash flows using a discount rate of 12% which resulted in a purchase price of $8.4 million. As a result of the purchase, IBC recorded a gain of $1.6 million. The purchase price was based upon a market discount rate as confirmed by an independent third party. In March 1996, IBC repurchased the subordinated interest from IMH, and as of March 31, 1997, holds the subordinated interest as an investment vehicle. Transfer of ICIFC Stock To conclude the deconsolidation of ICIFC, in the first quarter of 1997 ICII, as sole common shareholder, contributed the common shares of ICIFC to four individuals in approximately equal number of shares, with an approximate value of $25,000 each. ICII no longer has any equity interest in ICIFC. 104 THE EXCHANGE OFFER PURPOSE AND EFFECT In connection with the sale of the Old Par Securities, the Company, the Trust and the Subsidiary Guarantors (collectively, the "Registrants") entered into a Registration Rights Agreement with the Initial Purchaser pursuant to which the Registrants agreed to file a registration statement under the Securities Act with respect to the New Par Securities and, upon the effectiveness of such registration statement, offer to the holders of the Old Par Securities the opportunity to exchange their Old Par Securities for a like liquidation amount of New Par Securities, which will be issued without a restrictive legend and, except as set forth below, may be reoffered and resold by the holder without registration under the Securities Act. Upon the completion of the Exchange Offer, each of the Registrants' obligations with respect to the registration of the Old Par Securities and the New Par Securities will terminate, except as provided below. A copy of the Registration Rights Agreement delivered in connection therewith has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. Following the completion of the Exchange Offer, holders of Old Par Securities not tendered will not have any further registration rights, except as provided below, and the Old Par Securities will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for the Old Par Securities could be adversely affected upon completion of the Exchange Offer. Based on an interpretation by the staff of the Commission set forth in no- action letters issued to third-parties, the Registrants believe that New Par Securities issued pursuant to the Exchange Offer in exchange for Old Par Securities may be offered for resale, resold and otherwise transferred by a holder thereof (other than any such holder that is an "affiliate" of the Registrants within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder represents to the Registrants that (i) such New Par Securities are acquired in the ordinary course of business of such holder, (ii) such holder is not engaging in and does not intend to engage in a distribution of such New Par Securities and (iii) such holder has no arrangement or understanding with any person to participate in the distribution of such New Par Securities. Any holder who tenders in the Exchange Offer for the purpose of participating in a distribution of the New Par Securities cannot rely on such interpretation by the staff of the Commission and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Each broker-dealer that receives New Par Securities for its own account in exchange for Old Par Securities, where such Old Par Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of such New Par Securities. See "Plan of Distribution." In the event that any holder of Old Par Securities would not receive freely tradeable New Par Securities in the Exchange Offer or is not eligible to participate in the Exchange Offer, such holder can elect, by so indicating on the Letter of Transmittal and providing certain additional necessary information, to have such holder's Old Par Securities registered in a "shelf" registration statement on an appropriate form pursuant to Rule 415 under the Securities Act. In the event that the Registrants are obligated to file a "shelf" registration statement, they will be required to keep such "shelf" registration statement effective for a period of three years or such shorter period that will terminate when all of the Old Par Securities covered by such registration statement have been sold pursuant thereto. Other than as set forth in this paragraph, no holder will have the right to require the Registrants to register such holder's Par Securities under the Securities Act. See "Procedures for Tendering Old Securities." Pursuant to the Registration Rights Agreement, the Registrants (or, if the Debentures have been distributed to holders of the Par Securities in liquidation of the Trust, the Company only) agreed to file with the Commission, on or prior to 30 days after the Closing Date, the Exchange Offer Registration Statement on the appropriate form under the Securities Act with respect to the New Par Securities, the New Guarantee and the New Debentures. Upon the effectiveness of the Exchange Offer Registration Statement, the Registrants will offer to the holders of Old Par Securities who are able to make certain representations the opportunity to exchange their Transfer 105 Restricted Old Par Securities for New Par Securities pursuant to the Exchange Offer. If (i) the Registrants are not required to file the Exchange Offer Registration Statement or permitted to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy, (ii) the Company has received an opinion of independent tax counsel experienced in such matters to the effect that, as a result of the consummation of the Exchange Offer, there is more than an insubstantial risk that (x) the Trust would be subject to United States federal income tax with respect to income received or accrued on the Debentures or New Debentures, (y) interest payable by the Company on such Debentures or New Debentures would not be deductible by the Company, in whole or in part, for United States federal income tax purposes, or (z) the Trust would be subject to more than a de minimis amount of other taxes, duties or other governmental charges or (iii) any holder of Old Par Securities notifies the Company and the Trust on or before the 20th Business Day following the consummation of the Exchange Offer that (A) it is prohibited by law or Commission policy from participating in the Exchange Offer, (B) it may not resell the New Par Securities acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales or (C) it is a broker-dealer and owns Old Par Securities acquired directly from the Trust or an affiliate of the Trust or in the Remarketing, the Registrants will file with the Commission a Shelf Registration Statement to cover resales of the Securities by the holders thereof who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement. The Company and the Trust will use their respective best efforts to cause the applicable registration statement to be declared effective as promptly as possible by the Commission. For purposes of the foregoing, "Transfer Restricted Securities" means each Par Security, Guarantee or Debenture until (i) the date on which such Par Security, Guarantee or Debenture has been exchanged by a person other than a broker-dealer for a New Par Security, New Guarantee or New Debenture in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of an Old Par Security for a New Par Security , the date on which such New Par Security is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Par Security, Guarantee or Debenture has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the date on which such Par Security, Guarantee or Debenture is distributed to the public pursuant to Rule 144 under the Securities Act. The Registration Rights Agreement provides that (i) the Registrants will file an Exchange Offer Registration Statement with the Commission on or prior to 30 days after the Closing Date (unless not required to do so pursuant to clause (x) or (y) of the fourth sentence of the preceding paragraph), (ii) the Registrants will use their respective best efforts to have the Exchange Offer Registration Statement declared effective by the Commission on or prior to 90 days after the Closing Date, (iii) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Registrants will commence the Exchange Offer and use their best efforts to issue on or prior to 30 Business Days after the date on which the Exchange Offer Registration Statement was declared effective by the Commission, New Par Securities, New Guarantees and New Debentures in exchange for all Old Par Securities, Old Guarantees and Old Debentures tendered prior thereto in the Exchange Offer and (iv) if obligated to file the Shelf Registration Statement, the Registrants will use their best efforts to file the Shelf Registration Statement with the Commission on or prior to 60 days after such filing obligation arises and to cause the Shelf Registration to be declared effective by the Commission on or prior to 30 days after such obligation arises. If (w) the Registrants fail to file any of the Registration Statements required by the Registration Rights Agreement on or before the date specified for such filing, (x) any of such Registration Statements is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"), (y) the Registrants fail to consummate the Exchange Offer within 30 Business Days of the Effectiveness Target Date with respect to the Exchange Offer Registration Statement or (z) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Transfer Restricted Securities during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (w) through (z) above a "Registration Default"), then the Company will pay additional interest ("Additional Interest") on the Debentures (including in respect of amount occurring during any Extension Period) and corresponding Additional Distributions (the "Additional Distributions") will become payable on the Transfer Restricted 106 Securities, with respect to the first 90-day period immediately following the occurrence of such Registration Default in an amount equal to $.05 per week per $1,000 liquidation or principal amount of Transfer Restricted Securities held by such holder. The amount of the Additional Interest (and corresponding Additional Distributions) will increase by an additional $.05 per week per $1,000 liquidation or principal amount of Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Additional Interest (and corresponding Additional Distributions) of $.50 per week per $1,000 liquidation or principal amount of Transfer Restricted Securities. All accrued Additional Interest (and corresponding Additional Distributions) will be paid by the Company on each Distribution payment date to The Depositary Trust Company ("DTC") by wire transfer of immediately available funds or by federal funds check and to holders of definitive securities by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Following the cure of all Registration Defaults, the accrual of Additional Interest (and corresponding Additional Distributions) will cease. Transfer Restricted Securities which have not been exchanged for New Par Securities, New Debentures and New Guarantees pursuant to the Exchange Offer are mandatorily redeemable by the Company on the Remarketing Settlement Date, as described under "Description of Securities--Redemption--Transfer Restricted Security Redemption." Holders of Old Par Securities will be required to make certain representations to the Company, the Trust and the Subsidiary Guarantors (as described in the Registration Rights Agreement) in order to participate in the Exchange Offer and will be required to deliver information to be used in connection with the Shelf Registration Statement and to provide comments on the Shelf Registration Statement within the time periods set forth in the Registration Rights Agreement in order to have their Securities included in the Shelf Registration Statement and benefit from the provisions regarding Additional Interest set forth above. TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES Upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal (which together constitute the Exchange Offer), the Trust will accept for exchange Old Par Securities which are properly tendered on or prior to the Expiration Date and not withdrawn as permitted below. As used herein, the term "Expiration Date" means 5:00 P.M., New York City time, on , 1997; provided, however, that if the Trust, in its sole discretion, has extended the period of time during which the Exchange Offer is open, the term "Expiration Date" means the latest time and date to which the Exchange Offer is extended. As of the date of this Prospectus, $70,000,000 aggregate liquidation amount of the Old Par Securities is outstanding. This Prospectus, together with the Letter of Transmittal, is first being sent on or about , 1997, to all holders of Old Par Securities known to the Trust. The Trust's obligation to accept Old Par Securities for exchange pursuant to the Exchange Offer is subject to certain customary conditions as set forth under "--Certain Conditions to the Exchange Offer" below. The Trust expressly reserves the right, at any time or from time to time, to extend the period of time during which the Exchange Offer is open, and thereby delay acceptance for exchange of any Old Par Securities, by giving oral or written notice of such extension to the holders thereof as described below. During any such extension, all Old Par Securities previously tendered will remain subject to the Exchange Offer and may be accepted for exchange by the Trust. Any Old Par Securities not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Old Par Securities tendered in the Exchange Offer must be in denominations of principal amount of $1,000 or any integral multiple thereof. The Trust expressly reserves the right to amend or terminate the Exchange Offer, and not to accept for exchange any Old Par Securities not theretofore accepted for exchange, upon the occurrence of any of the conditions of the Exchange Offer specified below under "--Certain Conditions to the Exchange 107 Offer." The Trust will give oral or written notice of any extension, amendment, non-acceptance or termination to the holders of the Old Par Securities as promptly as practicable, such notice in the case of any extension to be issued by means of a press release or other public announcement no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. PROCEDURES FOR TENDERING OLD SECURITIES Only a registered holder of Old Par Securities may tender such Old Par Securities in the Exchange Offer. The tender to the Trust of Old Par Securities by a holder thereof as set forth below and the acceptance thereof by the Trust will constitute a binding agreement between the tendering holder and the Trust upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal. Except as set forth below, a holder who wishes to tender Old Par Securities for exchange pursuant to the Exchange Offer must transmit a properly completed and duly executed Letter of Transmittal, including all other documents required by such Letter of Transmittal, to Chase Trust Company of California (the "Exchange Agent") at one of the addresses set forth below under "Exchange Agent" on or prior to the Expiration Date. In addition, either (i) certificates for such Old Par Securities must be received by the Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book- Entry Confirmation") of such Old Par Securities, if such procedure is available, into the Exchange Agent's account at DTC (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date, or (iii) the holder must comply with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OLD PAR SECURITIES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD PAR SECURITIES SHOULD BE SENT TO THE TRUST. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner whose Old Par Securities are registered in the name of a broker, dealer, commercial bank, trust company, or other nominee and who wishes to tender should contact the registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering such owner's Old Par Securities, either make appropriate arrangements to register ownership of the Old Par Securities in such beneficial owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signatures on a Letter of Transmittal or a notice of withdrawal described below (see "--Withdrawal Rights"), as the case may be, must be guaranteed (see "--Guaranteed Delivery Procedures") unless the Old Par Securities surrendered for exchange pursuant thereto are tendered (i) by a registered holder of the Old Par Securities who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution (as defined below). In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guaranties must be by a financial institution (including most banks, savings and loan associations and brokerage houses) that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Program or the Stock Exchanges Medallion Program (collectively, "Eligible Institutions"). If Old Par Securities are registered in the name of a person other than a signer of the Letter of Transmittal, the Old Par Securities surrendered for exchange must be endorsed by or be accompanied by a written instrument or instruments of transfer or exchange, in satisfactory form as determined by the Trust in its sole discretion, duly executed by the registered holder exactly as the name or names of the registered holder or holders appear on the Old Par Securities with the signature thereon guarantied by an Eligible Institution. If the Letter of Transmittal or any Old Par Securities or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in- fact, officers of corporations or others acting in a fiduciary or 108 representative capacity, such person should so indicate when signing, and, unless waived by the Trust, proper evidence satisfactory to the Trust of their authority to so act must be submitted with the Letter of Transmittal. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of Old Par Securities tendered for exchange will be determined by the Trust in its sole discretion, which determination shall be final and binding. The Trust reserves the absolute right to reject any and all tenders of any particular Old Par Securities not properly tendered or not to accept any particular Old Par Securities which acceptance might, in the judgment of the Trust or its counsel, be unlawful. The Trust also reserves the absolute right to waive any defects or irregularities or conditions of the Exchange Offer as to any particular Old Par Securities either before or after the Expiration Date (including the right to waive the ineligibility of any holder who seeks to tender Old Par Securities in the Exchange Offer). The interpretation of the terms and conditions of the Exchange Offer as to any particular Old Par Securities either before or after the Expiration Date (including the Letter of Transmittal and the instructions thereto) by the Trust shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Par Securities for exchange must be cured within such reasonable period of time as the Trust shall determine. None of the Trust, the Exchange Agent or any other person shall be under any duty to give notification of any defect or irregularity with respect to any tender of Old Par Securities for exchange, nor shall any of them incur any liability for failure to give such notification. By tendering, each holder will represent to the Trust that, among other things, the New Par Securities acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Par Securities, whether or not such person is the holder, and that neither the holder nor such other person has any arrangement or understanding with any person to participate in the distribution of the New Par Securities. If any holder or any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of the Trust, the Company or the Subsidiary Guarantors or is engaged in or intends to engage in, or has an arrangement or understanding with any person to participate in, a distribution of such New Par Securities to be acquired pursuant to the Exchange Offer, such holder or any such other person (i) may not rely on the applicable interpretation of the staff of the Commission and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer that receives New Par Securities for its own account in exchange for Old Par Securities, where such Old Par Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Par Securities. See "Plan of Distribution." The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. ACCEPTANCE OF OLD PAR SECURITIES FOR EXCHANGE; DELIVERY OF NEW PAR SECURITIES Upon satisfaction or waiver of all of the conditions to the Exchange Offer, the Trust will accept, promptly after the Expiration Date, all Old Par Securities properly tendered and will issue the New Par Securities promptly after acceptance of the Old Par Securities. See "--Certain Conditions to the Exchange Offer" below. For purposes of the Exchange Offer, the Trust will be deemed to have accepted properly tendered Old Par Securities for exchange when, as and if the Trust has given oral or written notice thereof to the Exchange Agent. For each Old Par Security accepted for exchange, the holder of such Old Par Security will receive as set forth below under "Description of the Securities--Book-Entry, Delivery and Form" a New Par Security having a principal amount equal to that of the surrendered Old Par Security. Accordingly, registered holders of New Par Securities on the relevant record date for the first interest payment date following the consummation of the Exchange Offer will receive interest accruing from the most recent date to which interest has been paid on the Old Par Securities or, if no interest has been paid, from , 1997. Old Par Securities accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer. Holders whose Old Par Securities are accepted for exchange will not receive any payment in respect of accrued interest on such Old Par Securities otherwise payable on any interest payment date the record date for which occurs on or after consummation of the Exchange Offer. 109 In all cases, issuance of New Par Securities for Old Par Securities that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of certificates for such Old Par Securities or a timely Book-Entry Confirmation of such Old Par Securities into the Exchange Agent's account at the Book-Entry Transfer Facility, a properly completed and duly executed Letter of Transmittal and all other required documents. If any tendered Old Par Securities are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if Old Par Securities are submitted for a greater principal amount than the holder desires to exchange, such unaccepted or non-exchanged Old Par Securities will be returned without expense to the tendering holder thereof (or, in the case of Old Par Securities tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry procedures described below, such non-exchanged Old Par Securities will be credited to an account maintained with such Book-Entry Transfer Facility) as promptly as practicable after the expiration or termination of the Exchange Offer. BOOK-ENTRY TRANSFER The Exchange Agent will make a request to establish an account with respect to the Old Par Securities at the Book-Entry Transfer Facility for purposes of the Exchange Offer within two business days after the date of this Prospectus, and any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of Old Par Securities by causing the Book-Entry Transfer Facility to transfer such Old Par Securities into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Old Par Securities may be effected through book- entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or a facsimile thereof, with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received by the Exchange Agent at one of the addresses set forth below under "--Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with. GUARANTEED DELIVERY PROCEDURES If a registered holder of the Old Par Securities desires to tender such Old Par Securities and the Old Par Securities are not immediately available, or time will not permit such holder's Old Par Securities or other required documents to reach the Exchange Agent before the Expiration Date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if (i) the tender is made through an Eligible Institution, (ii) on or prior to 5:00 P.M., New York City time, on the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form provided by the Trust (by telegram, telex, facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of Old Par Securities and the amount of Old Par Securities tendered, stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Old Par Securities, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent, and (iii) the certificates for all physically tendered Old Par Securities, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution within three NYSE trading days after the date of execution of the Notice of Guaranteed Delivery WITHDRAWAL RIGHTS Tenders of Old Par Securities may be withdrawn at any time prior to 5:00 P.M., New York City time, on the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent at one of the addresses set forth below under "--Exchange Agent." Any such notice of withdrawal must specify the name of the person having tendered the Old Par Securities to be withdrawn, identify 110 the Old Par Securities to be withdrawn (including the principal amount of such Old Par Securities), and (where certificates for Old Par Securities have been transmitted) specify the name in which such Old Par Securities are registered, if different from that of the withdrawing holder. If certificates for Old Par Securities have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of such certificates the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution unless such holder is an Eligible Institution in which case such guarantee will not be required. If Old Par Securities have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the Book- Entry Transfer Facility to be credited with the withdrawn Old Par Securities and otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Trust, whose determination will be final and binding on all parties. Any Old Par Securities so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Par Securities which have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to such holder (or, in the case of Old Par Securities tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described above, such Old Par Securities will be credited to an account maintained with such Book-Entry Transfer Facility for the Old Par Securities) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Par Securities may be retendered by following one of the procedures described under "--Procedures for Tendering Old Par Securities" above at any time on or prior to the Expiration Date. CERTAIN CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provisions of the Exchange Offer, and subject to its obligations pursuant to the Registration Rights Agreement, the Trust shall not be required to accept for exchange, or to issue New Par Securities in exchange for, any Old Par Securities and may terminate or amend the Exchange Offer, if at any time before the acceptance of such New Par Securities for exchange, any of the following events shall occur: If (i) the Registrants are not required to file the Exchange Offer Registration Statement or permitted to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy, (ii) the Company has received an opinion of independent tax counsel experienced in such matters to the effect that, as a result of the consummation of the Exchange Offer, there is more than an insubstantial risk that (x) the Trust would be subject to United States federal income tax with respect to income received or accrued on the Debentures or New Debentures, (y) interest payable by the Company on such Debentures or New Debentures would not be deductible by the Company, in whole or in part, for United States federal income tax purposes, or (z) the Trust would be subject to more than a de minimis amount of other taxes, duties or other governmental charges or (iii) any holder of Transfer Restricted Securities notifies the Company and the Trust on or before the 20th Business Day following the consummation of the Exchange Offer that (A) it is prohibited by law or Commission policy from participating in the Exchange Offer, (B) it may not resell the New Par Securities, the New Guarantees and the New Debentures acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales or (C) it is a broker-dealer and owns Old Par Securities acquired directly from the Trust or an affiliate of the Trust or in the Remarketing, the Registrants will file with the Commission a Shelf Registration Statement to cover resales of the Par Securities by the holders thereof who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement. The foregoing conditions are for the sole benefit of the Registrants and may be asserted by the Registrants in whole or in part at any time and from time to time in their sole discretion. The failure by the Registrants at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and such right shall be deemed an ongoing right which may be asserted at any time and from time to time. In addition, the Trust will not accept for exchange any Old Par Securities tendered, and no New Par Securities will be issued in exchange for any such Old Par Securities, if at such time any stop order is threatened 111 by the Commission or in effect with respect to the Registration Statement of which this Prospectus is a part or the qualification of the Indenture under the Trust Indenture Act of 1939, as amended. The Exchange Offer is not conditioned on any minimum principal amount of Old Par Securities being tendered for exchange. EXCHANGE AGENT Chase Trust Company of California has been appointed as the Exchange Agent for the Exchange Offer. All executed Letters of Transmittal should be directed to the Exchange Agent at the address set forth below. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests or Notices of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: Chase Trust Company, Exchange Agent By Hand/Overnight Courier/By Mail: c/o The Chase Manhattan Bank Attn: Mr. Carlos Estevez 55 Water Street Second Floor, Room #234 New York, New York 10041 By Facsimile: (212) 638-7380 Confirm by Telephone (212) 638-0828 DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL. The Exchange Agent also acts as Property Trustee and Indenture Trustee. FEES AND EXPENSES The Trust will not make any payment to brokers, dealers, or others soliciting acceptances of the Exchange Offer. The estimated cash expenses to be incurred in connection with the Exchange Offer will be paid by the Company and are estimated in the aggregate to be $200,000. TRANSFER TAXES Holders who tender their Old Par Securities for exchange will not be obligated to pay any transfer taxes in connection therewith, except that holders who instruct the Trust to register New Par Securities in the name of, or request that Old Par Securities not tendered or not accepted in the Exchange Offer be returned to, a person other than the registered tendering holder will be responsible for the payment of any applicable transfer tax thereon. CONSEQUENCES OF FAILURE TO EXCHANGE OLD PAR SECURITIES Holders of Old Par Securities who do not exchange their Old Par Securities for New Par Securities pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Par Securities as set forth in the legend thereon as a consequence of the issuance of the Old Par Securities pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Par Securities may not be offered or sold, unless registered under the 112 Securities Act and applicable state securities laws. None of the Trust, the Company nor the Subsidiary Guarantors (collectively, the "Registrants") currently anticipate that it will register Old Par Securities under the Securities Act. See "Description of the Securities--Exchange Offer; Registration Rights." Based on interpretations by the Staff of the Division of Corporation Finance of the Commission, as set forth in no-action letters issued to third parties, the Registrants believe that New Par Securities issued pursuant to this Exchange Offer in exchange for Old Par Securities may be offered for resale, resold and otherwise transferred by a holder thereof (other than a holder who is a broker-dealer) without further compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such New Par Securities are acquired in the ordinary course of such holder's business and that such holder is not participating, and has no arrangement or understanding with any person to participate, in a distribution (within the meaning of the Securities Act) of such New Par Securities. However, any holder of Old Par Securities who is an "affiliate" of the Registrants (within the meaning of Rule 405 under the Securities Act) or who intends to participate in the Exchange Offer for the purpose of distributing New Par Securities, or any broker-dealer who purchased Old Par Securities from the Trust to resell them pursuant to Rule 144A under the Securities Act ("Rule 144A") or any other available exemption under the Securities Act, (a) will not be able to rely on the interpretations of the Staff of the Division of Corporation Finance of the Commission set forth in the above-mentioned interpretive letters, (b) will not be permitted or entitled to tender such Old Par Securities in the Exchange Offer and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or other transfer of such Old Par Securities unless such sale is made pursuant to an exemption from such requirements. In addition, as described below, if any broker-dealer holds Old Par Securities acquired for its own account as a result of market-making or other trading activities and exchanges such Old Par Securities for New Par Securities, then such broker-dealer must deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of such New Par Securities. Each holder of Old Par Securities who wishes to exchange Old Par Securities for New Par Securities in the Exchange Offer will be required to represent that (i) it is not an "affiliate" of the Registrants, (ii) any New Par Securities to be received by it are being acquired in the ordinary course of its business, (iii) it has no arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of such New Par Securities, and (iv) if such holder is not a broker-dealer, such holder is not engaged in, and does not intend to engage in, a distribution (within the meaning of the Securities Act) of such New Par Securities. In addition, the Registrants may require such holder, as a condition to such holder's eligibility to participate in the Exchange Offer, to furnish to the Registrants (or an agent thereof) in writing information as to the number of "beneficial owners" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")) on behalf of whom such holder holds the Par Securities to be exchanged in the Exchange Offer. Each broker-dealer that receives New Par Securities for its own account pursuant to the Exchange Offer must acknowledge that it acquired the Old Par Securities for its own account as the result of market-making activities or other trading activities and must agree that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Par Securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Based on the position taken by the Staff of the Division of Corporation Finance of the Commission in the interpretive letters referred to above, the Registrants believe that broker-dealers who acquired Old Par Securities for their own accounts, as a result of market-making activities or other trading activities ("Participating Broker-Dealers") may fulfill their prospectus delivery requirements with respect to the New Par Securities received upon exchange of such Old Par Securities with this Prospectus, as it may be amended or supplemented from time to time. Subject to certain exceptions, the Registrants have agreed that this Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of such New Par Securities for a period ending 180 days after the Registration Statement of which this Prospectus constitutes a part is declared effective. Any Participating Broker-Dealer who is an "affiliate" of the Registrants (within the meaning of Rule 405 under the Securities Act) may not rely on such interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. 113 Any Old Par Securities not tendered and accepted in the Exchange Offer will remain outstanding and will be entitled to all the same rights and will be subject to the same limitations applicable thereto under the Declaration (except for those rights relating to the Exchange Offer which terminate upon consummation of the Exchange Offer). Following consummation of the Exchange Offer, the holders of Old Par Securities will continue to be subject to all of the existing restrictions upon transfer thereof and none of the Registrants will have any further obligation to such holders (other than under certain limited circumstances) to provide for registration under the Securities Act of the Old Par Securities held by them. Any Old Par Securities which have not been exchanged for New Par Securities pursuant to the Exchange Offer will be mandatorily redeemed by the Company on the Remarketing Settlement Date, as described under "Description of the Securities--Redemption--Transfer Restricted Security Redemption." To the extent that Old Par Securities are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered Old Par Securities could be adversely affected. See "Risk Factors-- Consequences of a Failure to Exchange Old Par Securities." In addition, to comply with the securities laws of certain jurisdictions, if applicable, the New Par Securities may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or an exemption from registration or qualification is available and is complied with. The Registrants have agreed, pursuant to the Registration Rights Agreement, subject to certain limitations specified therein, to register or qualify the New Par Securities for offer or sale under the securities laws of such jurisdiction as any holder reasonably requests in writing. Unless a holder so requests, the Registrants do not currently intend to register or qualify the sale of the New Par Securities in any such jurisdictions. 114 THE TRUST The Trust is a statutory business trust formed under the Delaware Business Trust Act, as amended (the "Trust Act"), pursuant to (i) a declaration of trust (as so amended and restated, the "Declaration") dated as of May 28, 1997, executed by the Company, as sponsor, and the trustees of the Trust and (ii) a certificate of trust, dated as of May 28, 1997, filed with the Secretary of State of the State of Delaware. The Company acquired Common Securities in an aggregate liquidation amount equal to at least 3% of the total capital of the Trust, at the same time as the Par Securities were sold. The Trust used all the proceeds derived from the issuance of the Trust Securities to purchase the Debentures and, accordingly, the assets of the Trust consist solely of the Debentures. The Trust exists for the exclusive purpose of (i) issuing and selling the Trust Securities representing undivided beneficial ownership interests in the assets of the Trust, (ii) investing the gross proceeds from such sales in the Debentures and (iii) engaging in only those other activities necessary or incidental thereto. Pursuant to the Declaration, there are five trustees (the "Trustees") for the Trust. Three of the Trustees (the "Regular Trustees") are individuals who are employees or officers of or who are affiliated with the Company. The fourth trustee is a financial institution that is unaffiliated with the Company (the "Property Trustee"). The fifth trustee is an entity that maintains its principal place of business in the State of Delaware (the "Delaware Trustee"). Initially, Chase Trust Company of California, a state banking corporation, will act as Property Trustee, and its affiliate, Chase Manhattan Bank, a Delaware corporation, will act as Delaware Trustee until, in each case, removed or replaced by the Company as holder of the Common Securities. Chase Trust Company of California will also act as trustee under the Guarantee (the "Guarantee Trustee"). The Property Trustee holds title to the Debentures for the benefit of the holders of the Trust Securities and, as the holder of the Debentures, the Property Trustee has the power to exercise all rights, powers and privileges of a holder of Debentures under the Indenture (as defined herein). In addition, the Property Trustee maintains exclusive control of a segregated non-interest bearing bank account (the "Property Account") to hold all payments made in respect of the Debentures for the benefit of the holders of the Trust Securities. The Guarantee Trustee holds the Guarantee for the benefit of the holders of the Par Securities. The Company, as the holder of all the Common Securities, has the right to appoint, remove or replace any of the Trustees and to increase or decrease the number of Trustees, provided that the number of Trustees will be at least three; provided further that at least one Trustee will be a Delaware Trustee, at least one Trustee will be the Property Trustee and at least one Trustee will be a Regular Trustee. The Company will pay all fees and expenses related to the organization and operations of the Trust (including any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States or any other domestic taxing authority upon the Trust) and will be responsible for all debts and obligations of the Trust (other than with respect to the Par Securities). For so long as the Par Securities remain outstanding, the Company has covenanted (i) to maintain directly or indirectly 100% ownership of the Common Securities, (ii) to cause the Trust to remain a statutory business trust and not to voluntarily dissolve, wind-up, liquidate or be terminated, except as permitted by the Declaration, (iii) to use its commercially reasonable efforts to ensure that the Trust will not be an "investment company" for purposes of the 1940 Act (as defined herein) and (iv) to take no action that would be reasonably likely to cause the Trust to be classified as an association or a publicly traded partnership taxable as a corporation for United States federal income tax purposes. The rights of the holders of the Par Securities, including economic rights, rights to information and voting rights, are set forth in the Declaration and the Trust Indenture Act. See "Description of Securities." The Declaration and the Guarantee also incorporate by reference the terms of the Trust Indenture Act. The location of the principal executive office of the Trust is c/o the Company, 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance, California, 90505, and its telephone number is (310) 373-1704. 115 DESCRIPTION OF SECURITIES The Par Securities represent undivided beneficial ownership interests in the assets of the Trust and the holders thereof are entitled to a preference in certain circumstances with respect to Distributions and amounts payable on redemption or liquidation over the Common Securities, as well as other benefits as described in the Declaration. This summary of certain provisions of the Par Securities and the Declaration does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Declaration, including the definitions therein of certain terms, and the Trust Indenture Act. Wherever particular defined terms of the Declaration (as supplemented or amended from time to time) are referred to herein, the definitions of such defined terms are incorporated herein by reference. For purposes of this summary, the term "Company" refers only to ICII and not to any of its Subsidiaries. GENERAL The Par Securities rank on a parity, and payments will be made thereon pro rata, with the Common Securities except as described under "--Subordination of Common Securities." Legal title to the Debentures is held by the Property Trustee in trust for the benefit of the holders of the Trust Securities. The Guarantee executed by the Company for the benefit of the holders of the Par Securities is a guarantee with respect to the Par Securities but does not guarantee payment of Distributions or amounts payable on redemption or liquidation of the Par Securities when the Trust does not have sufficient funds available to make such payments. See "Description of Guarantee." The Company's obligations under the Guarantee, taken together with its obligations under the Debentures and the Indenture, including its obligation to pay all costs, expenses and liabilities of the Trust (other than with respect to the Par Securities), constitute a full and unconditional guarantee of all of the Trust's obligations under the Par Securities. Holders of the Par Securities have no preemptive or similar rights. DISTRIBUTIONS From the date of original issuance to but excluding the Remarketing Settlement Date, distributions will accumulate at the Initial Distribution Rate of the stated liquidation amount of $1,000 per Par Security. From the Remarketing Settlement Date to but excluding the date of redemption of the Par Securities, holders of Par Securities will be entitled to receive Distributions at the Adjusted Distribution Rate that results from the Remarketing consummated on the Remarketing Settlement Date. The Adjusted Distribution Rate will not exceed the Maximum Adjusted Distribution Rate. See "--Remarketing--Remarketing Procedures." As used herein: (i) "Scheduled Remarketing Date" means the third Business Day prior to any Scheduled Remarketing Settlement Date; (ii) "Scheduled Remarketing Settlement Date" means June 14, 2002, or such other date determined pursuant to this definition, unless a Trust Enforcement Event has occurred and is continuing on the 25th Business Day prior to such Scheduled Remarketing Settlement Date, in which case the Scheduled Remarketing Settlement Date will be the 30th Business Day after the date of cure or waiver of such Trust Enforcement Event; provided that if (x) purchases and sales of Par Securities pursuant to a Remarketing are not consummated on any Scheduled Remarketing Settlement Date for any reason (including the Company's failure to make the deposit required in the event of a Special Mandatory Redemption) other than the occurrence and continuance of any other Trust Enforcement Event or if (y) the Company fails to redeem Debentures in connection with a Tax Opinion Redemption after cancelling the Remarketing, the next Scheduled Remarketing Settlement Date will be the 30th Business Day after such Scheduled Remarketing Settlement Date; (iii) "Remarketing Settlement Date" means the Scheduled Remarketing Settlement Date on which purchases and sales of Par Securities pursuant to a Remarketing are consummated; 116 (iv) "Maximum Adjusted Distribution Rate" means the rate per annum, determined on the Scheduled Remarketing Date by the Remarketing Agent in its discretion, equal to the greater of (a) the 30-year Treasury Rate plus 600 basis points and (b) a nationally-recognized high-yield index rate for similarly-rated issues, plus 100 basis points; and (v) "30-year Treasury Rate" means the rate per annum equal to the semi- annual equivalent yield to maturity of the U.S. Treasury security used, in accordance with customary financial practice, as the benchmark pricing bond in pricing new issues of corporate debt securities of 30-year maturities on the Scheduled Remarketing Date. Distributions are payable semi-annually in arrears on June 15th (June 14 in 2002) and December 15th of each year, commencing December 15, 1997, and on the Scheduled Remarketing Settlement Date. In the event that any date on which Distributions are payable on the Par Securities is not a Business Day, then payment of the Distributions payable on such date will be made on the next succeeding day that is a Business Day (and without any additional Distributions or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such payment was originally payable (each date on which Distributions are payable in accordance with the foregoing, a "Distribution Date"). A "Business Day" means any day other than a Saturday or a Sunday, or a day on which banking institutions in The City of New York are authorized or required by law or executive order to remain closed or a day on which the principal corporate trust office of the Property Trustee or the Indenture Trustee (as defined herein) is closed for business. The amount of Distributions payable for any period will be computed (i) for any full 180-day semi-annual distribution period, on the basis of a 360-day year of twelve 30-day months and (ii) for any period shorter than a full 180-day semi-annual distribution period for which distributions are computed, on the basis of a 30-day month and for periods less than a month, the actual number of days elapsed per 30-day-month. Distributions on the Par Securities (other than distributions on a redemption date) will be payable to the holders thereof as they appear on the register of the Trust as of the close of business on the relevant record dates, which, as long as the Par Securities are represented by one or more global certificates ("Global Certificates"), will be the close of business on the June 1 or December 1 next preceding the Distribution Date. Distributions payable on any Par Securities that are not punctually paid on any Distribution Date will cease to be payable to the person in whose name such Par Securities are registered on the relevant record date, and such defaulted Distribution will instead be payable to the person in whose name such Par Securities are registered on the special record date or other specified date determined in accordance with the Declaration. At all times, the Applicable Distribution Rate, the distribution payment dates and other payment dates for the Par Securities will correspond to the interest rate, interest payment dates and other payment dates on the Debentures, which will be the sole assets of the Trust. Distributions on the Par Securities must be paid on the dates payable to the extent that the Trust has funds available for the payment of such Distributions. The revenue of the Trust available for distribution to holders of its Par Securities will be limited to payments under the Debentures in which the Trust has invested the proceeds from the issuance and sale of the Trust Securities. See "Description of Debentures." If the Company does not make interest payments on the Debentures, the Property Trustee will not have funds available to pay Distributions on the Par Securities. Following the Remarketing Settlement Date, the Company will have the right under the Indenture to defer the payment of interest on the Debentures at any time or from time to time for a period not exceeding 10 consecutive semi- annual periods (each, an "Extension Period"), provided that no Extension Period may extend 117 beyond the Stated Maturity of the Debentures. Accordingly, there could be multiple Extension Periods of varying terms throughout the term of the Debentures. As a consequence of any such extension, semi-annual Distributions on the Par Securities will be deferred by the Trust during any such Extension Period. Distributions to which holders of the Par Securities are entitled will accumulate and compound semi-annually at the Adjusted Distribution Rate from the relevant payment date for such Distributions. The term Distributions as used herein includes any such compounded amounts unless the context otherwise requires. During any such Extension Period, the Company may not, and may not permit any subsidiary of the Company to, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank on a parity with or junior to the Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks on a parity with or junior in interest to the Debentures (other than (a) dividends or distributions in common stock of the Company, (b) payments under the Guarantee, (c) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (d) purchases of common stock related to the issuance of common stock or rights under any of the Company's benefit plans). Prior to the termination of any such Extension Period, the Company may further extend the Extension Period, provided that no Extension Period may exceed 10 consecutive semi-annual periods or extend beyond the Stated Maturity of the Debentures. Upon the termination of any such Extension Period and the payment of all amounts then due on any Interest Payment Date, the Company may elect to begin a new Extension Period, subject to the foregoing requirements. See "Description of the Debentures--Option to Extend Interest Payment Period" and "Certain United States Federal Income Tax Consequences--Interest Income and Original Issue Discount." The Company has no current intention of exercising its right, following the Remarketing Settlement Date, to defer payments of interest by extending the interest payment period of the Debentures. REDEMPTION Upon the repayment or redemption, in whole or in part, of the Debentures held by the Trust, whether at Stated Maturity or upon earlier redemption as provided in the Indenture, the proceeds from such repayment or redemption will be applied by the Property Trustee to redeem the Trust Securities. See "Description of Debentures--Redemption" for a description of the Company's options to redeem the Debentures. If less than all of the Debentures held by the Trust are to be repaid or redeemed on a redemption date, then the proceeds from such repayment or redemption will be allocated pro rata to the redemption of the Trust Securities. In addition, if the Remarketing Agent is unable to remarket all of the Par Securities tendered or deemed tendered for purchase in the Remarketing, the Company will be required to redeem the Debentures as described under "--Remarketing--Special Mandatory Redemption." Special Event Redemption or Distribution of Debentures; Shortening of Stated Maturity If, at any time, either a Tax Event or an Investment Company Event (each, a "Special Event") shall occur and be continuing, the Regular Trustees may, within 90 days following the occurrence of such Special Event, elect to dissolve the Trust upon not less than 30 nor more than 60 days' notice and, after satisfaction of liabilities to creditors, if any, cause the Debentures to be distributed to the holders of the Trust Securities in liquidation of the Trust. If an Investment Company Event shall occur and be continuing, the Company also has the option, after the Remarketing Settlement Date, to redeem the Debentures, in whole but not in part (and thereby cause a mandatory redemption of the Securities), at any time within 90 days following the occurrence of such an Investment Company Event at a redemption price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of redemption. In addition, if a Tax Event shall occur and be continuing and in the opinion of independent tax counsel to the Trust experienced in such matters, there would in all cases, after effecting the termination of the Trust and the distribution of the Debentures to the holders of the Trust Securities in exchange therefor upon liquidation of the Trust, be more than an insubstantial risk that the Tax Event would continue to exist, then the Company will have the right (a) to shorten the Stated Maturity of the 118 Debentures to a date not earlier than June 14, 2012 (a "Maturity Advancement") such that, in the opinion of such independent tax counsel, after advancing the Stated Maturity of the Debentures, interest paid on the Debentures will be deductible by the Company for United States federal income tax purposes or (b) after the Scheduled Remarketing Date, to redeem the Debentures, in whole but not in part (and thereby cause a mandatory redemption of the Par Securities), at any time within 90 days following the occurrence of a Tax Event at a redemption price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of redemption. Under current United States federal income tax law and interpretations thereof and assuming that, as expected, the Trust is treated as a grantor trust, a distribution of the Debentures should not be a taxable event to holders of the Par Securities. Should there be a change in law, a change in legal interpretation, certain Tax Events or other circumstances, however, the distribution could be a taxable event to holders of the Par Securities. See "Certain United States Federal Income Tax Consequences--Distribution of Debentures or Cash upon Liquidation of the Trust." If the Company does not elect any of the options described above, the Par Securities will remain outstanding until the repayment of the Debentures, whether at maturity or redemption, and in the event a Tax Event has occurred and is continuing, the Company will be obligated to pay any additional taxes, duties, assessments and other governmental charges (other than withholding taxes) to which the Trust has become subject as a result of a Tax Event. See "Description of Debentures." A "Tax Event" means the receipt by the Company of an opinion of independent tax counsel to the Company, experienced in such matters, to the effect that, as a result of any amendment to, change in or announced proposed change in the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is adopted or which proposed change, pronouncement or decision is announced on or after the date of original issuance of the Par Securities, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures, (ii) interest payable by the Company on such Debentures is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes, or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. "Investment Company Event" means the receipt by the Trust of an opinion of counsel, rendered by a law firm having a recognized national securities practice, to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in 1940 Act Law"), the Trust is or will be considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended (the "1940 Act"), which Change in 1940 Act Law becomes effective on or after the date of original issuance of the Securities. Tax Opinion Redemption If the Company receives a Tax Opinion (as defined herein) at least 35 business days prior to the Election Date, the Remarketing may be cancelled at the option of the Company, in which case the Debentures (and, thus, the Securities) would be redeemed by the Company on the Scheduled Remarketing Settlement Date, in whole but not in part, at a redemption price equal to 100% of the principal amount of such Debentures plus accrued and unpaid interest thereon to such Scheduled Remarketing Settlement Date. As used herein, "Tax Opinion" means an opinion of an independent tax counsel to the Company experienced in such matters to the effect that, as a result of (a) any amendment to, or change (including any announced proposed change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, or which amendment or change is effective or such proposed change, pronouncement or decision is announced on or after the date of original issuance of the Par 119 Securities, that it is more likely than not that (i) the Trust will be, following the Remarketing Settlement Date, subject to United States federal income tax with respect to interest accrued or received on the Debentures, (ii) the Trust will be, following the Remarketing Settlement Date, subject to more than a de minimis amount of taxes, duties or other governmental charges, or (iii) interest payable to the Trust on the Debentures, following the Remarketing Settlement Date, will not be deductible, in whole or in part, by the Company for United States federal income tax purposes. Transfer Restricted Security Redemption Upon consummation of the Exchange Offer, the Company will be required, on the Remarketing Settlement Date, to redeem, in whole (but not in part), certain Debentures (the ownership of which is represented by the Par Securities) which were not exchanged pursuant to the Exchange Offer (a "Transfer Restricted Security Redemption"). As part of a Transfer Restricted Security Redemption, on the Schedule Remarketing Settlement Date such Old Par Securities will be exchanged with the Trust for Debentures having an aggregate principal amount equal to the aggregate liquidation of such Old Par Securities and such Debentures shall immediately be redeemed by the Company at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest (including Additional Interest), if any, to the date of redemption. REDEMPTION PROCEDURES Set forth below are procedures applicable to a redemption of Par Securities other than a Special Mandatory Redemption of all of the Par Securities. Procedures applicable to a Special Mandatory Redemption are set forth under "--Remarketing--Special Mandatory Redemption." Par Securities redeemed on each redemption date will be redeemed at the redemption price in respect of the Debentures plus an amount equal to accrued and unpaid Distributions thereon through the date of redemption (the "Redemption Price") with the applicable proceeds from the contemporaneous redemption or payment of the Debentures. Redemptions of the Par Securities will be made and the Redemption Price will be payable on each redemption date only to the extent that the Trust has sufficient funds available for the payment of such Redemption Price. See also "--Subordination of Common Securities." Notice of any redemption (other than a Special Mandatory Redemption) will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of Par Securities to be redeemed at its registered address. If the Trust gives a notice of redemption in respect of the Par Securities or if the Par Securities are to be redeemed following a Special Mandatory Redemption of all of the Debentures, then, by 12:00 noon, New York City time, on the redemption date (including the Remarketing Settlement Date), to the extent funds are available, the Property Trustee will deposit irrevocably with DTC funds sufficient to pay the applicable Redemption Price for all securities held in DTC and will give DTC irrevocable instructions and authority to pay the Redemption Price to the holders of the Par Securities. See "Book-Entry Issuance." If any Par Securities are not represented by one or more Global Certificates, the Trust, to the extent funds are available, will irrevocably deposit with the Paying Agent (as defined herein) for such Par Securities funds sufficient to pay the applicable Redemption Price and will give the paying agent irrevocable instructions and authority to pay the Redemption Price to the holders thereof upon surrender of their certificates evidencing the Par Securities. Notwithstanding the foregoing, Distributions payable on or prior to the redemption date for any Par Security called for redemption will be payable to the holders of such Par Security on the relevant record dates for the related Distribution Dates. If notice of redemption shall have been given and funds deposited as required, then immediately prior to the close of business on the date of such deposit, all rights of the holders of such Par Securities so called for redemption will cease, except the right of the holders of such Par Securities to receive the Redemption Price, but without interest on such Redemption Price, and such Par Securities will cease to be outstanding. In the event that any date fixed for redemption of Par Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such payment was originally payable. 120 In the event that payment of the Redemption Price in respect of Par Securities called for redemption is improperly withheld or refused and not paid either by the Trust or by the Company pursuant to the Guarantee as described under "Description of Guarantee," Distributions on such Par Securities will continue to accumulate at the then Applicable Distribution Rate in effect at the beginning of the related interest period, or increased, to the extent permitted by applicable law, if the Remarketing has not occurred on a Scheduled Remarketing Date, from the redemption date originally established by the Trust for the Par Securities to the date such Redemption Price is actually paid, in which case the actual payment date will be the date fixed for redemption for purposes of calculating the Redemption Price. See "-- Distributions." The Trust may not redeem fewer than all of the outstanding Par Securities unless all accrued and unpaid distributions have been paid on all Par Securities for all semi-annual distribution periods terminating on or prior to the date of redemption. If fewer than all of the Trust Securities issued by the Trust are to be redeemed on a redemption date, then the aggregate amount of such Trust Securities to be redeemed will be allocated pro rata among the Par Securities and the Common Securities. If Par Securities are represented by one or more Global Certificates, they will be redeemed as described below under "Book-Entry Issuance." The particular Par Securities to be redeemed will be selected on a pro rata basis not more than 60 days prior to the redemption date by the Property Trustee from the outstanding Par Securities not previously called for redemption, by such method as the Property Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $1,000 or integral multiples of $1,000 in excess thereof) of the liquidation preference of Par Securities of denominations larger than $1,000. The Property Trustee will promptly notify the Trust registrar in writing of the Par Securities selected for redemption and, in the case of any Par Security selected for partial redemption, the liquidation amount thereof to be redeemed. For all purposes of the Declaration, unless the context otherwise requires, all provisions relating to the redemption of Par Securities shall relate, in the case of any Par Security redeemed or to be redeemed only in part, to the portion of the aggregate liquidation amount of Par Securities which has been or is to be redeemed. Subject to applicable law (including, without limitation, United States federal securities law), the Company or its subsidiaries may at any time and from time to time purchase outstanding Par Securities by tender, in the open market or by private agreement. Change of Control The Declaration provides that upon the occurrence of a Change of Control on or prior to the Remarketing Settlement Date, each holder of Par Securities will have the right to require the Trust to cause all or any part (equal to $1,000 liquidation amount or any integral multiple thereof) of the Par Securities to be exchanged for an equivalent principal amount of Debentures. Promptly thereafter, such Debentures will be repurchased by the Company pursuant to the Indenture, as described below (the "Change of Control Offer"), at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon to the date of purchase (the "Change of Control Payment"). Within 10 days following any Change of Control, the Company will notify the Trust of such Change of Control and the Trust will mail a notice to each holder describing the transaction or transactions that constitute the Change of Control and offering to exchange the Par Securities for the Debentures pursuant to the procedures required by the Declaration and described in such notice. The Trust and the Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the exchange of the Par Securities and the repurchase of the Debentures as a result of a Change of Control. The Change of Control Offer will remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Change of Control Offer Period"). No later than five Business Days after the termination of the Change of Control Offer Period (the "Change of Control Purchase Date"), the Trust will accept all Par Securities tendered in response to the Change of Control Offer and the Company will repurchase all Debentures exchanged for such 121 Par Securities. Payment for the Debentures exchanged for any Par Securities so accepted will be made in the same manner as interest payments are made. On the Change of Control Purchase Date, the Trust will, to the extent lawful, (a) accept for exchange all Par Securities or portions thereof properly tendered pursuant to the Change of Control Offer, (b) deliver or cause to be delivered to the Property Trustee the Par Securities so accepted together with a certificate of the Regular Trustees stating the aggregate liquidation amount of Par Securities or portions thereof being exchanged by the Trust and (c) the Trust will then exchange, for such Par Securities, Debentures having an equivalent aggregate principal amount. The Company will promptly deposit with the Indenture Trustee an amount equal to the Change of Control Payment in respect of all Par Securities or portions thereof so exchanged. The Indenture Trustee will promptly mail to each holder of Par Securities so exchanged the Change of Control Payment for such Par Securities, and the Trust will promptly authenticate and mail (or cause to be transferred by book entry) to each holder a new Par Security equal in liquidation amount to any unexchanged portion of the Par Securities surrendered, if any; provided that each such new Par Securities will be in a liquidation amount of $1,000 or an integral multiple thereof. The Trust and the Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. Asset Sales The Declaration provides that if the Trust owns all of the Debentures and if the aggregate amount of Excess Proceeds under the covenant entitled "Description of Debentures--Certain Covenants of the Company--Asset Sales" exceeds $5.0 million, the Trust will be required to make an offer to all holders of Par Securities (an "Asset Sale Offer") to exchange, for such Par Securities the maximum principal amount of Debentures that may be exchanged under such covenant out of the Excess Proceeds, which Debentures shall then be repurchased by the Company at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of purchase, in accordance with the procedures set forth in the Declaration and the Indenture. An Asset Sale Offer will remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Asset Sale Offer Period"). No later than five Business Days after the termination of the Asset Sale Offer Period (the "Asset Sale Purchase Date"), the Trust will accept for exchange up to the liquidation amount of Par Securities required to be exchanged pursuant to this covenant (the "Asset Sale Offer Amount") or, if less than the Asset Sale Offer Amount has been tendered, all Par Securities tendered in response to the Asset Sale Offer. On or before the Asset Sale Purchase Date, the Trust will, to the extent lawful, accept for exchange, on a pro rata basis to the extent necessary, the Asset Sale Offer Amount of Par Securities or portions thereof tendered pursuant to the Asset Sale Offer, or if less than the Asset Sale Offer Amount has been tendered, all Par Securities tendered, and the Regular Trustees will deliver to the Property Trustee a certificate stating that such Par Securities or portions thereof were accepted for exchange by the Trust in accordance with the terms of this covenant. Promptly following such exchange, the Company will (but in any case not later than five days after the Asset Sale Purchase Date) mail or deliver to each tendering holder an amount equal to the purchase price of the Debentures exchanged with such holder by the Trust, and the Trust will promptly issue a new Par Security, and the Trust will authenticate and mail or deliver such new Par Security to such holder, in a liquidation amount equal to any unexchanged portion of the Par Security surrendered. Any Par Security not so accepted will be promptly mailed or delivered by the Trust to the holder thereof. The Trust and the Company will publicly announce the results of the Asset Sale Offer on the Asset Sale Purchase Date. 122 REMARKETING Remarketing Procedures Set forth below is a summary of the procedures to be followed in connection with the Remarketing of the Par Securities (or, if the Debentures have been distributed to holders of the Par Securities in liquidation of the Trust, the Debentures): If the Company receives a Tax Opinion at least 35 Business Days prior to the Election Date, the Company has the option to cancel the Remarketing by giving, to the Property Trustee, DTC and the Remarketing Agent written notice of such cancellation. In such event, all of the Debentures (and, thus, the Par Securities) are subject to a Tax Opinion Redemption by the Company on the Scheduled Remarketing Date. See "--Redemption--Tax Opinion Redemption." If the Company does not receive such a Tax Opinion or if the Company does not elect to cancel the Remarketing after receiving such a Tax Opinion, not less than 20 nor more than 35 Business Days prior to the Election Date, the Trust is required to give a Notice of Remarketing of the Securities to DTC. Such notice will describe the Remarketing and will be accompanied by (i) an offering memorandum relating to the Par Securities and to the Remarketing and (ii) a Notice of Election to be completed and delivered by the holders of Par Securities. In addition, if the Company is required to redeem Debentures (and, thus, Par Securities) in connection with a Transfer Restricted Security Redemption, holders of such Par Securities will receive notice of such redemption at or prior to the time when the Notice of Remarketing of the Par Securities is given to DTC. Such holders may not tender their Par Securities for repurchase in the Remarketing. Not later than 4:00 P.M., New York City time, on the Election Date, each holder of Par Securities may give, through the facilities of DTC, a notice to the Property Trustee of its election ("Notice of Election") (i) to retain and not to have all or any portion of the Par Securities owned by it remarketed in the Remarketing to be conducted on the Scheduled Remarketing Date or (ii) to tender all or any portion of such Par Securities for purchase in the Remarketing (such portion, in either case, is required to be in the liquidation amount of $1,000 or any integral multiple thereof). Any Notice of Election given to the Property Trustee will be irrevocable and may not be conditioned upon the level at which the Adjusted Distribution Rate is established in the Remarketing. Promptly after 4:30 P.M., New York City time, on the Election Date, the Property Trustee, based on the Notices of Election received by it through DTC prior to such time, will notify the Trust, the Company and the Remarketing Agent of the number of Par Securities to be retained by holders of Par Securities and the number of Par Securities tendered for purchase in the Remarketing. If any holder of Par Securities gives a Notice of Election to tender Par Securities as described in clause (ii) in the prior paragraph, the Par Securities so subject to such Notice of Election will be deemed tendered for purchase in the Remarketing, notwithstanding any failure by such holder to deliver or properly deliver such Par Securities to the Remarketing Agent for purchase. IF ANY HOLDER OF PAR SECURITIES FAILS TIMELY TO DELIVER A NOTICE OF ELECTION, AS DESCRIBED ABOVE, SUCH PAR SECURITIES WILL BE DEEMED TENDERED FOR PURCHASE IN THE REMARKETING, NOTWITHSTANDING SUCH FAILURE OR THE FAILURE BY SUCH HOLDER TO DELIVER OR PROPERLY DELIVER SUCH PAR SECURITIES TO THE REMARKETING AGENT FOR PURCHASE. The right of each holder of Par Securities to have Par Securities tendered for purchase shall be limited to the extent that (i) the Remarketing Agent conducts a remarketing pursuant to the terms of the Remarketing Agreement (as defined herein), (ii) Par Securities tendered have not been called for redemption, (iii) the Remarketing Agent is able to find purchasers for the tendered Par Securities at an Adjusted Distribution Rate that does not exceed the Maximum Distribution Rate and (iv) such purchaser or purchasers deliver the purchase price therefor to the Remarketing Agent. If a holder of Par Securities has indicated by timely delivery of a Notice of Election that it wishes to tender securities held by it for purchase in the Remarketing and such holder desires to purchase Par Securities in the 123 Remarketing at or above a specified rate, such holder should separately notify the Remarketing Agent in accordance with the procedures specified in the Notice of Remarketing and indicate the specified rate per annum at or above which such holder will purchase Par Securities. In such case, the Remarketing Agent will give priority to a holder's purchase of a number of Securities equal to the number of Par Securities tendered by such holder in the Remarketing, provided that the Adjusted Distribution Rate is not less than the specified rate. If holders of Par Securities submit Notices of Election to retain all of the Par Securities then outstanding, the Adjusted Distribution Rate will be the rate determined by the Remarketing Agent in its sole discretion, as the rate that would have been established had a Remarketing been held on the Scheduled Remarketing Date. On the Scheduled Remarketing Date, the Remarketing Agent will use commercially reasonable efforts to remarket, at a price equal to 100% of the liquidation amount thereof, Par Securities tendered or deemed tendered for purchase. Prior to 4:00 P.M., New York City time, on the Scheduled Remarketing Date, the Remarketing Agent will determine the Adjusted Distribution Rate, which will be the rate per annum (rounded to the nearest one-thousandth (0.001) of one percent per annum) which the Remarketing Agent determines, in its sole judgment, to be the lowest rate per annum, if any, not exceeding the Maximum Adjusted Distribution Rate, that will enable it to remarket all Par Securities tendered or deemed tendered for remarketing at a price of $1,000 per Security. Notwithstanding the foregoing, if the Remarketing Agent is able to remarket some, but is unable to remarket all, of the Par Securities tendered or deemed tendered for purchase in the Remarketing, the Adjusted Distribution Rate will be the highest rate, not exceeding the Maximum Adjusted Distribution Rate, required to remarket the Par Securities sold in the Remarketing. If the Remarketing Agent is unable to remarket by 4:00 P.M., New York City time, on the Scheduled Remarketing Date, all Par Securities tendered or deemed tendered for purchase at a price of $1,000 per Security, each holder that tendered Par Securities for sale shall sell a number of Par Securities on a pro rata basis, to the extent practicable, or by lot, as determined by the Remarketing Agent in its sole discretion, based on the number of orders to purchase Par Securities in the Remarketing. If the allocation procedures described in the preceding sentence would result in the sale of a fraction of a Par Security, the Remarketing Agent will, in its sole discretion, round up or down the number of Par Securities sold by each holder in the Remarketing so that each Security sold in the Remarketing will be a whole Security and the total number of Par Securities sold equals the total number of Par Securities purchased in the Remarketing. By approximately 4:30 P.M., New York City time, on the Scheduled Remarketing Date, the Remarketing Agent will advise, by telephone (i) DTC, the Property Trustee, the Indenture Trustee, the Trust and the Company of the Adjusted Distribution Rate determined in the Remarketing and the number of Par Securities sold in the Remarketing, (ii) each purchaser (or the DTC Participant thereof) of the Adjusted Distribution Rate determined in the Remarketing and the number of Par Securities such purchaser is to purchase and (iii) each purchaser to give instructions to its DTC Participant to pay the purchase price on the Scheduled Remarketing Settlement Date in same day funds against delivery of the Par Securities purchased through the facilities of DTC. All Par Securities tendered or deemed tendered in the Remarketing will be automatically delivered to the account of the Remarketing Agent through the facilities of DTC against payment of the purchase price therefor on the Scheduled Remarketing Settlement Date. The Remarketing Agent will make payment to the DTC Participant of each tendering holder of Par Securities in the Remarketing through the facilities of DTC by the close of business on the Scheduled Remarketing Settlement Date. In accordance with DTC's normal procedures, on the Remarketing Settlement Date, the transactions described above with respect to each Par Security tendered for purchase and sold in the Remarketing will be executed through DTC and the accounts of the DTC Participants will be debited and credited and such Par Securities delivered by book entry as necessary to effect purchases and sales of such Par Securities. DTC is expected to make payment in accordance with its normal procedures. 124 If any holder selling Par Securities in the Remarketing fails to deliver such Par Securities, the DTC Participant of such selling holder and of any other person that was to have purchased Par Securities in the Remarketing may deliver to any such other person a number of Par Securities that is less than the number of Par Securities that otherwise was to be purchased by such person. In such event, the number of Par Securities to be so delivered will be determined by such DTC Participant and delivery of such lesser number of Par Securities will constitute good delivery. The Remarketing Agent is not obligated to purchase any Par Securities that would otherwise remain unsold in the Remarketing. Neither the Trust, any Trustee, the Company nor the Remarketing Agent shall be obligated in any case to provide funds to make payment upon tender of Par Securities for Remarketing. Special Mandatory Redemption If, by 4:00 P.M., New York City time, on any Scheduled Remarketing Date, the Remarketing Agent is unable to remarket, at a price of $1,000 per Par Security, all of the Par Securities tendered or deemed tendered for purchase in the Remarketing on such Scheduled Remarketing Date, then (i) such unsold Par Securities shall be exchanged on the related Scheduled Remarketing Settlement Date with the Trust for Debentures having an aggregate principal amount equal to the aggregate liquidation amount of such unsold Par Securities and such Debentures shall be immediately redeemed, unless (ii) as a result of such redemption, less than $25.0 million principal amount of Debentures would remain outstanding. In such latter event, the Company is required to redeem on such Scheduled Remarketing Settlement Date all of the Debentures (thereby causing the Trust to redeem all of the outstanding Par Securities) and the Remarketing will be cancelled. In either case of (i) or (ii) above, the redemption price of the Debentures shall be 100% of the principal amount of the outstanding Debentures so redeemed. Because the Remarketing Settlement Date will also be a Distribution Date, Distributions to be paid on such Distribution Date for the Par Securities will be paid to the person in whose name the Par Securities are registered on the corresponding record date. AS A RESULT OF THE SPECIAL MANDATORY REDEMPTION, ALL PAR SECURITIES TENDERED OR DEEMED TENDERED FOR PURCHASE IN THE REMARKETING WILL BE PURCHASED IN THE REMARKETING, OR MANDATORILY REDEEMED, ON THE REMARKETING SETTLEMENT DATE. If the Company is required to redeem the Debentures on the Scheduled Remarketing Settlement Date as part of a Special Mandatory Redemption, by 12:00 Noon, New York City time, on the Business Day prior to the Scheduled Remarketing Settlement Date, the Company is required to deposit irrevocably with the Indenture Trustee funds sufficient to pay the redemption price with respect to the Debentures to be redeemed. Remarketing Agent The Company and the Trust have entered into a Remarketing Agreement (the "Remarketing Agreement") with the Remarketing Agent which provides, among other things, that Lehman Brothers Inc. will act as exclusive Remarketing Agent and will use commercially reasonable efforts to remarket Par Securities tendered or deemed tendered for purchase in the Remarketing at a price of $1,000 per Par Security and determine the Adjusted Distribution Rate. Under certain circumstances, some portion of the Par Securities tendered in the Remarketing may be purchased by the Remarketing Agent. See "--Remarketing Procedures." The Remarketing Agreement provides that the Remarketing Agent shall incur no liability to the Company or to any holder of Par Securities in its individual capacity or as Remarketing Agent for any action or failure to act in connection with a Remarketing or otherwise, except as a result of gross negligence or willful misconduct on its part. The Company has agreed to indemnify the Remarketing Agent against certain liabilities, including liabilities under the Securities Act, arising out of or in connection with its duties under the Remarketing Agreement. The Remarketing Agreement also provides that any Remarketing Agent may resign and be discharged from its duties and obligations thereunder; provided, however, that no such resignation will become effective until the 125 Company has appointed at least one nationally recognized broker-dealer as successor Remarketing Agent and such successor Remarketing Agent has entered into a remarketing agreement with the Company on terms no less favorable than those set forth in the Remarketing Agreement. In such case, the Company will use its best efforts to appoint a successor Remarketing Agent and enter into such a remarketing agreement with such person as soon as reasonably practicable. SUBORDINATION OF COMMON SECURITIES Payment of Distributions on, and the Redemption Price of, the Trust Securities, as applicable, shall be made pro rata based on the liquidation amount of such Trust Securities; provided, however, that if on any Distribution Date or redemption date an Indenture Event of Default shall have occurred and be continuing, no payment of any Distribution on, or Redemption Price of, any of the Common Securities, and no other payment on account of the redemption, liquidation or other acquisition of such Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions on all of the outstanding Par Securities for all Distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all of the outstanding Par Securities then called for redemption, shall have been made or provided for, and all funds available to the Property Trustee shall first be applied to the payment in full in cash of all Distributions on, or Redemption Price of the Par Securities then due and payable. LIQUIDATION DISTRIBUTION UPON DISSOLUTION Pursuant to the Declaration, the Trust shall automatically dissolve on the first to occur of: (i) certain events of bankruptcy, dissolution or liquidation of the Company; (ii) the distribution of the Debentures to the holders of the Trust Securities; (iii) the redemption of all of the Par Securities in connection with the maturity or redemption of all of the Debentures and (iv) the entry by a court of competent jurisdiction of an order for the dissolution of the Trust. If an early dissolution occurs as described in clause (i), (ii) or (iv) above, the Trust shall be liquidated by the Trustees as expeditiously as the Trustees determine to be possible by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, to the holders of the Trust Securities their pro rata interest in the Debentures, unless such distribution is determined by the Property Trustee not to be practical, in which event such holders will be entitled to receive out of the assets of the Trust available for distribution to holders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to, in the case of holders of Par Securities, the aggregate of the liquidation amount plus accrued and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). If such Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Par Securities shall be paid on a pro rata basis. The holder(s) of the Common Securities will be entitled to receive distributions upon any such liquidation pro rata with the holders of the Par Securities, except that if an Indenture Event of Default has occurred and is continuing, the Par Securities shall have a priority over the Common Securities. After the liquidation date is fixed for any distribution of Debentures to holders of the Par Securities (i) the Par Securities will no longer be deemed to be outstanding, (ii) DTC or its nominee, as a record holder of Par Securities, will receive a registered Global Certificate or Certificates representing the Debentures to be delivered upon such distribution and (iii) any certificates representing Par Securities not held by DTC or its nominee will be deemed to represent Debentures having a principal amount equal to the liquidation amount of such Par Securities, and bearing accrued and unpaid interest in an amount equal to the accrued and unpaid Distributions on such Par Securities until such certificates are presented for cancellation whereupon the Company will issue to such holder, and the Indenture Trustee will authenticate, a certificate representing such Debentures. TRUST ENFORCEMENT EVENTS An Indenture Event of Default that has occurred and is continuing constitutes a "Trust Enforcement Event" under the Declaration with respect to the Trust Securities, provided that pursuant to the Declaration, the holder 126 of the Common Securities will be deemed to have waived any Trust Enforcement Event with respect to the Common Securities until all Trust Enforcement Events with respect to the Par Securities have been cured, waived or otherwise eliminated. Until such Trust Enforcement Event with respect to the Par Securities has been so cured, waived or otherwise eliminated, the Property Trustee will be deemed to be acting solely on behalf of the holders of the Par Securities and only the holders of the Par Securities will have the right to direct the Property Trustee with respect to certain matters under the Declaration, and therefore the Indenture. Upon the occurrence of a Trust Enforcement Event, the Indenture Trustee (as defined herein) or the Property Trustee as the holder of the Debentures will have the right under the Indenture to declare the principal of and interest on the Debentures to be immediately due and payable. Each of the Company and the Trust is required to file annually with the Property Trustee an officers' certificate as to its compliance with all conditions and covenants under the Declaration. If the Property Trustee fails to enforce its rights with respect to the Debentures, any holder of Par Securities may institute a legal proceeding directly against the Company to enforce the Property Trustee's rights under such Debentures without first instituting any legal proceeding against the Property Trustee or any other person or entity. In addition, if a Trust Enforcement Event has occurred and is continuing and such event is attributable to the failure of the Company to pay interest, principal or other required payments on the Debentures on the date such interest, principal or other payment is otherwise payable, then a holder of Par Securities may, on or after the respective due dates specified in the Debentures, institute a proceeding directly against the Company under the Indenture for enforcement of payment on Debentures having a principal amount equal to the aggregate liquidation amount of the Par Securities held by such holder (a "Direct Action"). In connection with such Direct Action, the rights of the Company will be subrogated to the rights of such holder of Par Securities to the extent of any payment made by the Company to such holder of Par Securities. VOTING RIGHTS; AMENDMENT OF THE DECLARATION Except as provided below and under "Description of Guarantee Amendments and Assignment" and as otherwise required by law and the Declaration, the holders of the Securities will have no voting rights. So long as any Debentures are held by the Property Trustee, the holders of a majority in liquidation amount of the Par Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or to direct the exercise of any trust or power conferred upon the Property Trustee under the Declaration, including the right to direct the Property Trustee, as holder of the Debentures, to (i) exercise the remedies available to it under the Indenture as a holder of the Debentures, (ii) consent to any amendment or modification of the Indenture or the Debentures where such consent shall be required or (iii) waive any past default and its consequences that is waivable under the Indenture; provided, however, that if an Indenture Event of Default has occurred and is continuing, then the holders of 25% of the aggregate liquidation amount of the Par Securities may direct the Property Trustee to declare the principal of and interest on the Debentures due and payable; provided, further, that where a consent or action under the Indenture would require the consent or act of the holders of more than a majority of the aggregate principal amount of Debentures affected thereby, only the holders of the percentage of the aggregate stated liquidation amount of the Par Securities which is at least equal to the percentage required under the Indenture may direct the Property Trustee to give such consent to take such action. The Property Trustee shall notify each holder of the Par Securities of any notice of any Indenture Event of Default which it receives from the Company with respect to the Debentures. Except with respect to directing the time, method, and place of conducting a proceeding for a remedy, the Property Trustee shall be under no obligation to take any of the actions described in clauses (i) and (ii) above unless the Property Trustee has obtained an opinion of independent tax counsel to the effect that the Trust will not fail to be classified as a grantor trust for United States federal income tax purposes, as a result of such action, and each holder will be treated as owning an undivided beneficial ownership interest in the Debentures. 127 The Declaration may be amended from time to time by the Company and a majority of the Regular Trustees (and in certain circumstances the Property Trustee and the Delaware Trustee), without the consent of the holders of the Par Securities, (i) to cure any ambiguity, correct or supplement any provisions in the Declaration that may be defective or inconsistent with any other provision, or to make any other provisions with respect to matters or questions arising under the Declaration that shall not be inconsistent with the other provisions of the Declaration, or (ii) to modify, eliminate or add to any provisions of the Declaration to such extent as shall be necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any Trust Securities are outstanding or to ensure that the Trust will not be required to register as an "investment company" under the 1940 Act, provided, however, that such action shall not adversely affect in any material respect the interests of any holder of Trust Securities, and any amendments of the Declaration shall become effective when notice thereof is given to the holders of Trust Securities. The Declaration may be amended by the Company and a majority of the Regular Trustees with (i) the consent of holders representing not less than a majority in liquidation amount of the outstanding Trust Securities and (ii) receipt by the Regular Trustees of an opinion of counsel to the effect that such amendment or the exercise of any power granted to the Regular Trustees in accordance with such amendment will not affect the Trust's status for United States federal income tax purposes as a grantor trust or the Trust's exemption from status as an "investment company" under the 1940 Act, provided, further that without the consent of each holder of Trust Securities affected thereby, the Declaration may not be amended to (i) change the amount or timing of any Distribution on the Trust Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Trust Securities as of a specified date or (ii) restrict the right of a holder of Trust Securities to institute suit for the enforcement of any such payment on or after such date. Any required approval or direction of holders of Par Securities may be given at a meeting of holders of Par Securities convened for such purpose or pursuant to written consent. The Regular Trustees will cause a notice of any meeting at which holders of Securities are entitled to vote, or of any matter upon which action by written consent of such holders is to be taken, to be given to each holder of record of Par Securities in the manner set forth in the Declaration. No vote or consent of the holders of Par Securities will be required for the Trust to redeem and cancel its Par Securities in accordance with the Declaration. Notwithstanding that holders of Par Securities are entitled to vote or consent under any of the circumstances described above, any of the Par Securities that are owned by the Company, the Trustees or any affiliate of the Company or any Trustees, shall, for purposes of such vote or consent, be treated as if they were not outstanding. EXPENSES AND TAXES In the Indenture, the Company, as borrower, has agreed to pay all debts and other obligations (other than with respect to the Par Securities) and all costs and expenses of the Trust (including costs and expenses relating to the organization of the Trust, the fees and expenses of the Trustees and the costs and expenses relating to the operation of the Trust) and to pay any and all taxes and all costs and expenses with respect thereto (other than United States withholding taxes) to which the Trust might become subject. The foregoing obligations of the Company under the Indenture are for the benefit of, and shall be enforceable by, any person to whom any such debts, obligations, costs, expenses and taxes are owed (a "Creditor") whether or not such Creditor has received notice thereof. Any such Creditor may enforce such obligations of the Company directly against the Company, and the Company has irrevocably waived any right or remedy to require that any such Creditor take any action against the Trust or any other person before proceeding against the Company. The Company has also agreed in the Indenture to execute such additional agreements as may be necessary or desirable to give full effect to the foregoing. REGISTRAR AND TRANSFER AGENT The Property Trustee acts as registrar and transfer agent for the Par Securities. 128 Registration of transfers or exchanges of Par Securities will be effected without charge by or on behalf of the Trust, but upon payment of any tax or other governmental charges that may be imposed in connection with any transfer or exchange, the Trust may charge a sum sufficient to cover any such payment. The Trust will not be required (i) to issue, register or cause to be registered the transfer or exchange of any Par Securities during a period beginning at the opening of business 15 days before the day of the mailing of the relevant notice of redemption and ending at the close of business on the day of such mailing or (ii) to register or cause to be registered the transfer or exchange of any Par Securities so selected for redemption, except in the case of any Par Securities being redeemed in part, any portion thereof not to be redeemed. INFORMATION CONCERNING THE PROPERTY TRUSTEE The Property Trustee, other than during the occurrence and continuance of a Trust Enforcement Event, undertakes to perform only such duties as are specifically set forth in the Declaration and, after such Trust Enforcement Event (which has not been cured or waived), must exercise the same degree of care and skill as a prudent person would exercise or use in the conduct of his or her own affairs. Subject to this provision, the Property Trustee is under no obligation to exercise any of the powers vested in it by the Declaration at the request of any holder of Par Securities unless it is offered reasonable security and indemnity against the costs, expenses and liabilities that might be incurred thereby. If no Trust Enforcement Event has occurred and is continuing and the Property Trustee is required to decide between alternative causes of action, construe ambiguous provisions in the Declaration or is unsure of the application of any provision of the Declaration, and the matter is not one on which holders of Par Securities are entitled under the Declaration to vote, then the Property Trustee may, but shall be under no duty to, take such action as is directed by the Company and, if not so directed, shall take such action as it deems advisable and in the best interests of the holders of the Trust Par Securities and will have no liability except for its own bad faith, negligence or willful misconduct. PAYMENT AND PAYING AGENCY Payments in respect of the Global Certificates shall be made to DTC, which shall credit the relevant accounts at DTC on the applicable Distribution Dates or, if the Par Securities are not represented by one or more Global Certificates, such payments shall be made by check mailed to the address of the holder entitled thereto as such address shall appear on the register in respect of the registrar. The paying agent (the "Paying Agent") shall initially be the Property Trustee and any co-paying agent chosen by the Property Trustee and acceptable to the Regular Trustees and the Company. The Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Property Trustee and the Company. In the event that the Property Trustee shall no longer be the Paying Agent, the Regular Trustees shall appoint a successor (which shall be a bank or trust company acceptable to the Regular Trustees and the Company) to act as Paying Agent. MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any corporation or other Person (as defined in the Declaration), except as described below. The Trust may, at the request of the Company, with the consent of the Regular Trustees and without the consent of the holders of the Par Securities, the Delaware Trustee or the Property Trustee merge with or into, consolidate, amalgamate, be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to a trust organized as such under the laws of any State; provided that (i) such successor entity (if not the Trust) either (a) expressly assumes all of the obligations of the Trust with respect to the Par Securities or (b) substitutes for the Securities other securities having substantially the same terms as the Par Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Par Securities rank in priority with respect to distributions and payments upon liquidation, redemption and otherwise, (ii) if the Trust is not the successor entity, the Company expressly appoints a trustee of such successor entity possessing the same powers and duties as the Property Trustee as the holder of the Debentures, (iii) the Par Securities or any Successor Securities are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or with any other organization on which the Par Securities are 129 then listed or quoted; (iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Par Securities (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization, (v) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the holders of the Par Securities (including any Successor Securities) in any material respect, (vi) such successor entity has a purpose identical to that of the Trust, (vii) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer, or lease, the Company has received an opinion from independent counsel to the Trust experienced in such matters to the effect that (a) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the holders of the Par Securities (including any Successor Securities) in any material respect and (b) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, (1) neither the Trust nor such successor entity will be required to register as an investment company under the Investment Company Act and (2) the Trust or the successor entity will continue to be classified as a grantor trust for United States federal income tax purposes, (viii) the Company or any permitted successor or assignee owns all of the Common Securities of such successor entity and guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee and (ix) such successor entity expressly assumes all of the obligations of the Trust with respect to the Trustees. Notwithstanding the foregoing, the Trust shall not, except with the consent of holders of 100% in aggregate liquidation amount of the Par Securities, consolidate, amalgamate, merge with or into, be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or the successor entity to be classified as other than a grantor trust for United States federal income tax purposes and each holder of the Par Securities not to be treated as owning an undivided interest in the Debentures. MERGER OR CONSOLIDATION OF TRUSTEES Any corporation into which the Property Trustee, the Delaware Trustee or any Regular Trustee that is not a natural person may be merged or converted or with which such Trustee may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of such Trustee, shall be the successor of such Trustee under the Declaration, provided such corporation shall be otherwise qualified and eligible. MISCELLANEOUS The Regular Trustees are authorized and directed to conduct the affairs of and to operate the Trust in such a way that the Trust will not be deemed to be an "investment company" required to be registered under the Investment Company Act or classified as other than a grantor trust for United States federal income tax purposes and so that the Debentures will be treated as indebtedness of the Company for United States federal income tax purposes. In this connection, the Company and the Regular Trustees are authorized to take any action, not inconsistent with applicable law, the Certificate of Trust or the Declaration, that the Company and the Regular Trustees determine in their discretion to be necessary or desirable for such purposes, as long as such action does not materially adversely affect the interests of the holders of the Par Securities. The Trust may not borrow money, issue debt, reinvest proceeds derived from investments, mortgage or pledge any of its assets. In addition the Trust may not undertake any activity that would cause the Trust not to be classified as a grantor trust for United States federal income tax purposes. 130 DESCRIPTION OF DEBENTURES The Debentures were issued under an Indenture (the "Indenture"), between the Company and Chase Trust Company of California, as trustee (the "Indenture Trustee"). This summary of certain terms and provisions of the Debentures and the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Indenture. For purposes of this summary, the term "Company" refers only to ICII and not to any of its subsidiaries. GENERAL Concurrently with the issuance of the Par Securities, the Trust invested the proceeds thereof and the consideration paid by the Company for the Common Securities in the Debentures issued by the Company. The Debentures are in the principal amount equal to the aggregate liquidation amount of the Par Securities plus the Company's concurrent investment in the Common Securities. The Debentures accrue interest at the Applicable Interest Rate of the principal amount thereof, payable semi-annually in arrears on June 15th (June 14 in 2002) and December 15th of each year, commencing December 15, 1997, and on the Scheduled Remarketing Settlement Date (each, an "Interest Payment Date"). From the date of original issuance of the Par Securities (the "Closing Date") to but excluding the Remarketing Settlement Date, the "Applicable Interest Rate" will be 10 1/4% per annum (the "Initial Interest Rate"). From the Remarketing Settlement Date to but excluding the date of redemption of the Debentures, the Applicable Interest Rate will equal the Adjusted Distribution Rate that results from the Remarketing consummated on the Remarketing Settlement Date. Interest on the Debentures is payable to the person in whose name the Debentures are registered, at the close of business on the June 1 or December 1 next preceding the relevant Interest Payment Date. It is anticipated that, until the liquidation, if any, of the Trust, each Debenture will be held in the name of the Property Trustee in trust for the benefit of the holders of the Trust Securities. The amount of interest payable for any period will be computed (i) for any full 180-day semi-annual interest payment period, on the basis of a 360-day year consisting of twelve 30-day months and (ii) for any period shorter than a full 180-day semi-annual interest payment, a 30-day month and for periods of less than a month, the actual number of days elapsed per 30-day month. In the event that any date on which interest is payable on the Debentures is not a Business Day, then payment of the interest payable on such date will be made on the next succeeding day that is a Business Day (and without any additional interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such payment was originally payable. Accrued interest that is not paid on the applicable Interest Payment Date will bear additional interest on the amount thereof (to the extent permitted by law) at the Applicable Interest Rate in effect at the beginning of such period, compounded semi-annually. The term "interest" as used herein shall include interest payments, Additional Interest and interest on interest payments not paid on the applicable Interest Payment Date. The Debentures will mature on June 15, 2032, or earlier, in certain circumstances, upon the occurrence and continuation of a Tax Event. See "Description of Securities--Special Event Redemption or Distribution of Debentures; Shortening of Stated Maturity." Until the Remarketing Settlement Date, the Debentures will be unconditionally guaranteed on a senior unsecured basis by each of the Subsidiary Guarantors, which consist of all of the Company's Restricted Subsidiaries other than the Trust, SPTL and the Special Purpose Subsidiaries. The Subsidiary Guarantees will be released on the Remarketing Settlement Date. Until the Remarketing Settlement Date, the Debentures will be general unsecured obligations of the Company ranking on a parity with all Indebtedness of the Company, if any, that is not subordinated to the Debentures and senior to any Indebtedness of the Company that is subordinated to the Debentures. Until the Remarketing Settlement Date, when the Subsidiary Guarantees will be released, the Subsidiary Guarantees will rank on a parity with all Indebtedness of the Subsidiary Guarantors, if any, that is not subordinated to the 131 Subsidiary Guarantees and senior to any Indebtedness of the Subsidiary Guarantors that is subordinated to the Subsidiary Guarantees. After the Remarketing Settlement Date, the Debentures will be subordinated and junior in right of payment to all Senior Debt of the Company. After the Remarketing Settlement Date, the Indenture does not limit the incurrence or issuance of other secured or unsecured debt of the Company, whether under the Indenture or any existing or other indenture that the Company may enter into in the future or otherwise. See "--Ranking." OPTION TO EXTEND INTEREST PAYMENT PERIOD Following the Remarketing Settlement Date, so long as no Indenture Event of Default has occurred and is continuing, the Company has the right under the Indenture to defer the payment of interest and Additional Interest, if any, at any time or from time to time for a period not exceeding 10 consecutive semi- annual periods with respect to each Extension Period, provided that no Extension Period may extend beyond the Stated Maturity of the Debentures. At the end of such Extension Period, the Company must pay all interest and Additional Interest, if any, then accrued and unpaid (together with interest thereon at the Applicable Interest Rate in effect at the beginning of such period, compounded semi-annually, to the extent permitted by applicable law). During an Extension Period, interest and Additional Interest, if any, will continue to accrue and holders of Debentures (or holders of Par Securities while the Par Securities are outstanding) will be required to accrue interest income (as OID) for United States federal income tax purposes. See "Certain United States Federal Income Tax Consequences--Interest Income and Original Issue Discount." During any such Extension Period, the Company may not, and may not permit any subsidiary of the Company to, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank on a parity with or junior in interest to the Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks pari passu or junior in interest to the Debentures (other than (a) dividends or distributions in common stock of the Company, (b) payments under the Guarantee, (c) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (d) purchases of common stock related to the issuance of common stock or rights under any of the Company's benefit plans). Prior to the termination of any such Extension Period, the Company may further extend the Extension Period, provided that no Extension Period may exceed 10 consecutive semi-annual periods or extend beyond the Stated Maturity of the Debentures. Upon the termination of any such Extension Period and the payment of all amounts then due on any Interest Payment Date, the Company may elect to begin a new Extension Period subject to the above requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof. The Company must give the Property Trustee, the Regular Trustees and the Indenture Trustee notice of its election of such Extension Period not less than one Business Day prior to such record date. The Property Trustee shall give notice of the Company's election to begin a new Extension Period to the holders of the Securities. REDEMPTION Optional Redemption. The Debentures are redeemable at the option of the Company, in whole or in part, at any time or from time to time through and including June 15, 2001 at a redemption price (the "Initial Optional Redemption Price") equal to the greater of (i) 100% of the principal amount of such Debentures and (ii) as determined by a Quotation Agent (as defined herein), the sum of the present values of the principal amount of such Debentures as if redeemed on June 14, 2002, together with scheduled prepayments of interest from the prepayment date to but excluding June 14, 2002, discounted to the prepayment date on a semi-annual basis (assuming a 360-day year consisting of 30-day months) at the Adjusted Treasury Rate, plus, in each case, accrued and unpaid interest and Additional Interest, if any, to the date of redemption. 132 In addition, if certain circumstances are met, the Debentures are redeemable at any time after the Remarketing Settlement Date in whole (but not in part), within 90 days of the occurrence and continuation of a Special Event, at a redemption price equal to 100% of the principal amount of such Debentures, plus, in each case, accrued and unpaid interest and Additional Interest, if any, thereon to the date of redemption. See "Description of Securities-- Redemption--Special Event Redemption or Distribution of Debentures; Shortening of Stated Maturity." On and after June 15, 2012, the Debentures are redeemable prior to maturity at the option of the Company, in whole or in part, at any time at the redemption prices described in the next sentence, plus accrued and unpaid interest and Additional Interest, if any, to the date of redemption. The redemption price (expressed as a percentage of principal amount) shall be equal to 100% plus the product of (x) the Adjusted Distribution Rate and (y) the applicable Factor (as defined below) if redeemed during the twelve-month period beginning on June 15th of the years indicated below, the applicable "Factor" shall equal:
YEAR PERCENTAGE ---- ---------- 2012.......................................................... 50% 2013.......................................................... 45% 2014.......................................................... 40% 2015.......................................................... 35% 2016.......................................................... 30% 2017.......................................................... 25% 2018.......................................................... 20% 2019.......................................................... 15% 2020.......................................................... 10% 2021.......................................................... 5%
On and after June 15, 2022, the redemption price will be 100% of the principal amount of the Debentures to be redeemed, plus accrued and unpaid interest and Additional Interest, if any, to the date of redemption. If the Debentures are redeemed, the Trust must redeem the Trust Securities having an aggregate liquidation amount equal to the aggregate principal amount of Debentures so redeemed. See "Description of Securities--Redemption." Notice of any redemption (other than a redemption of Debentures in connection with a Special Mandatory) will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of Debentures to be redeemed at its registered address. Unless the Company defaults in payment of the redemption price, on and after the redemption date interest ceases to accrue on such Debentures or portions thereof called for redemption. As used herein, "Adjusted Treasury Rate" means, with respect to any prepayment date, the Treasury Rate plus 0.50%. "Treasury Rate" means (i) the yield, under the heading which represents the average for the immediately prior week, appearing in the most recently published statistical release designated "H.15(519)" or any successor publication which is published weekly by the Federal Reserve and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities", for the maturity corresponding to the Remaining Life (if no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Remaining Life shall be determined and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury 133 Price for such prepayment date. The Treasury Rate shall be calculated on the third business day preceding the prepayment date. "Comparable Treasury Issue" means with respect to any prepayment date the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life. If no United States Treasury security has a maturity which is within a period from three months before to three months after the last day of the Remaining Life, the two most closely corresponding United States Treasury securities shall be used as the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or extrapolated on a straight-line basis, rounding to the nearest month using such securities. "Quotation Agent" means Lehman Brothers Inc. and their respective successors; provided, however, that if the foregoing shall cease to be a primary United States Government securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer. "Comparable Treasury Price" means (A) the average of five Reference Treasury Dealer Quotations for such prepayment date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Indenture Trustee obtains fewer than three such Reference Treasury Dealer Quotations, the average of all such Quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any prepayment date, the average, as determined by the Indenture Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Indenture Trustee by such Reference Treasury Dealer at 5:00 p.m. New York City time, on the third business day preceding such prepayment date. Special Mandatory Redemption If the Remarketing Agent is unable to remarket all of the Par Securities tendered or deemed tendered for purchase in the Remarketing, the Company will be required to redeem Debentures as described under "Description of Securities--Remarketing--Special Mandatory Redemption." Tax Opinion Redemption If the Company receives a Tax Opinion at least 35 business days prior to the Election Date, the Company has the option to cancel the Remarketing by giving, to the Property Trustee, DTC and the Remarketing Agent written notice of such cancellation. In such event, all of the Debentures (and, thus, the Par Securities) are subject to a Tax Opinion Redemption by the Company on the Scheduled Remarketing Date. Transfer Restricted Security Redemption In addition, upon consummation of the Exchange Offer, the Company will be required , on the Remarketing Settlement Date, to redeem, in whole (but not in part), all of the Debentures (and, thus, the Par Securities) which were not exchanged pursuant to the Exchange Offer pursuant to a Transfer Restricted Security Redemption. As part of a Transfer Restricted Security Redemption, on the Scheduled Remarketing Settlement Date such Old Par Securities will be exchanged with the Trust for Debentures having an aggregate principal amount equal to the aggregate liquidation amount of such Old Par Securities and such Debentures shall immediately be redeemed by the Company at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest (including Additional Interest), if any, to the date of redemption. 134 REMARKETING If the holders of Par Securities receive Debentures upon the liquidation or dissolution of the Trust, the Debentures will be subject to the remarketing procedures that would have been applicable to the Securities. See "Description of the Securities--Remarketing." RANKING Until the Remarketing Settlement Date, the Debentures will be general unsecured obligations of the Company ranking on a parity with all Indebtedness of the Company, if any, that is not subordinated to the Debentures or Guarantee and senior to any Indebtedness of the Company that is subordinated to the Debentures or Guarantee. Until the Remarketing Settlement Date, when the Subsidiary Guarantees will be released, the Subsidiary Guarantees will rank on a parity with all Indebtedness of the Subsidiary Guarantors, if any, that is not subordinated to the Subsidiary Guarantees and senior to any Indebtedness of the Subsidiary Guarantors that is subordinated to the Subsidiary Guarantees. Until the Remarketing Settlement Date, the Debentures will be effectively subordinated to all Indebtedness and other liabilities of SPTL and any Special Purpose Subsidiaries, and the Debentures, and the Subsidiary Guarantees will be effectively subordinated to secured Indebtedness of the Company and the Subsidiary Guarantors. As of March 31, 1997, on a pro forma basis after giving effect to the Offering and the application of proceeds thereof, the Debentures and Guarantee would have been effectively subordinated to approximately $1.3 billion of deposits and other borrowings at SPTL and the Debentures, the Guarantee and the Subsidiary Guarantees would have been effectively subordinated to approximately $304.9 million of secured Indebtedness of the Subsidiary Guarantors. After the Remarketing Settlement Date, the Debentures will be subordinated and junior in right payment to all Senior Debt of the Company. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities, the holders of Senior Debt will be entitled to receive payment in full of all Obligations due in respect of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt) before the holders of Debentures will be entitled to receive any payment with respect to the Debentures, and until all Obligations with respect to Senior Debt are paid in full, any distribution to which the holders of Debentures would be entitled shall be made to the holders of Senior Debt (except that holders of Debentures may receive Permitted Junior Securities and payments made from the trust described under "--Legal Defeasance and Covenant Defeasance"). The Company also may not make any payment upon or in respect of the Debentures (except in Permitted Junior Securities or from the trust described under "--Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of the principal of, premium, if any, or interest on Designated Senior Debt occurs and is continuing beyond any applicable period of grace or (ii) any other default occurs and is continuing with respect to Designated Senior Debt that permits holders of the Designated Senior Debt as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from the Company or the holders of any Designated Senior Debt. Payments on the Debentures may and shall be resumed (a) in the case of a payment default, upon the date on which such default is cured or waived and (b) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior Debt has been accelerated. No new period of payment blockage may be commenced unless and until (i) 360 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice and (ii) all scheduled payments of principal, premium, if any, and interest on the Debentures that have come due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. The Indenture further requires that the Company promptly notify holders of Senior Debt if payment of the Debentures is accelerated because of an Event of Default. 135 In addition to the subordination provision described above, the Debentures will be effectively subordinated to secured Indebtedness of the Company and will be effectively subordinated to all Indebtedness and other liabilities of all of the Subsidiaries of the Company. As of March 31, 1997, on a pro forma basis after giving effect to the Offering and the application of proceeds thereof, the Debentures would have been subordinated to approximately $220.2 million of Senior Debt of the Company and would have been effectively subordinated to approximately $1.6 billion of Indebtedness of the Company's Subsidiaries (including approximately $1.3 billion of deposits and other borrowings at SPTL and approximately $304.9 million of secured Indebtedness of the Company's subsidiaries but not including the Trust's guarantee of $200.0 million of the 9 7/8% Senior Notes). See "Risk Factors--Ranking of Obligations under the Debentures, the Guarantee and the Subsidiary Guarantees." INDENTURE EVENTS OF DEFAULT The Indenture provides that, on or prior to the Remarketing Settlement Date, any one or more of the following described events with respect to the Debentures that has occurred and is continuing constitutes an "Indenture Event of Default" with respect to the Debentures: (i) default for 30 days in the payment when due of interest on the Debentures; (ii) default in payment when due of the principal of or premium, if any, on the Debentures; (iii) failure by the Company to comply with the provisions described under the captions "Certain Covenants of the Company--Change of Control," "--Asset Sales," "-- Restricted Payments" or "--Incurrence of Indebtedness and Issuance of Preferred Stock"; (iv) failure by the Company for 60 days after notice to comply with any of its other agreements in the Indenture or the Debentures; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5.0 million or more; (vi) failure by the Company or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; (vii) except as permitted by the Indenture or if, at the time thereof, any Subsidiary Guarantee of a Subsidiary Guarantor that is a Significant Subsidiary shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect, or any Subsidiary Guarantor, or any Person acting on behalf of any such Subsidiary Guarantor, shall deny or disaffirm, in writing, its obligation under its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency with respect to the Company or any of its Subsidiaries. After the Remarketing Settlement Date, only the events described in subparagraphs (i), (ii), (iv) and (vii) will constitute "Indenture Events of Default." If an Indenture Event of Default occurs and is continuing, the Indenture Trustee or the Holders of at least 25% in principal amount of the then outstanding Debentures may declare all the Debentures to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company or any Subsidiary, all outstanding Debentures will become due and payable without further action or notice. Holders of the Debentures may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding Debentures may direct the Indenture Trustee in its exercise of any trust or power. The Indenture Trustee may withhold from holders of the Debentures notice of any continuing Indenture Default or Event of Default (except a Default or Indenture Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. In the case of any Indenture Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Debentures pursuant to the 136 optional redemption provisions of the Indenture, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Debentures. If an Event of Default occurs prior to June 14, 2012 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption after the Remarketing Settlement Date of the Debentures prior to June 14, 2012, then the initial optional redemption premium specified in the Indenture shall also become immediately due and payable to the extent permitted by law upon the acceleration of the Debentures. The holders of a majority in aggregate principal amount of the Debentures then outstanding by notice to the Indenture Trustee may on behalf of the holders of all of the Debentures waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Indenture Event of Default in the payment of interest or Additional Interest on, the principal of the Debentures. The Company is required to deliver to the Indenture Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Indenture Event of Default, to deliver to the Indenture Trustee a statement specifying such Default or Indenture Event of Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS No director, officer, employee, incorporator, organizer, member, manager or shareholder of the Company, as such, shall have any liability for any obligations of the Company under the Debentures, the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of Debentures by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Debenture. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such waiver is against public policy. SUBSIDIARY GUARANTEES On or prior to the Scheduled Remarketing Settlement Date, the Company's obligations under the Indenture and the Debentures will be jointly and severally guaranteed through the Subsidiary Guarantees by each of the Subsidiary Guarantors, which consist of all Restricted Subsidiaries other than SPTL and the Special Purpose Subsidiaries. Each Subsidiary Guarantor will unconditionally guarantee, jointly and severally, the full and prompt performance of the Company's obligations under the Indenture and the Debentures, including payment of principal and interest on the Debentures. The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to the contributions obligations under the Indenture, result in the obligations of such Subsidiary Guarantor under the Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. The Indenture provides that no Subsidiary Guarantor may consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Subsidiary Guarantor unless (i) subject to the provisions of the following paragraph, the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) assumes all the obligations of such Subsidiary Guarantor pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee; (ii) immediately after giving effect to such transaction, no Indenture Default or Indenture Event of Default exists; and (iii) such Subsidiary Guarantor, or any Person formed by or surviving any such consolidation or merger, would have Consolidated Net Worth (immediately after giving effect to such transaction) equal to or greater than the Consolidated Net Worth of such Subsidiary Guarantor immediately preceding the transaction. The Indenture provides that in the event of (i) the designation of any Subsidiary Guarantor as an Unrestricted Subsidiary or (ii) a sale or other disposition of all or substantially all of the assets of any Subsidiary Guarantor to a third party or any Unrestricted Subsidiary, by way of merger, consolidation or otherwise, or a 137 sale or other disposition of all of the capital stock of any Subsidiary Guarantor, in either case, in a transaction or manner that does not violate any of the covenants in the Indenture, then such Subsidiary Guarantor (in the event of such a designation or a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Subsidiary Guarantor) or the Person acquiring the property (in the event of a sale or other disposition of all or substantially all of the assets of such Subsidiary Guarantor) will be released from and relieved of any obligations under its Subsidiary Guarantee; provided that any Net Proceeds of such sale or other disposition are applied in accordance with the covenant described under the caption "--Certain Covenants of the Company--Asset Sales," and provided further, however, that any such termination shall occur only to the extent that all obligations of such Subsidiary Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests that secure, any other Indebtedness of the Company or its Restricted Subsidiaries shall also terminate upon such release, sale or disposition. CERTAIN COVENANTS OF THE COMPANY Fees and Expenses The Company has covenanted in the Indenture that if and so long as the Trust is the holder of all Debentures, the Company, as borrower, will pay to the Trust all fees and expenses related to the Trust and the offering of the Par Securities and will pay, directly or indirectly, all ongoing costs, expenses and liabilities of the Trust (including any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States or any domestic taxing authority upon the Trust but excluding obligations under the Securities). Change of Control The Indenture provides that upon the occurrence of a Change of Control on or prior to the Remarketing Settlement Date, each holder of Debentures will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Debentures pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Additional Interest, if any, thereon to the date of purchase (the "Change of Control Payment"). If at the time of the Change of Control the Trust is the owner of all of the Debentures, the Trust shall make the Change of Control Offer for the Par Securities as set forth in "Description of Securities--Redemption Procedures--Change of Control," and the Company will repurchase the Debentures exchanged by the Trust for the Par Securities as set forth in the Declaration. Accordingly, the description of the Change of Control Offer set forth in this section only applies to a Change of Control Offer when the Trust is not the owner of all of the Debentures. Within 10 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Debentures pursuant to the procedures required by the Indenture and described in such notice. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Debentures as a result of a Change of Control. The Change of Control Offer will remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Change of Control Offer Period"). No later than five Business Days after the termination of the Change of Control Offer Period (the "Change of Control Purchase Date"), the Company will purchase all Debentures tendered in response to the Change of Control Offer. Payment for any Debentures so purchased will be made in the same manner as interest payments are made. If the Change of Control Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest will be paid to the Person in whose name a Debenture is registered at the close of business on such record date, and no additional interest or Additional Interest, if any, will be payable to holders who tender Debentures pursuant to the Change of Control Offer. 138 On the Change of Control Payment Date, the Company will, to the extent lawful, (a) accept for payment all Debentures or portions thereof properly tendered pursuant to the Change of Control Offer, (b) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Debentures or portions thereof so tendered and (c) deliver or cause to be delivered to the Trustee the Debentures so accepted together with an officers' certificate stating the aggregate principal amount of Debentures or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each holder of Debentures so tendered the Change of Control Payment for such Debentures, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each holder a new Debenture equal in principal amount to any unpurchased portion of the Debentures surrendered, if any; provided that each such new Debenture will be in a principal amount of $1,000 or an integral multiple thereof. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the holders of Debentures to require that the Company repurchase or redeem the Debentures in the event of a takeover, recapitalization or other restructuring. Asset Sales The Indenture provides that, on or prior to the Remarketing Settlement Date, the Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale in excess of $1.0 million unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors, except for sales of Securitization Related Assets, which require no such resolution) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents; provided that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet, excluding contingent liabilities and trade payables), of the Company or any such Restricted Subsidiary that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability and (y) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are promptly, but in no event more than 30 days after receipt, converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received), shall be deemed to be cash for purposes of this provision. Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Company or the Restricted Subsidiary may apply such Net Proceeds, (a) to permanently reduce Senior Indebtedness (other than the Debentures or the 9 7/8% Senior Notes or the Subsidiary Guarantees thereof) of the Company or of the Subsidiary Guarantors, or (b) to an Investment (excluding guarantees of Indebtedness or other obligations), the making of a capital expenditure or the acquisition of other tangible assets, in each case in or with respect to a Related Business. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will be required to make an offer to all holders of Debentures and, at the Company's election, the 9 7/8% Senior Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Debentures (and, if applicable, the 9 7/8% Senior Notes) that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Additional Interest, if any, thereon to the date of purchase, in accordance with the procedures set forth in the Indenture and in the indenture governing the 9 7/8% Senior Notes. If at the time of the Asset Sale Offer the Trust is the owner of all of the Debentures, the Trust shall make the Asset Sale Offer for the Par Securities as set forth in "Description of the Securities--Asset Sales," and the Company will repurchase the Debentures exchanged by the Trust for the Securities as set forth in the Declaration. Accordingly, the description of the Asset Sale Offer set forth in this section only applies to an Asset Sale Offer when the Trust is not the owner of all the Debentures. 139 To the extent that the aggregate amount of Debentures (and, if applicable, the 9 7/8% Senior Notes) tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. An Asset Sale Offer will remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Asset Sale Offer Period"). No later than five Business Days after the termination of the Asset Sale Offer Period (the "Asset Sale Purchase Date"), the Company will purchase the principal amount of Debentures (and, if applicable, the 9 7/8% Senior Notes) required to be purchased pursuant to this covenant (the "Asset Sale Offer Amount") or, if less than the Asset Sale Offer Amount has been tendered, all Debentures (and, if applicable, the 9 7/8% Senior Notes) tendered in response to the Asset Sale Offer. Payment for any Debentures (and, if applicable, the 9 7/8% Senior Notes) so purchased will be made in the same manner as interest payments are made. If the Asset Sale Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest and Additional Interest, if any, will be paid to the Person in whose name a Debenture is registered at the close of business on such record date, and no additional interest will be payable to holders who tender Debentures pursuant to the Asset Sale Offer. On or before the Asset Sale Purchase Date, the Company will, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Asset Sale Offer Amount of Debentures (and, if applicable, the 9 7/8% Senior Notes) or portions thereof tendered (and, if applicable, the 9 7/8% Senior Notes) pursuant to the Asset Sale Offer, or if less than the Asset Sale Offer Amount has been tendered, all Debentures (and, if applicable, the 9 7/8% Senior Notes) tendered, and will deliver to the Trustee an officers' certificate stating that such Debentures (and, if applicable, the 9 7/8% Senior Notes) or portions thereof were accepted for payment by the Company in accordance with the terms of this covenant. The Company, the Depository or the Paying Agent, as the case may be, will promptly (but in any case not later than five days after the Asset Sale Purchase Date) mail or deliver to each tendering holder an amount equal to the purchase price of the Debentures (and, if applicable, the 9 7/8% Senior Notes) tendered by such holder and accepted by the Company for purchase. The Company will promptly issue a new Debenture, and the Trustee, upon written request from the Company will authenticate and mail or deliver such new Debenture to such holder, in a principal amount equal to any unpurchased portion of the Debenture surrendered. Any Debenture not so accepted will be promptly mailed or delivered by the Company to the holder thereof. The Company will publicly announce the results of the Asset Sale Offer on the Asset Sale Purchase Date. Restricted Payments The Indenture provides that, on or prior to the Remarketing Settlement Date, the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company) or to the direct or indirect holders of the Company's or any of its Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or dividends or distributions payable to the Company or any Restricted Subsidiary that is a Subsidiary Guarantor or to SPTL); (ii) purchase, redeem or otherwise acquire or retire for value (including without limitation in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company or other Affiliate of the Company (other than any such Equity Interests owned by the Company or any Restricted Subsidiary of the Company that is a Subsidiary Guarantor or by SPTL); (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Debentures (other than Debentures), except a payment of interest or principal at Stated Maturity; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: 140 (a) no Indenture Default or Indenture Event of Default shall have occurred and be continuing or would occur as a consequence thereof; (b) at the time of and immediately after giving effect to such Restricted Payment, the Company would be able to incur at least $1.00 of additional Indebtedness pursuant to the test described in the first sentence of the covenant described in "Incurrence of Indebtedness and Issuance of Preferred Stock"; and (c) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Subsidiaries after the Issue Date (excluding Restricted Payments permitted by clauses (x) and (y) of the next succeeding paragraph), is less than the sum of (i) 25% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the Issue Date to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds received by the Company from the issue or sale since the Issue Date of Equity Interests (other than Disqualified Stock) of the Company or of debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or convertible debt securities) sold to a Subsidiary of the Company and other than Disqualified Stock or debt securities that have been converted into Disqualified Stock), (iii) to the extent that any Restricted Investment that was made after the Issue Date is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment, (iv) 25% of any dividends received by the Company or a Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor or by SPTL after the Issue Date from an Unrestricted Subsidiary of the Company, plus (v) $15.0 million. The foregoing provisions will not prohibit (v) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture; (w) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company or any Restricted Subsidiary in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than any Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph; (x) the defeasance, redemption or repurchase of subordinated Indebtedness with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness or the substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests of the Company (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph; (y) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Subsidiary of the Company held by any member of the Company's (or any of its Subsidiaries') management pursuant to any management equity subscription agreement or stock option agreement or other management agreement or plan; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed $500,000 in any twelve-month period plus the aggregate cash proceeds received by the Company during such twelve-month period from any reissuance of Equity Interests by the Company to members of management of the Company and its Subsidiaries; and (z) the repurchase, redemption or other retirement for value of any Equity Interests of any Restricted Subsidiary in a Strategic Investor Repurchase Transaction; and no Indenture Default or Indenture Event of Default shall have occurred and be continuing immediately after such transaction. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments 141 will be deemed to constitute Investments in an amount equal to the greatest of (x) the net book value of such Investments at the time of such designation, (y) the fair market value of such Investments at the time of such designation and (z) the original fair market value of such Investments at the time they were made. Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all Restricted Payments (other than cash) shall be the fair market value (evidenced by a resolution of the Board of Directors set forth in an officers' certificate delivered to the Trustee) on the date of the Restricted Payment of the asset(s) proposed to be transferred by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an officers' certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "Restricted Payments" were computed, which calculations may be based upon the Company's latest available financial statements. Incurrence of Indebtedness and Issuance of Preferred Stock The Indenture provides that, on or prior to the Remarketing Settlement Date, the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume, guaranty or otherwise become directly or indirectly liable with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and that the Company will not permit any of its Restricted Subsidiaries to issue any shares of preferred stock; provided, however, that the Company or any Subsidiary Guarantor may incur Indebtedness (including Acquired Debt) or any Subsidiary Guarantor may issue preferred stock or SPTL may incur Permitted SPTL Preferred Stock if, on the date of such incurrence and after giving effect thereto, the Company's Consolidated Leverage Ratio does not exceed 2.0 to 1.0. The foregoing provisions will not apply to: (i) Indebtedness of the Company existing on the Issue Date; (ii) the incurrence by the Company of Indebtedness represented by the Debentures or by the Subsidiary Guarantors of Indebtedness represented by the Subsidiary Guarantees; (iii) the incurrence of Permitted Warehouse Indebtedness by the Company or any of its Restricted Subsidiaries, and any Guarantee by the Company of such Indebtedness incurred by a Restricted Subsidiary, provided, however, that to the extent any such Indebtedness of the Company or a Subsidiary Guarantor ceases to constitute Permitted Warehouse Indebtedness, such Indebtedness shall be deemed to be incurred at such time by the Company or such Subsidiary Guarantor, as the case may be; (iv) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness that was permitted by the Indenture to be incurred or that was outstanding at the Issue Date; (v) the incurrence by the Company or a Restricted Subsidiary of Hedging Obligations directly related to (A) Indebtedness of the Company or a Restricted Subsidiary incurred in conformity with the provisions of the Indenture, (B) Receivables held by the Company or its Restricted Subsidiaries pending sale in a Qualified Securitization Transaction, (C) Receivables of the Company or its Restricted Subsidiaries that have been sold pursuant to a Warehouse Facility, (D) Receivables that the Company or the Restricted Subsidiary reasonably expects to purchase or commit to purchase, finance or accept as collateral, or (E) Securitization Related Assets and other assets owned or financed by the Company or its Restricted Subsidiaries in the ordinary course of business; provided, however, that, in the case of each of the foregoing clauses (A) through (E), such Hedging Obligations are eligible to receive hedge accounting treatment in accordance with GAAP as applied by the Company and its Restricted Subsidiaries on the Issue Date; and 142 (vi) Indebtedness of the Subsidiary Guarantors or of SPTL to the Company or Permitted SPTL Preferred Stock issued to the Company to the extent that such Indebtedness or such Permitted SPTL Preferred Stock constitutes a Permitted Investment of the Company of the type permitted under the definition of Permitted Investments; (vii) the incurrence by the Company or any of its Restricted Subsidiaries other than a Special Purpose Subsidiary of intercompany Indebtedness owing to the Company or any of its Restricted Subsidiaries other than a Special Purpose Subsidiary; provided, however, that (i) any subsequent issuance or transfer of any Capital Stock which results in any such Indebtedness being held by a Person other than a Restricted Subsidiary and (ii) any sale or transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary (other than a Special Purpose Subsidiary) shall be deemed, in each case, to constitute the incurrence of such Indebtedness by the Company or such Subsidiary, as the case may be; (viii) the incurrence by a Special Purpose Subsidiary of Non-Recourse Debt in a Qualified Securitization Transaction and the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt; provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of the Special Purpose Subsidiary or other Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company; and (ix) the incurrence by the Company and its Restricted Subsidiaries of Indebtedness in an aggregate principal amount which, together with the principal amount of all Indebtedness of the Company and its Restricted Subsidiaries outstanding on the date of Incurrence (other than Indebtedness permitted by clauses (ii) through (vii) above, or the first paragraph of this covenant), does not exceed $10.0 million. Liens The Indenture provides that, on or prior to the Remarketing Settlement Date, Company will not, and will not permit any of its Restricted Subsidiaries to, create, incur or otherwise cause or suffer to exist or become effective any Lien for the benefit of any Indebtedness ranking pari passu with or junior to the Debentures, other than Permitted Liens, upon any property or assets of the Company or any Restricted Subsidiary of the Company or any shares of stock or debt of any Restricted Subsidiary of the Company which owns property or assets, now owned or hereafter acquired, unless (i) if such lien secures Indebtedness which is pari passu with the Debentures, then the Debentures are secured on an equal and ratable basis or (ii) if such lien secures Indebtedness which is junior to the Debentures, any such lien shall be junior to a lien granted to the holders of the Debentures. The Indenture will provide that the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien on any asset now owned or hereafter acquired, or any income or profits therefrom or assign or convey any right to receive income therefrom, except Permitted Liens. Dividend and Other Payment Restrictions Affecting Subsidiaries The Indenture provides that, on or prior to the Remarketing Settlement Date, the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the Issue Date, (b) the Warehouse Facilities as in effect as of the Issue Date, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, additions, replacements or refinancings thereof; provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, additions, replacements or refinancings are no more restrictive with respect to such dividend and other payment restrictions than those contained in the Warehouse Facilities as in effect on the Issue Date, (c) Indebtedness or other contractual requirements of a Special Purpose Subsidiary in connection 143 with a Qualified Securitization Transaction; provided that such restrictions apply only to such Special Purpose Subsidiary, (d) the Indenture and the Debentures, (e) applicable law, (f) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired; provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the Indenture to be incurred, (g) by reason of customary nonassignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (h) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired, or (i) Permitted Refinancing Indebtedness; provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced. Transactions with Affiliates The Indenture provides that, on or prior to the Remarketing Settlement Date, the Company will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $2.0 million, a resolution of the Board of Directors set forth in an officers' certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10.0 million, in addition to such officers' certificate, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an investment banking firm of national standing which is not an Affiliate of the Company; provided, however, that such fairness opinion shall not be required with respect to a Qualified Securitization Transaction or other transaction that is made in the ordinary course of business of the Company or such Restricted Subsidiary, as the case may be, and is consistent with the past business practice of the Company or such Restricted Subsidiary. Notwithstanding the foregoing, the following shall not be deemed Affiliate Transactions: (i) any employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (ii) any issuance of securities, or other payments, compensation, benefits, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (iii) the grant of stock options or similar rights to employees and directors of the Company pursuant to plans approved by the Board of Directors in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (iv) loans or advances to employees in the ordinary course of business in accordance with the past practices of the Company or its Restricted Subsidiaries, but in any event not to exceed $500,000 in aggregate principal amount outstanding at any one time, (v) the payment of reasonable fees to directors of the Company and its Restricted Subsidiaries who are not employees of the Company or its Restricted Subsidiaries, (vi) transactions between or among the Company and/or its Restricted Subsidiaries, (vii) Restricted Payments and Permitted Investments (other than Strategic Investor Repurchase Transactions) that are permitted by the provisions of the Indenture described above under the caption "-- Restricted Payments," and (viii) transactions between a Special Purpose Subsidiary and any Person in which the Special Purpose Subsidiary has an Investment. 144 Business Activities The Indenture provides that, on or prior to the Remarketing Settlement Date, Company will not, and will not permit any Restricted Subsidiary to, engage in any line of business that is not a Related Business (except as a result of Investments in other businesses made or acquired in connection with the activities or conduct of the Related Businesses in the ordinary course of business by the Company and its Restricted Subsidiaries, including Investments obtained as a result of the foreclosure of Liens securing amounts lent by the Company or any of its Restricted Subsidiaries). Reports The Indenture provides that, whether or not required by the rules and regulations of the Commission, so long as any Debentures are outstanding, the Company will furnish to the holders of Debentures (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K even if the Company were not required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K even if the Company were not required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, the Company and the Subsidiary Guarantors have agreed that, for so long as any Debentures remain outstanding, they will furnish to the holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. Additional Subsidiary Guarantees The Indenture provides that, on or prior to the Remarketing Settlement Date, the Company will not, and will not permit any of the Subsidiary Guarantors to, make any Investment in any Subsidiary that is not a Subsidiary Guarantor unless either (i) such Investment is permitted by the covenant entitled "Restricted Payments," or (ii) such Subsidiary executes a Subsidiary Guarantee and delivers an opinion of counsel in accordance with the provisions of the Indenture. Merger, Consolidation, or Sale of Assets The Indenture provides that the Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Debentures and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Indenture Default or Indenture Event of Default exists; and (iv) except in the case of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of the Company, the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (A) will have Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction and (B) will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had 145 occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the test described in the first sentence of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock." AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the Indenture or the Debentures may be amended or supplemented with the consent of the holders of at least a majority in principal amount of the Debentures then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Debentures), and any existing default or compliance with any provision of the Indenture or the Debentures may be waived with the consent of the holders of a majority in principal amount of the then outstanding Debentures (including consents obtained in connection with a tender offer or exchange offer for Debentures). Without the consent of each holder affected, an amendment or waiver may not (with respect to any Debentures held by a non-consenting holder): (i) reduce the principal amount of Debentures whose holders must consent to an amendment, supplement or waiver; (ii) reduce the principal of or change the fixed maturity of any Debenture or alter the provisions with respect to the redemption of the Debentures; provided that the covenants entitled "Asset Sales" and "Change of Control" are not redemption provisions; (iii) reduce the rate of or change the time for payment of interest on any Debenture; (iv) waive an Indenture Default or Indenture Event of Default in the payment of principal of or premium, if any, or interest the Debentures (except a rescission of acceleration of the Debentures by the holders of at least a majority in aggregate principal amount of the Debentures and a waiver of the payment default that resulted from such acceleration); (v) make any Debenture payable in money other than that stated in the Debentures; (vi) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of holders of Debentures to receive payments of principal of or premium, if any, or interest on, the Debentures; (vii) waive a redemption payment with respect to any Debenture; or (viii) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any holder of Debentures, the Company and the Trustee may amend or supplement the Indenture or the Debentures to cure any ambiguity, defect or inconsistency, to provide for uncertificated Debentures in addition to or in place of certificated Debentures, to provide for the assumption of the Company's obligations to holders of Debentures in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the holders of Debentures or that does not adversely affect the legal rights under the Indenture of any such holder, or to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. For purposes of the foregoing, any amendment or supplement which extends period of time during which the Debentures may not be redeemed at the option of the Company shall not be deemed to adversely affect the legal rights under the Indenture of any holders. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding Debentures ("Legal Defeasance") except for (i) the rights of holders of outstanding Debentures to receive payments in respect of the principal of, premium, if any, and interest and Additional Interest, if any, on such Debentures when such payments are due from the trust referred to below, (ii) the Company's obligations with respect to the Debentures concerning issuing temporary Debentures, registration of Debentures, mutilated, destroyed, lost or stolen Debentures and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and the Company's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute an Indenture Default or Indenture Event of Default with respect to the Debentures. In the event Covenant Defeasance occurs, certain 146 events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "Events of Default" will no longer constitute an Indenture Event of Default with respect to the Debentures. In order to exercise either Legal Defeasance or Covenant Defeasance: (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the holders of the Debentures, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest and Additional Interest, if any, on the outstanding Debentures on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Debentures are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the Issue Date, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the holders of the outstanding Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the holders of the outstanding Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Indenture Default or Indenture Event of Default shall have occurred and be continuing on the date of such deposit (other than an Indenture Default or Indenture Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Company must deliver to the Trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Debentures over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (viii) the Company must deliver to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. DISTRIBUTIONS OF DEBENTURES; BOOK-ENTRY ISSUANCE Under certain circumstances involving the termination of the Trust, Debentures may be distributed to the holders of the Securities in liquidation of the Trust after satisfaction of liabilities to creditors of the Trust as provided by applicable law. If distributed to holders of Securities in liquidation, the Debentures will initially be issued in the form of Global Certificates and, if distributed after the Remarketing Settlement Date, certificated securities not represented by Global Certificates. DTC, or any successor depositary, will act as depositary for such Global Certificates. It is anticipated that the depositary arrangements for such Global Certificates would be substantially identical to those in effect for the Securities. For a description of Global Certificates and certificated securities not represented by Global Certificates, see "Book-Entry Issuance." There can be no assurance as to the market price of any Debentures that may be distributed to the holders of Securities. 147 PAYMENT AND PAYING AGENTS The Company initially will act as Paying Agent with respect to the Debentures except that, if the Debentures are distributed to the holders of the Securities in liquidation of such holders' interests in the Trust, the Indenture Trustee will act as the Paying Agent. The Company at any time may designate additional Paying Agents or rescind the designation of any Paying Agent or approve a change in the office through which any Paying Agent acts, except that the Company will be required to maintain a Paying Agent at the place of payment. Any moneys deposited with the Indenture Trustee or any Paying Agent, or then held by the Company in trust, for the payment of the principal of and premium, if any, or interest or Additional Interest, if any, on any Debentures and remaining unclaimed for two years after such principal and premium, if any, or interest has become due and payable shall, at the request of the Company, be repaid to the Company and the holder of such Debentures shall thereafter look, as a general unsecured creditor, only to the Company for payment thereof. GOVERNING LAW The Indenture and the Debentures are governed by and construed in accordance with the laws of the State of New York. CONCERNING THE INDENTURE TRUSTEE The Indenture contains certain limitations on the rights of the Indenture Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Indenture Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days or apply to the Commission for permission to continue or resign. The holders of a majority in principal amount of the then outstanding Debentures will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Indenture Trustee, subject to certain exceptions. The Indenture provides that in case an Indenture Event of Default shall occur (which shall not be cured), the Indenture Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Indenture Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any holder of Debentures, unless such holder shall have offered to the Indenture Trustee security and indemnity satisfactory to it against any loss, liability or expense. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Debt" means, with respect to any specified Person (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, control (including, with correlative meanings, the terms controlling, controlled by and under common control with), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a 148 Person shall be deemed to be control. Notwithstanding the foregoing, no Person (other than the Company or any Restricted Subsidiary of the Company) in whom a Special Purpose Subsidiary makes an Investment in connection with a Qualified Securitization Transaction shall be deemed to be an Affiliate of the Company or any of its Restricted Subsidiaries solely by reason of such Investment. "Asset Sale" means (a) any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (other than as permitted under "--Certain Covenants of the Company--Merger, Consolidation or Sale of Assets" or "-- Subsidiary Guaranties") (each referred to for the purposes of this definition as a "disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary, as the case may be), (ii) all or substantially all the assets of any division or line of business of the Company or any Restricted Subsidiary, (iii) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary, as the case may be, including any sale of the stock of a Restricted Subsidiary, or (iv) any Securitization Related Asset, or (b) any issuance of Capital Stock (other than non-convertible preferred stock that is not Disqualified Stock) by any of the Company's Restricted Subsidiaries, except any such issuance to the Company or any Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor. Notwithstanding the foregoing, an "Asset Sale" does not include (a) a disposition by a Subsidiary to the Company or a Wholly Owned Restricted Subsidiary or by the Company to a Wholly Owned Restricted Subsidiary, (b) a disposition that constitutes a Restricted Payment permitted by the covenant described under "--Certain Covenants--Restricted Payments"), (c) sales of Receivables in Qualified Securitization Transactions for the fair market value thereof, including cash in an amount at least equal to 75% of the book value thereof as determined in accordance with GAAP, (d) transfers of Receivables by a Special Purpose Subsidiary to third parties in a Qualified Securitization Transaction and (e) any trade or exchange by the Company or any Restricted Subsidiary of any assets for similar assets of a Related Business owned or held by another Person; provided that (1) the fair market value of the assets traded or exchanged by the Company or such Restricted Subsidiary (including any cash or Cash Equivalents to be delivered by the Company or such Restricted Subsidiary) is reasonably equivalent to the fair market value of the asset or assets (together with any cash or Cash Equivalents) to be received by the Company or such Restricted Subsidiary and (2) such exchange is approved by a majority of the directors of the Company who are not employees of the Company or its Restricted Subsidiaries. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capitalized Excess Servicing Fees Receivables" mean, with respect to the sale of Receivables in a Qualified Securitization Transaction, the present value of the excess of the weighted average coupon on the Receivables sold over the sum of (i) the coupon in the pass-through certificates, (ii) a base servicing fee paid to the loan or lease servicer and (iii) expected losses to be incurred on the portfolio of Receivables sold, considering prepayment assumptions. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means: (i) United States dollars; (ii) Government Securities (except that for purpose of this definition, Government Securities must have a remaining Weighted Average Life to Maturity of not more than one year from the date of investment therein); (iii) commercial paper or other short-term corporate obligation that has received a rating of at least A-1 or AA from Standard & Poor's Corporation ("S&P"), P-1 or Aa2 from Moody's Investor Services, Inc. ("Moody's"), F-1 or AA from Fitch Investor Service, Inc. ("Fitch"), 149 or D-1 or AA from Duff & Phelps Credit Rating Co., ("Duff"); (iv) time deposits, certificates of deposit, bank acceptances or bank notes issued by any bank having capital surplus and undivided profits aggregating at least $500 million (or the foreign currency equivalent thereof) and at least a high A rating (or the equivalent) from any two of the following: S&P, Moody's, Thomson Bankwatch, Inc. or IBCA, Inc.; (v) money market preferred stocks which, at the date of acquisition and at all times thereafter, are accorded ratings of at least mid AA by any two of the following: S&P, Moody's, Fitch or Duff; (vi) tax-exempt obligations that are accorded ratings at the time of investment therein of at least mid AA (or equivalent short-term ratings) by any two of the following; S&P, Moody's, Fitch or Duff; (vii) master repurchase agreements with foreign or domestic banks having capital and surplus of not less than $500 million (or the foreign equivalent thereof) or primary dealers so long as (a) such bank or dealer has a rating of at least mid AA from any two of the following: S&P, Moody's, Fitch or Duff; (b) such agreements are collateralized with obligations of the United States government or its agencies at a ratio of 102%, or with other collateral rated at least mid AA from any two of the following: S&P, Moody's, Fitch or Duff, at a rate of 103% and, in either case marked to market weekly and (c) such securities shall be held by a third-party agent; (viii) guaranteed investment contracts and/or agreements of a bank, insurance company or other institution whose unsecured, uninsured and unguaranteed obligations (or claims-paying ability) are, at the time of investment therein, rated AAA by any two of the following: S&P, Moody's, Fitch or Duff; (ix) money market funds, the portfolio of which is limited to investments described in clauses (i) through (viii); (x) with respect to Non-Domestic Persons, instruments that are comparable to those described in clauses (i), (ii), (iv) and (vii) in the country in which such Non-Domestic Person is organized or has its principal business operations; and (xii) up to $1.0 million in the aggregate of other financial assets held by Restricted Subsidiaries. In no event shall any of the Cash Equivalents described in clauses (iii) through (viii), (x) and (xi) above have a final maturity more than one year from the date of investment therein. "Change of Control" means the occurrence of one or more of the following events: (i) a person or entity or group (as that term is used in Section 13(d)(3) of the Exchange Act) of persons or entities shall have become the beneficial owner of a majority of the securities of the Company ordinarily having the right to vote in the election of directors; (ii) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any directors who are members of such Board of Directors of the Company on the date hereof and any new directors whose election by such Board of Directors of the Company or whose nomination for election by the shareholders of the Company was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; (iii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company and its Restricted Subsidiaries, taken as a whole, to any person or entity or group (as so defined) of persons, or entities (other than to any Wholly Owned Restricted Subsidiary of the Company); (iv) the merger or consolidation of the Company with or into another corporation or the merger of another corporation into the Company with the effect that immediately after such transaction any person or entity or group (as so defined) of persons or entities shall have become the beneficial owner of securities of the surviving corporation of such merger or consolidation representing a majority of the combined voting power of the outstanding securities of the surviving corporation ordinarily having the right to vote in the election of directors; or (v) the adoption of a plan relating to the liquidation or dissolution of the Company. "Consolidated Leverage Ratio" as of any date of determination means the ratio of (i) the aggregate amount of all consolidated Indebtedness of the Company and its Restricted Subsidiaries, excluding Warehouse Indebtedness and Guarantees thereof permitted to be incurred pursuant to clause (iii) of the covenant described under "--Incurrence of Indebtedness and Issuance of Preferred Stock" to (ii) the Consolidated Net Worth of the Company. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Restricted 150 Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof that is a Subsidiary Guarantor, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in accounting principles shall be excluded, and (v) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Subsidiaries. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Restricted Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock (other than Disqualified Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less (x) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the Issue Date in the book value of any asset owned by such Person or a consolidated Restricted Subsidiary of such Person, (y) all investments as of such date in unconsolidated Restricted Subsidiaries and in Persons that are not Restricted Subsidiaries (except, in each case, Permitted Investments), and (z) all unamortized debt discount and expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "Designated Senior Debt" means any Senior Debt permitted under the Indenture the principal amount of which is $25.0 million or more and that has been designated by the Company as "Designated Senior Debt." "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the Stated Maturity of the Debentures. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Equity Offering" means an underwritten primary public offering of Equity Interests (other than Disqualified Stock) of the Company pursuant to an effective registration statement under the Securities Act. "Existing Indebtedness" means the Indebtedness of the Company and its Subsidiaries (other then Indebtedness under the Warehouse Facilities) in existence on the Issue Date, until such amounts are repaid. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Issue Date. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates, in either case in the ordinary course of business and not for speculative or investment purposes. 151 "Indebtedness" means, with respect to any Person on any date of determination (without duplication), (i) the principal of and premium (if any) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable, (ii) all Capital Lease Obligations of such Person, (iii) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade account payable and expense accruals arising in the ordinary course of business), (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the tenth Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit), (v) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock other than Permitted SPTL Preferred Stock (but excluding any accrued dividends), (vi) all Warehouse Indebtedness, (vii) all obligations of the type referred to in clauses (i) through (vi) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guaranty, (viii) all obligations of the type referred to in clauses (i) through (vii) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured and (ix) to the extent not otherwise included in this definition, Hedging Obligations of such Person. Except in the case of Warehouse Indebtedness (the amount of which shall be determined in accordance with the definition thereof) the amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. Notwithstanding the foregoing, the term "Indebtedness" does not include deposit liabilities of any Restricted Subsidiary, the deposits of which are insured by the Federal Deposit Insurance Corporation or any successor agency or Indebtedness of any Restricted Subsidiary to the Federal Home Loan Bank of San Francisco or any successor thereto incurred in the ordinary course of business and secured by qualifying mortgage loans or mortgage-backed securities. "Indenture Default" means any event that is or with the passage of time or the giving of notice or both would be an Indenture Event of Default. "Investments" means, with respect to any Person, all investment by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interest or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP; provided that an acquisition of assets, Equity Interests or other securities by the Company for consideration consisting of common equity securities of the Company shall not be deemed to be an Investment. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value (as determined as set forth in the last paragraph under the covenant entitled "-- Restricted Payment") of the Equity Interests of such Restricted Subsidiary not sold or disposed of; provided, however, that this requirement shall not apply if (i) the class of Equity Interests of the Restricted Subsidiary owned by the Company is registered under Section 12 of the Exchange Act and is listed on a national securities exchange or quoted on a national quotations system and (ii) if the Company has entered into an agreement with the Restricted Subsidiary that provides the Company with the right to demand (subject to customary restrictions) registration of all of is Equity Interests under the Securities Act. 152 "Issue Date" means the date on which the Debenture are originally issued. "Lien" means, with respect to any Person, any mortgage, pledge, security interest, encumbrance, lien or charge of any kind on the assets of such Person (including (i) any conditional sale or other title retention agreement or lease in the nature thereof, and (ii) any claim (whether direct or indirect through subordination or other structural encumbrance against any Securitization Related Asset sold or otherwise transferred by such Person to a buyer, unless such Person is not liable for any losses thereon). "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and after any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness secured by a Lien on the asset or assets that were the subject of such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), or (b) is directly or indirectly liable (as a guarantor or otherwise); and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than the Debentures being offered hereby) of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other labilities payable under the documentation governing any Indebtedness. "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary (i) in a Subsidiary Guarantor or in SPTL or a Person that will, upon the making of such Investment, become a Subsidiary Guarantor, provided, however, that the primary business of such Subsidiary Guarantor is a Related Business; and provided further, that any Investment by the Company in SPTL must be in the form of Permitted SPTL Preferred Stock or in a security senior to such stock; (ii) in another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Subsidiary Guarantor, provided, however, that such Person's primary business is a Related Business, (iii) comprised of Cash Equivalents, (iv) comprised of Receivables owing to the Company or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms, (v) comprised of payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business, (vi) comprised of stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted 153 Subsidiary or in satisfaction of judgments, (vii) in any Person to the extent such Investment represents the noncash portion of the consideration received for an Asset Sale as permitted pursuant to the covenant described under "-- Certain Covenants of the Company--Asset Sales," (viii) comprised of Receivables of the Company or any of its Wholly Owned Restricted Subsidiaries, or (ix) comprised of Securitization Related Assets arising in a Qualified Securitization Transaction. "Permitted Liens" means, with respect to any Person: (a) pledges or deposits by such Person under worker's compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits of cash or United States government bonds to secure surety or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent, in each case Incurred in the ordinary course of business; (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, in each case for sums not yet due or being contested in good faith by appropriate proceedings or other Liens arising out of judgments or awards against such Person with respect to which such Person shall then be proceeding with an appeal or other proceedings for review; (c) Liens for property taxes not yet subject to penalties for non-payment or which are being contested in good faith and by appropriate proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit issued pursuant to the request of and for the account of such Person in the ordinary course of its business; provided, however, that such letters of credit do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances, easements or reservations of, or rights of others for, licenses, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real property or Liens incidental to the conduct of the business of such Person or to the ownership of its properties which were not Incurred in connection with Indebtedness and which do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of such Person; (f) Liens securing Indebtedness Incurred to finance the construction, purchase or lease of, or repairs, improvements or additions to, property of such Person (but excluding Capital Stock of another Person); provided, however, that the Lien may not extend to any other property owned by such Person or any of its Subsidiaries at the time the Lien is Incurred, and the Indebtedness secured by the Lien may not be Incurred more than 180 days after the latest of the acquisition, completion of construction, repair, improvement, addition or commencement of full operation of the property subject to the Lien; (g) Liens on Receivables owned by the Company or a Restricted Subsidiary, as the case may be, to secure Indebtedness permitted under the provisions described in clause (ii) under "-- Certain Covenants of the Company--Incurrence of Indebtedness and Issuance of Preferred Stock" and Liens to secure Indebtedness under mortgage loan repurchase agreements or repurchase facilities permitted under the provisions described in clause (iii) under "Certain Covenants of the Company--Incurrence of Indebtedness and Issuance of Preferred Stock"; (h) Liens on Securitization Related Assets (or on the Capital Stock of any Subsidiary of such Person substantially all the assets of which are Securitization Related Assets); provided, however, that, (x) any such Liens may only encumber Securitization Related Assets, in an amount not to exceed 75% of the excess, if any, of (i) the total amount of Securitization Related Assets, determined on a consolidated basis in accordance with GAAP, as of the creation of such Lien over (ii) an amount equal to 150% of all unsecured Senior Indebtedness of the Company and its Restricted Subsidiaries as of the time of creation of such Lien; and (y) the balance of Securitization Related Assets, not permitted to be encumbered by the foregoing proviso (x) shall remain unencumbered by any Lien; (i) Liens on Receivables and other assets of a Special Purpose Subsidiary incurred in connection with a Qualified Securitization Transaction; (j) Liens existing on the Issue Date; (k) Liens on property or shares of Capital Stock of another Person at the time such other Person becomes a Subsidiary of such Person; provided, however, that such Liens are not created, incurred or assumed in connection with, or in contemplation of, such other Person becoming such a Subsidiary; provided further, however, that such Lien may not extend to any other property owned by such Person or any of its Subsidiaries; (l) Liens on property at the time such Person or any of its Subsidiaries acquires the property, including, any acquisition by means of a merger or consolidation with or into such Person or a Subsidiary of such Person; provided, however, that such Liens are not created, incurred or assumed in connection with, or in contemplation of such acquisition; provided further, however, that the Liens may not extend to any other property owned by such Person or any of its Subsidiaries; (m) Liens securing 154 Indebtedness or other obligations of a Subsidiary of such Person owing to such Person or a Restricted Subsidiary of such Person; (n) Liens (other than on any Securitization Related Assets) securing Hedging Obligations; (o) Liens on cash or other assets (other than Securitization Related Assets) securing Warehouse Indebtedness of the Company or its Restricted Subsidiaries; (p) Liens to secure any Permitted Refinancing Indebtedness as a whole, or in part, with any Indebtedness permitted under the Indenture to be Incurred and secured by any Lien referred to in the foregoing clauses (f), (j), (k) and (1); provided, however, that (x) such new Lien shall be limited to all or part of the same property that secured the original Lien (plus improvements to or on such property) (y) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of (A) the outstanding, principal amount or, if greater, committed amount of the Indebtedness described under clauses (f), (j), (k) or (1), as the case may be, at the time the original Lien became a Permitted Lien and (B) an amount necessary to pay any fees and expenses, including premiums, related to such refinancing, refunding, extension, renewal or replacement; (q) Liens securing deposit liabilities of any Restricted Subsidiary, the deposits of which are insured by the Federal Deposit Insurance Corporation or any successor agency or Indebtedness of any Restricted Subsidiary to the Federal Home Loan Bank of San Francisco or any successor thereto incurred in the ordinary course of business and secured by qualifying mortgage loans or mortgage-backed securities; and (r) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries. Notwithstanding the foregoing, "Permitted Liens" will not include any Lien described in clauses (f), (j) or (k) above to the extent such Lien applies to any Additional Assets acquired directly or indirectly from Net Proceeds pursuant to the covenant described under "-- Certain Covenants of the Company--Sale of Assets." "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Debentures, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Debentures on terms at least as favorable to the Holders of Debentures as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (v) such Indebtedness may not include a Guaranty of Indebtedness of a Person that is not a Subsidiary of the Company. "Permitted SPTL Preferred Stock" means nonvoting (except as provided in the second proviso below), noncumulative, perpetual preferred stock of SPTL, which would qualify as Tier 1 capital or the equivalent thereof on an unrestricted basis for purposes of the capital requirements contained in 12 C.F.R. Part 325, Subpart A, or any successor provision; provided that the total liquidation preference of such preferred stock outstanding at any time shall not exceed 20% of the Consolidated Net Worth of SPTL (after giving effect to the issuance of such preferred stock); and provided further, that the holders of such stock may be granted the right to elect directors constituting less than a majority of the board of directors of SPTL if dividends on such have not been paid for six dividend periods, whether consecutive or not, and until such time as SPTL has paid or declared and set apart for payment dividends for four consecutive dividend periods. "Permitted Warehouse Indebtedness" means Warehouse Indebtedness in connection with a Warehouse Facility; provided, however, that (i) the assets as to which such Warehouse Indebtedness relates are or, prior to any funding under the related Warehouse Facility with respect to such assets, were eligible to be recorded as held for sale on the consolidated balance sheet of the Company in accordance with GAAP, (ii) such Warehouse 155 Indebtedness will be deemed to be Permitted Warehouse Indebtedness (a) in the case of a Purchase Facility, only to the extent the holder of such Warehouse Indebtedness has no contractual recourse to the Company and its Restricted Subsidiaries to satisfy claims in respect of such Permitted Warehouse Indebtedness in excess of the realizable value of the Receivables financed thereby, and (b) in the case of any other Warehouse Facility, only to the extent of the lesser of (A) the amount advanced by the lender with respect to the Receivables financed under such Warehouse Facility, and (B) the principal amount of such Receivables and (iii) any such Indebtedness has not been outstanding in excess of 364 days. "Purchase Facility" means any Warehouse Facility in the form of a purchase and sale facility pursuant to which the Company or a Restricted Subsidiary of the Company sells Receivables to a financial institution and retains a right of first refusal upon the subsequent resale of such Receivables by such financial institution. "Qualified Securitization Transaction" means any transaction or series of transactions pursuant to which (i) the Company or any of its Restricted Subsidiaries (other than a Special Purpose Subsidiary) sells, convey or otherwise transfers to a Special Purpose Subsidiary or (ii) the Company, any of its Restricted Subsidiaries or a Special Purpose Subsidiary sells, conveys or otherwise transfers to a special purpose owner trust or other Person Receivables (together with any assets related to such Receivables, including, without limitation, all collateral securing such Receivables, all contracts and all guarantees or other obligations in respect of such Receivables, proceeds of such Receivables and other assets which are customarily transferred in connection with asset securitization transactions involving Receivables) of the Company or any of its Restricted Subsidiaries in transactions constituting "true sales" under the Bankruptcy Laws and as "sales" under GAAP, as evidenced by an Opinion of Counsel to such effect. "Receivables" means consumer, mortgage and commercial loans, equipment or other lease receivables and receivables purchased or originated by the Company or any Restricted Subsidiary in the ordinary course of business; provided, however, that for purposes of determining the amount of a Receivable at any time, such amount shall be determined in accordance with GAAP, consistently applied, as of the most recent practicable date. "Related Business" means any consumer or commercial finance business or any financial advisory or financial service business. "Residual Certificates" means, with respect to the sale of Receivables in a Qualified Securitization Transaction, any certificates representing Receivables not sold or transferred in such transaction or otherwise retained by or returned to the Person transferring such Receivables. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Retained Interest" means, with respect to the sale of Receivables in a Qualified Securitization Transaction, the interest and rights retained by the Person in the Receivables transferred or sold in a Qualified Securitization Transaction, including any rights to receive cash flow attributable to such Receivables. "Securitization Related Assets" means, with respect to a Qualified Securitization Transaction: (i) the Capitalized Excess Servicing Fees Receivable retained by the Person who transfers or sells Receivables in such a transaction, (ii) the Retained Interest held by such Person in the Receivables sold or transferred in such transaction and (iii) Residual Certificates retained by such Person in such transaction. "Senior Debt" means all Indebtedness permitted to be incurred by the Company under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Debentures and all Obligations with respect to the foregoing. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (i) any 156 liability for federal, state, local or other taxes owed or owing by the Company, (ii) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (iii) any trade payables or (iv) any Indebtedness that is incurred in violation of the Indenture. "Senior Indebtedness" means all Indebtedness of the Company or the Subsidiary Guarantors that is not by its terms, subordinated in right of payment to the Debentures or the Subsidiary Guarantees, respectively. "Significant Subsidiary" means any Restricted Subsidiary that would be a "significant subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. "Special Purpose Subsidiary" means a Wholly Owned Restricted Subsidiary of the Company (a) that is designated (as set forth below) as a "Special Purpose Subsidiary" by the Board of Directors of the Company, (b) that does not engage in, and whose charter prohibits it from engaging in, any activities other than Qualified Securitization Transactions, (c) no portion of the Indebtedness or any other Obligations (contingent or otherwise) of which (i) is guaranteed by the Company or any other Restricted Subsidiary of the Company, (ii) is recourse to or obligates the Company or any other Restricted Subsidiary of the Company in any way other than pursuant to representations, warranties, covenants and indemnities entered into in the ordinary course of business in connection with a Qualified Securitization Transaction or (iii) subjects any property or asset of the Company or any other Restricted Subsidiary of the Company, directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to representations, warranties, covenants and indemnities entered into in the ordinary course of business in connection with a Qualified Securitization Transaction, (d) with which neither the Company nor any other Restricted Subsidiary of the Company has any material contract, agreement, arrangement or understanding other than on terms no less favorable to the Company or such Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company and (e) with which neither the Company nor any other Restricted Subsidiary of the Company has any obligation to maintain or preserve such Restricted Subsidiary's financial condition or cause such Restricted Subsidiary to achieve certain levels of operating results. Any such designation by the Board of Directors of the Company shall be evidenced to the Trustee by filing with the Trustee a certified copy of the resolution of the Board of Directors of the Company giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing conditions. "SPFC" means Southern Pacific Funding Corporation, a California corporation and a partially owned Subsidiary of the Company. "SPTL" means Southern Pacific Thrift & Loan Association, a California corporation and a Subsidiary of the Company. "Stated Maturity" means, with respect to any installment of principal or interest on any series of Indebtedness, the date on which such payment of principal or interest was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such principal or interest prior to the date originally scheduled for the payment thereof. "Strategic Investor Repurchase Transaction" means the repurchase, redemption or other retirement for value of any Equity Interests of any Restricted Subsidiary (a) from a strategic partner or investor owning such Equity Interests that, except for such Investment, would not be an Affiliate of the Company or its Restricted Subsidiaries and (b) in a transaction whose terms comply with the provisions set forth in "--Affiliate Transactions." "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner 157 of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof); provided, that SPFC and ICIFC shall not be considered Subsidiaries of the Company unless the Company owns more than 50% of the total voting power of shares of Capital Stock on or after March 31, 1997. "Subsidiary Guarantors" means each of (i) the Restricted Subsidiaries other than SPTL and the Special Purpose Subsidiaries and (ii) any other subsidiary that executes a Subsidiary Guarantee in accordance with the provisions of the Indenture, and their respective successors and assigns. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent that such Subsidiary: (a) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (b) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (c) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (d) has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described above under the caption "--Certain Covenants of the Company-- Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption "--Certain Covenants of the Company-- Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under the covenant described under the caption "--Certain Covenants of the Company--Incurrence of Indebtedness and Issuance of Preferred Stock," (ii) such Subsidiary becomes a Subsidiary Guarantor, and (iii) no Indenture Default or Indenture Event of Default would be in existence following such designation. "Warehouse Facility" means any funding arrangement, including a Purchase Facility, with a financial institution or other lender or purchaser, to the extent (and only to the extent) funding thereunder is used exclusively to finance or refinance the purchase or origination of Receivables by the Company or a Restricted Subsidiary of the Company for the purpose of (i) pooling such Receivables prior to securitization or (ii) sale, in each case in the ordinary course of business. "Warehouse Indebtedness" means the greater of (x) the consideration received by the Company or its Restricted Subsidiaries under a Warehouse Facility and (y) in the case of a Purchase Facility, the book value of the Receivables financed under such Warehouse Facility until such time as such Receivables are (i) securitized, (ii) repurchased by the Company or its Restricted Subsidiaries or (iii) sold by the counterparty under the Warehouse Facility to a Person who is not an Affiliate of the Company. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the product obtained by multiplying (a) the amount of each then 158 remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person and one or more Wholly Owned Subsidiaries of such Person. 159 DESCRIPTION OF GUARANTEE The Guarantee was executed and delivered by the Company concurrently with the issuance by the Trust of the Par Securities for the benefit of the holders from time to time of such Securities. Chase Trust Company of California acts as Guarantee Trustee under the Guarantee. This summary of certain provisions of the Guarantee does not purport to be complete and is subject to, and qualified in its entirety by reference to, all of the provisions of the Guarantee, including the definitions therein of certain terms. The Guarantee Trustee holds the Guarantee for the benefit of the holders of the Securities. GENERAL The Company has irrevocably and unconditionally agreed to pay in full, to the extent set forth herein, the Guarantee Payments (as defined below) to the holders of the Securities, as and when due, regardless of any defense, right of set-off or counterclaim that the Trust may have or assert. The following payments or distributions with respect to the Par Securities, to the extent not paid by or on behalf of the Trust (the "Guarantee Payments"), will be subject to the Guarantee: (i) any accumulated and unpaid Distributions required to be paid on the Par Securities, to the extent that the Trust has sufficient funds available therefor at the time, (ii) the Redemption Price with respect to any Par Securities called for redemption, to the extent that the Trust has sufficient funds available therefor at such time, or (iii) upon a voluntary or involuntary dissolution, winding up or liquidation of the Trust (unless the Debentures are distributed to holders of the Par Securities), the lesser of (a) the aggregate liquidation amount of the Par Securities and all accrued and unpaid Distributions thereon to the date of payment and (b) the amount of assets of the Trust remaining available for distribution to holders of Par Securities. The Company's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Company to the holders of the applicable Par Securities or by causing the Trust to pay such amounts to such holders. The Guarantee will apply only to the extent that the Trust has sufficient funds available to make such payments. If the Company does not make interest payments on the Debentures held by the Trust, the Trust will not be able to pay Distributions on the Par Securities and will not have funds legally available therefor. Until the Remarketing Settlement Date, the Guarantee will rank on a parity with all senior unsecured obligations of the Company and, thereafter, the Guarantee will rank subordinate and junior in right of payment to all Indebtedness of the Company. See "--Status of the Guarantee." The Guarantee does not limit the incurrence or issuance of other secured or unsecured debt of the Company, whether under the Indenture or any existing or other indenture that the Company may enter into in the future or otherwise. The Company has, through the Guarantee, the Debentures and the Indenture, taken together, fully and unconditionally guaranteed all of the Trust's obligations under the Par Securities. No single document standing alone or operating in conjunction with fewer than all of the other documents constitutes such guarantee. It is only the combined operation of these documents that has the effect of providing a full and unconditional guarantee of the Trust's obligations under the Securities. See "Relationship Among the Par Securities, the Debentures and the Guarantee." STATUS OF THE GUARANTEE Until the Remarketing Settlement Date, the Guarantee will be a general unsecured obligation of the Company ranking on a parity with all Indebtedness of the Company, if any, that is not subordinated to the Guarantee and senior to any Indebtedness of the Company that is subordinated to the Guarantee. After the Remarketing Settlement Date, the Guarantee will be subordinated and junior in right of payment to all Senior Debt of the Company. The Guarantee does not place a limitation on the amount of additional Indebtedness that may be incurred by the Company. 160 The Guarantee constitutes a guarantee of payment and not of collection (i.e., the guaranteed party may institute a legal proceeding directly against the Guarantor to enforce its rights under the Guarantee without first instituting a legal proceeding against any other person or entity). The Guarantee is held by the Guarantee Trustee for the benefit of the holders of the Par Securities. The Guarantee will not be discharged except by payment of the Guarantee Payments in full to the extent not paid by the Trust or upon distribution of the Debentures to the holders of the Par Securities in exchange for all of the Par Securities. AMENDMENTS AND ASSIGNMENT Except with respect to any changes that do not materially adversely affect the rights of holders of the Par Securities (in which case no consent of such holders will be required), the Guarantee may not be amended without the prior approval of the holders of not less than a majority of the aggregate liquidation amount of the outstanding Par Securities. The manner of obtaining any such approval will be as set forth under "Description of Securities-- Voting Rights; Amendment of the Declaration." All guarantees and agreements contained in the Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Company and shall inure to the benefit of the holders of the Par Securities then outstanding. EVENTS OF DEFAULT An event of default under the Guarantee will occur upon the failure of the Company to perform any of its payment or other obligations thereunder. The holders of not less than a majority in aggregate liquidation amount of the Par Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of the Guarantee or to direct the exercise of any trust or power conferred upon the Guarantee Trustee under the Guarantee. If the Guarantee Trustee fails to enforce the Guarantee, then any holder of the Par Securities may institute a legal proceeding directly against the Company to enforce the Guarantee Trustee's rights under the Guarantee without first instituting a legal proceeding against the Trust, the Guarantee Trustee or any other person or entity. The Company, as guarantor, is required to file annually with the Guarantee Trustee a certificate as to whether or not the Company is in compliance with all the conditions and covenants applicable to it under the Guarantee. INFORMATION CONCERNING THE GUARANTEE TRUSTEE The Guarantee Trustee, other than during the occurrence and continuance of a default by the Company in performance of the Guarantee, undertakes to perform only such duties as are specifically set forth in the Guarantee and, after default with respect to the Guarantee (that has not been cured or waived) that is actually known to a responsible officer of the Guarantee Trustee, must exercise the same degree of care and skill as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. Subject to this provision, the Guarantee Trustee is under no obligation to exercise any of the powers vested in it by the Guarantee at the request of any holder of any Par Security unless it is offered reasonable indemnity against the costs, expenses and liabilities that might be incurred thereby. TERMINATION OF THE GUARANTEE The Guarantee will terminate and be of no further force and effect upon full payment of the Redemption Price of all of the Par Securities, upon full payment of the amounts payable upon liquidation of the Trust or upon distribution of Debentures to the holders of the Par Securities in exchange for all of the Par Securities. The Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any holder of the Par Securities must restore payment of any sums paid under the Par Securities or the Guarantee. GOVERNING LAW The Guarantee is governed by and construed and interpreted in accordance with the laws of the State of New York. 161 RELATIONSHIP AMONG THE PAR SECURITIES, THE DEBENTURES AND THE GUARANTEE Payments of Distributions and other amounts due on the Par Securities (to the extent the Trust has funds available for the payment of such Distributions) are irrevocably guaranteed by the Company as and to the extent set forth under "Description of Guarantee." If and to the extent that the Company does not make payments under the Debentures, the Trust will not pay Distributions or other amounts due on the Par Securities. The Guarantee does not cover payment of Distributions when the Trust does not have sufficient funds to pay such Distributions. In such event, a holder of Par Securities may institute a legal proceeding directly against the Company to enforce payment of such Distributions to such holder after the respective due dates. Taken together, the Company's obligations under the Debentures, the Indenture and the Guarantee provide, in the aggregate, a full and unconditional guarantee of payments of distributions and other amounts due on the Par Securities. No single document standing alone or operating in conjunction with fewer than all of the other documents constitutes such guarantee. It is only the combined operation of these documents that has the effect of providing a full and unconditional guarantee of the Trust's obligations under the Par Securities. Following the Remarketing Settlement Date, the obligations of the Company under the Guarantee and the Debentures will be subordinate and junior in right of payment to all Senior Debt of the Company. SUFFICIENCY OF PAYMENTS As long as payments of interest, principal and other payments are made when due on the Debentures, such payments will be sufficient to cover Distributions and other payments due on the Par Securities, primarily because (i) the aggregate principal amount of the Debentures will be equal to the sum of the aggregate stated liquidation amount of the Trust Securities; (ii) the interest rate and interest and other payment dates on the Debentures will match the Distribution rate and Distribution and other payment dates for the related Par Securities; (iii) the Company will pay for all and any costs, expenses and liabilities of the Trust except the Trust's obligations under the Par Securities; and (iv) the Declaration further provides that the Trust will not engage in any activity that is not consistent with the limited purposes of the Trust. Notwithstanding anything to the contrary in the Indenture, the Company has the right to set-off any payment it is otherwise required to make thereunder with and to the extent the Company has theretofore made, or is concurrently on the date of such payment making, a related payment under the Guarantee. ENFORCEMENT RIGHTS OF HOLDERS OF PAR SECURITIES A holder of Par Securities may institute a legal proceeding directly against the Company to enforce its rights under the Guarantee without first instituting a legal proceeding against the Guarantee Trustee, the Trust or any other person or entity. Following the Remarketing Settlement Date, a default or event of default under any Senior Debt of the Company will not constitute a default or Indenture Event of Default. In addition, in the event of payment defaults under, or acceleration of, Senior Debt of the Company, the subordination provisions of the Indenture provide that no payments may be made in respect of the Debentures until such Senior Debt has been paid in full or any payment default thereunder has been cured or waived. Failure to make required payments on the Debentures would constitute an Indenture Event of Default under the Indenture. LIMITED PURPOSE OF TRUST The Par Securities evidence a beneficial ownership interest in the Trust, and the Trust exists for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in Debentures. A principal difference between the rights of a holder of Par Securities and a holder of Debentures is that a holder of Debentures is entitled to receive from the Company the principal amount of and interest accrued on Debentures held, while a holder of Par Securities is entitled to receive Distributions from the Trust (or from the Company under the Guarantee) if and to the extent the Trust has funds available for the payment of such Distributions. 162 RIGHTS UPON TERMINATION Upon any voluntary or involuntary termination, winding-up or liquidation of the Trust involving the liquidation of the Debentures, the holders of the Par Securities will be entitled to receive, out of assets held by the Trust, the liquidation distribution in cash. See "Description of Securities--Liquidation Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation or bankruptcy of the Company on or prior to the Remarketing Settlement Date, the Property Trustee, as holder of the Debentures, would be a senior unsecured creditor of the Company, on a parity in right of payment to all other senior unsecured indebtedness of the Company. Upon any voluntary or involuntary liquidation or bankruptcy of the Company which commences following the Remarketing Settlement Date, the Property Trustee, as holder of the Debentures, would be a subordinated creditor of the Company, subordinated in right of payment to all Indebtedness, but entitled to receive payment in full of principal and interest before any stockholders of the Company receive payments or distributions. Because the Company is the guarantor under the Guarantee and has agreed to pay for all costs, expenses and liabilities of the Trust (other than the Trust's obligations to the holders of the Par Securities), the positions of a holder of Par Securities and a holder of the Debentures relative to other creditors and to shareholders of the Company in the event of liquidation or bankruptcy of the Company would be substantially the same. 163 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES In the opinion of Simpson Thacher & Bartlett (a partnership which includes professional corporations), special United States federal income tax counsel to the Company and the Trust ("Tax Counsel"), the following summary accurately describes the material United States federal income tax consequences that may be relevant to the purchase, ownership and disposition of the Par Securities. Unless otherwise stated, this summary deals only with Par Securities held as capital assets by United States Persons (defined below) who purchase the Par Securities upon original issuance at their original issue price. As used herein, a "United States Person" means (i) a person that is a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate the income of which is subject to United States federal income taxation regardless of its source, or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of such trust and one or more United States fiduciaries have the authority to control all the substantial decisions of such trust. The tax treatment of a holder may vary depending on such holder's particular situation. This summary does not address all the tax consequences that may be relevant to a particular holder or to holders who may be subject to special tax treatment, such as banks, real estate investment trusts, regulated investment companies, insurance companies, dealers in securities or currencies, or tax-exempt investors. In addition, this summary does not include any description of any alternative minimum tax consequences or the tax laws of any state, local or foreign government that may be applicable to a holder of Par Securities. This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof, as of the date hereof, all of which are subject to change, possibly on a retroactive basis. The authorities on which this summary is based are subject to various interpretations and the opinions of Tax Counsel are not binding on the Internal Revenue Service ("IRS") or the courts, either of which could take a contrary position. Moreover, no rulings have been or will be sought by the Company from the IRS with respect to the transactions described herein. Accordingly, there can be no assurance that the IRS will not challenge the opinions expressed herein or that a court would not sustain such a challenge. Nevertheless, Tax Counsel has advised that it is of the view that, if challenged, the opinions expressed herein would be sustained by a court with jurisdiction in a properly presented case. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PAR SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE PAR SECURITIES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS SEE "DESCRIPTION OF SECURITIES--REDEMPTION--SPECIAL EVENT REDEMPTION OR DISTRIBUTION OF DEBENTURES; SHORTENING OF STATED MATURITY." CLASSIFICATION OF THE TRUST In connection with the issuance of the Par Securities, Tax Counsel is of the opinion that under current law and assuming full compliance with the terms of the Declaration, the Trust will not be taxable as a corporation. Accordingly, for United States federal income tax purposes, each beneficial owner (each a "holder") of Par Securities generally will be required to include in gross income its allocable share of the income earned on or with respect to the Debentures. CLASSIFICATION OF THE DEBENTURES The Company, the Trust and the holders of the Par Securities (by the acceptance of a beneficial interest in a Par Security) will agree to treat the Debentures as indebtedness for all United States tax purposes. Accordingly, the Company intends to take the position that the Debentures will be classified as indebtedness for United States federal income tax purposes. The following discussion assumes that the Debentures will be classified as indebtedness for such purposes. 164 EXCHANGE OF PAR SECURITIES The Exchange should not constitute a taxable event for United States federal income tax purposes. Consequently, no gain or loss should be recognized by a holder upon receipt of a New Par Security, the holding period of the New Par Security should include the holding period of the Old Par Security and the adjusted tax basis of the New Par Security should be the same as the adjusted tax basis of the Old Par Security immediately before the Exchange. INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT Because the Company has the right to defer the payment of stated interest on the Debentures, the stated interest on the Debentures will be considered to be original issue discount ("OID") (within the meaning of Section 1273(a) of the Code). Consequently, holders must include such stated interest in gross income on a daily economic accrual basis (using the constant-yield-to-maturity method of accrual described in Section 1272 of the Code), regardless of their regular method of tax accounting and in advance of receipt of the cash attributable to such income. The application of these OID accrual rules may accelerate the timing of a holder's recognition of such income in certain situations. Actual payments of stated interest on the Debentures, however, will not be separately reported as taxable income. Any amount of OID included in a holder's gross income with respect to a Par Security will increase such holder's adjusted tax basis in such Security, and the amount of Distributions received by a holder in respect of such OID will reduce such holder's adjusted tax basis in such Par Security. Corporate holders of Par Securities will not be entitled to a dividends- received deduction with respect to any income recognized by such holders with respect to the Par Securities. DISTRIBUTION OF DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST As described under the caption "Description of Debentures--Distribution of Debentures; Book-Entry Issuance," Debentures may be distributed to holders in exchange for the Par Securities and in liquidation of the Trust. Under current law, such a distribution would be non-taxable, and will result in the holder receiving directly its pro rata share of the Debentures previously held indirectly through the Trust, with a holding period and aggregate tax basis equal to the holding period and aggregate tax basis such holder had in its Par Securities before such distributions. If, however, the liquidation of the Trust were to occur because the Trust is subject to United States federal income tax with respect to income accrued or received on the Debentures, the distribution of the Debentures to holders would be a taxable event to the Trust and to each holder and a holder would recognize gain or loss as if the holder had exchanged its Par Securities for the Debentures it received upon liquidation of the Trust. A holder would accrue interest in respect of the Debentures received from the Trust in the manner described above under "--Interest Income and Original Issue Discount." Under certain circumstances described herein (see "Description of Securities--Redemption--Special Event Redemption or Distribution of Debentures; Shortening of Stated Maturity"), the Debentures may be redeemed for cash, with the proceeds of such redemption distributed to holders in redemption of their Par Securities. Under current law, such a redemption would constitute a taxable disposition of the redeemed Par Securities for United States federal income tax purposes, and a holder would recognize gain or loss as if it sold such redeemed Par Securities for cash. See "--Sales of Securities." SALES OF PAR SECURITIES A holder that sells Par Securities (pursuant to the Remarketing or otherwise) will recognize gain or loss equal to the difference between the amount realized by the holder on the sale or redemption of the Par Securities (except to the extent that such amount realized is characterized as a payment in respect of accrued but unpaid interest on such holder's allocable share of the Debentures which such holder has not previously included in gross income) and the holder's adjusted tax basis in the Securities sold or redeemed. Such gain or loss generally 165 will be a capital gain or loss and generally will be a long-term capital gain or loss if the Par Securities have been held for more than one year. Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. A holder will be required to add any accrued and unpaid OID to its adjusted tax basis for its Par Securities. To the extent the selling price of such holder's Par Securities is less than the adjusted tax basis (which will include any accrued and unpaid OID), a holder will recognize a capital loss. PROPOSED TAX LEGISLATION Both the United States Senate and the House of Representatives have approved proposals regarding certain changes to United States federal income tax law. While President Clinton previously proposed legislation that would have denied an issuer an interest deduction, for United States federal income tax purposes, on instruments such as the Debentures, the proposed provisions approved by both the United States Senate and the House of Representatives do not include any such provision. There can be no assurance, however, that future legislative proposals or final legislation will not adversely affect the ability of the Company to deduct interest on the Debentures or otherwise affect the tax treatment of the transactions described herein. Moreover, such legislation could give rise to a Tax Event which would permit the Company to distribute the Debentures to the holders of the Par Securities, shorten the maturity of the Debentures or cause a redemption of the Par Securities as described more fully under "Description of Securities--Redemption--Special Event Redemption or Distribution of Debentures; Shortening of Stated Maturity." NON-UNITED STATES HOLDERS Prospective purchasers of Par Securities that are Non-United States Holders should consult their tax advisors with respect to the tax consequences, United States federal and otherwise, of the purchase, ownership and disposition of Par Securities. A "Non-United States Holder" includes any person that is not a United States Person. INFORMATION REPORTING AND BACKUP WITHHOLDING Income on the Par Securities held of record by holders (other than corporations and other exempt holders) will be reported annually to such holders and to the IRS. The Regular Trustees currently intend to deliver such reports to holders of record prior to January 31 following each calendar year. It is anticipated that persons who hold Par Securities as nominees for beneficial holders will report the required tax information to beneficial holders on Form 1099. "Backup withholding" at a rate of 31% will apply to payments of interest to non-exempt United States holders unless the holder furnishes its taxpayer identification number in the manner prescribed in applicable Treasury regulations, certifies that such number is correct, certifies as to no loss of exemption from backup withholding and meets certain other conditions. Payment of the proceeds from disposition of Par Securities to or through a United States office of a broker is subject to information reporting and backup withholding unless the holder or beneficial owner establishes an exemption from information reporting and backup withholding. Any amounts withheld from a holder of the Par Securities under the backup withholding rules will generally be allowed as a refund or a credit against such holder's United States federal income tax liability, provided the required information is furnished to the IRS. 166 ERISA CONSIDERATIONS Generally, employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code ("Plans"), may purchase Securities, subject to the investing fiduciary's determination that the investment in Securities satisfies ERISA's fiduciary standards and other requirements applicable to investments by the Plan. The Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section 2510.3-101) (the "DOL Regulation") concerning the definition of what constitutes the assets of a Plan. The DOL Regulation provides that as a general rule, the underlying assets and properties of corporations, partnerships, trusts and certain other entities in which a plan makes an "equity" investment will be deemed for purposes of ERISA to be assets of the investing plan unless certain exceptions apply. There can be no assurance that any of the exceptions set forth in the DOL regulation will apply to the purchase of Securities offered hereby and, as a result, an investing Plan's assets could be considered to include an undivided interest in the Debentures held by the Trust. In the event that assets of the Trust are considered assets of an investing Plan, the Company, the Trustees and other persons, in providing services with respect to the Debentures, may be considered fiduciaries to such Plan and subject to the fiduciary responsibility provisions of Title I of ERISA (including the prohibited transaction provisions thereof). In addition, the prohibited transaction provisions of Section 4975 of the Code could apply with respect to transactions engaged in by any "disqualified person," as defined below, involving such assets unless a statutory or administrative exemption applies. Even if they are not fiduciaries, the Company and/or any of its affiliates may be considered a "party in interest" (within the meaning of ERISA) or a "disqualified person" (within the meaning of Section 4975 of the Code) with respect to certain Plans. The acquisition and ownership of Securities by a Plan (or by an individual retirement arrangement or other plan described in Section 4975(e)(1) of the Code) may constitute or result in a prohibited transaction under ERISA or Section 4975 of the Code, unless such Securities are acquired pursuant to and in accordance with an applicable exemption. As a result, Plans with respect to which the Company or any of its affiliates is a party in interest or a disqualified person should not acquire Securities unless such Securities are acquired pursuant to and in accordance with an applicable prohibited transaction exemption. Any purchaser or holder of the Securities or any interest therein will be deemed to have represented by its purchase and holding thereof that either (i) the purchaser and holder is not a Plan or any entity whose underlying assets include "plan assets" by reason of any Plan's investment in the entity and is not purchasing such securities on behalf of or with "plan assets" of any Plan or (ii) the purchase and holding of the Securities is covered by an applicable prohibited transaction exemption. Notwithstanding the foregoing, it is possible that the New Securities may qualify as "publicly offered securities" under the DOL Regulation if, in addition to an effective registration statement filed in connection with the Exchange Offer, they are also "widely held" and "freely transferable" at the time of the Exchange Offer. Under the DOL Regulation, a class of securities is "widely held" only if it is a class of securities owned by 100 or more investors independent of the issuer and each other. Although it is possible that at the time of the Exchange Offer the New Securities will be "widely held", no assurances can be given that will be true. If the New Securities are "publicly offered securities" at the time of the Exchange Offer, the assets of the Trust would not be assets of the Investing Plans as of such time. If the New Securities did not qualify as "publicly offered securities", the foregoing discussion about plan assets in the preceding paragraphs would also be available to the New Securities. Any Plans or other entities whose assets include Plan assets subject to ERISA or Section 4975 of the Code proposing to acquire Securities or New Securities should consult with their own counsel. 167 PLAN OF DISTRIBUTION The Company will not receive any proceeds from any sale of New Par Securities by broker-dealers. New Par Securities received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Par Securities or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such New Par Securities. Any broker-dealer that resells New Par Securities that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Par Securities may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Par Securities and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. Each broker-dealer that receives New Par Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Par Securities. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Par Securities received in exchange for Old Par Securities where such Old Par Securities were acquired as a result of market-making activities or other trading activities. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Company has agreed that, for a period of one year from the date hereof, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. For a period of one year from the date hereof, the Company will promptly send additional copies of this Prospectus and any amendment or Supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed, pursuant to the Registration Rights Agreement, to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for all the holders of the Notes as a single class) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain matters of Delaware law relating to the validity of the Securities will be passed upon for the Trust by Richards, Layton & Finger, P.A., special Delaware counsel to the Company and the Trust. The validity of the Debentures and the Guarantee will be passed upon for the Company and the Trust by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, Beverly Hills, California. Certain United States federal income taxation matters also will be passed upon for the Company and the Trust by Simpson Thacher & Bartlett, (a partnership which includes professional corporations), New York, New York. Freshman, Marantz, Orlanski, Cooper & Klein and Simpson Thacher & Bartlett will rely on the opinion of Richards, Layton & Finger, P.A. as to matters of Delaware Law. EXPERTS The consolidated financial statements of Imperial Credit Industries, Inc. and subsidiaries as of December 31, 1996 and 1995, and for each of the years in the three-year period ended December 31, 1996, have been included herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP contains an explanatory paragraph regarding the adoption of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" in 1995. 168 The financial statements of Franchise Mortgage Company LLC as of December 31, 1996 and 1995, and for the year ended December 31, 1996 and for the period from June 30, 1995 (inception) through December 31, 1995, have been included herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 169 IMPERIAL CREDIT INDUSTRIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Audited Consolidated Financial Statements: Independent Auditors' Report............................................. F-2 Consolidated Balance Sheets.............................................. F-3 Consolidated Statements of Income........................................ F-4 Consolidated Statements of Changes in Shareholders' Equity............... F-5 Consolidated Statements of Cash Flows.................................... F-6 Notes to Consolidated Financial Statements............................... F-7 Unaudited Condensed Consolidated Financial Statements: Consolidated Balance Sheets.............................................. F-46 Consolidated Statements of Income........................................ F-47 Consolidated Statements of Cash Flows.................................... F-48 Notes to Consolidated Financial Statements............................... F-49
All supplemental schedules are omitted as inapplicable or because the required information is included in the consolidated financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors Imperial Credit Industries, Inc.: We have audited the accompanying consolidated balance sheets of Imperial Credit Industries, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Imperial Credit Industries, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 3 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights," for the year ended December 31, 1995. KPMG Peat Marwick LLP Los Angeles, California January 29, 1997 F-2 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, --------------------- 1996 1995 ---------- ---------- ASSETS ------ Cash..................................................... $ 74,247 $ 39,166 Interest bearing deposits................................ 3,369 267,776 Investment in Federal Home Loan Bank stock............... 17,152 22,750 Trading securities, at market............................ 25,180 -- Securities available for sale, at market................. 59,116 5,963 Loans held for sale ..................................... 940,096 1,341,810 Loans held for investment, net........................... 1,068,599 668,771 Purchased and originated servicing rights................ 14,887 18,428 Capitalized excess servicing fees receivable............. 23,142 33,181 Retained interest in loan and lease securitizations...... 49,548 14,251 Interest-only and residual certificates.................. 87,017 10,840 Accrued interest on loans................................ 13,847 10,164 Premises and equipment, net.............................. 12,442 11,369 Other real estate owned, net............................. 12,214 7,179 Goodwill................................................. 38,491 20,346 Other assets............................................. 31,292 38,641 ---------- ---------- Total assets......................................... $2,470,639 $2,510,635 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Deposits................................................. $1,069,184 $1,092,989 Borrowings from Imperial Bank............................ -- 5,000 Borrowings from Federal Home Loan Bank................... 140,500 190,000 Other borrowings......................................... 694,352 875,815 Bonds.................................................... -- 111,995 Senior notes............................................. 88,209 80,472 Convertible subordinate debentures....................... 75,000 -- Accrued interest payable................................. 14,034 14,494 Income taxes payable..................................... 55,327 12,962 Minority interest in consolidated subsidiaries........... 54,936 1,452 Other liabilities........................................ 39,589 31,354 ---------- ---------- Total liabilities.................................... 2,231,131 2,416,533 ---------- ---------- Commitments and contingencies (note 27) Shareholders' equity: Preferred stock, 8,000,000 shares authorized; none issued or outstanding................................. -- -- Common stock, no par value. Authorized 80,000,000 shares; 38,291,112 and 14,578,481 shares issued and outstanding at December 31, 1996 and 1995, respectively.......................................... 145,521 51,981 Retained earnings...................................... 88,977 38,910 Unrealized gain on securities available for sale, net.. 5,010 3,211 ---------- ---------- Total shareholders' equity........................... 239,508 94,102 ---------- ---------- Total liabilities and shareholders' equity........... $2,470,639 $2,510,635 ========== ==========
See accompanying notes to consolidated financial statements. F-3 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- ------- REVENUE: Gain on sale of loans............................. $ 88,156 $ 39,557 $ 8,628 -------- -------- ------- Interest on loans................................. 188,242 120,244 79,173 Interest on investments........................... 10,807 6,630 3,610 Interest on other finance activities.............. 8,422 2,608 -- -------- -------- ------- Total interest income........................... 207,471 129,482 82,783 Interest expense.................................. 135,036 95,728 61,674 -------- -------- ------- Net interest income............................. 72,435 33,754 21,109 Provision for loan and lease losses............... 9,773 5,450 5,150 -------- -------- ------- Net interest income after provision for loan and lease losses..................................... 62,662 28,304 15,959 -------- -------- ------- Loan servicing income............................. 1,680 12,718 16,332 Gain on sale of servicing rights.................. 7,591 3,578 30,837 Gain on sale of SPFC stock........................ 51,243 -- -- Gain on sale of stock by subsidiary............... 31,447 -- -- Management fees................................... 3,347 38 -- Other income...................................... 10,807 1,114 1,048 -------- -------- ------- Total other income.............................. 106,115 17,448 48,217 -------- -------- ------- Total revenue..................................... 256,933 85,309 72,804 -------- -------- ------- EXPENSES: Personnel expense................................. 48,355 34,053 33,477 Amortization of PMSRs and OMSRs................... 1,121 3,986 3,176 Occupancy expense................................. 4,653 3,904 3,399 Data processing expense........................... 2,163 1,461 1,323 Net expenses of other real estate owned........... 7,014 1,913 969 Professional services............................. 9,559 2,769 1,528 FDIC insurance premiums........................... 327 1,137 2,170 Telephone and other communications................ 2,917 2,509 2,820 Restructuring provision--exit from former mortgage banking operations............................... 3,800 -- -- General and administrative expense................ 19,140 9,448 12,652 -------- -------- ------- Total expenses.................................. 99,049 61,180 61,514 -------- -------- ------- Income before income taxes........................ 157,884 24,129 11,290 Income taxes...................................... 69,874 10,144 4,685 Minority interest in income (loss) of consolidated subsidiaries..................................... 12,026 (208) -- -------- -------- ------- Income before extraordinary item.................. 75,984 14,193 6,605 Extraordinary item--repurchase of 9 3/4% Senior Notes due 2004, net of income taxes.............. -- -- 919 -------- -------- ------- Net income...................................... $ 75,984 $ 14,193 $ 7,524 ======== ======== ======= INCOME PER SHARE: Primary: Income before extraordinary item................ $ 1.96 $ 0.41 $ 0.19 Extraordinary item--repurchase of 9 3/4% Senior Notes due 2004................................. -- -- 0.03 -------- -------- ------- Net Income...................................... $ 1.96 $ 0.41 $ 0.22 ======== ======== ======= Fully Diluted: Income before extraordinary item................ $ 1.95 $ 0.40 $ 0.19 Extraordinary item--repurchase of 9 3/4% Senior Notes due 2004................................. -- -- 0.03 -------- -------- ------- Net Income...................................... $ 1.95 $ 0.40 $ 0.22 ======== ======== =======
See accompanying notes to consolidated financial statements. F-4 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNREALIZED GAIN ON NUMBER OF SECURITIES TOTAL SHARES COMMON RETAINED AVAILABLE SHAREHOLDERS' OUTSTANDING STOCK EARNINGS FOR SALE, NET EQUITY ----------- -------- -------- ------------- ------------- (IN THOUSANDS) Balance, December 31, 1993................... 9,607 $ 51,060 $ 17,193 $ -- $ 68,253 Exercise of stock options................ 14 96 -- -- 96 Net income, 1994........ -- -- 7,524 -- 7,524 ------ -------- -------- ------ -------- Balance, December 31, 1994................... 9,621 51,156 24,717 -- 75,873 Exercise of stock options................ 147 825 -- -- 825 3-for-2 stock split..... 4,810 -- -- -- -- Unrealized gain on securities available for sale, net.......... -- -- -- 3,211 3,211 Net income, 1995........ -- -- 14,193 -- 14,193 ------ -------- -------- ------ -------- Balance, December 31, 1995................... 14,578 51,981 38,910 3,211 94,102 Exercise of stock options................ 868 1,671 -- -- 1,671 1-for-10 stock dividend. 1,460 25,917 (25,917) -- -- 2-for-1 stock split..... 18,952 -- -- -- -- Issuance of common stock.................. 2,440 59,228 -- -- 59,228 Unrealized gain on securities available for sale, net.......... -- -- -- 1,799 1,799 Tax benefit from exercise of stock options................ -- 6,851 -- -- 6,851 Retirement of stock..... (7) (127) -- -- (127) Net income, 1996........ -- -- 75,984 -- 75,984 ------ -------- -------- ------ -------- Balance, December 31, 1996................... 38,291 $145,521 $ 88,977 $5,010 $239,508 ====== ======== ======== ====== ========
See accompanying notes to consolidated financial statements. F-5 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 --------- ---------- ----------- (IN THOUSANDS) Cash flows from operating activities: Net income................................ $ 75,984 $ 14,193 $ 7,524 Adjustments to reconcile net income to net cash (used in)provided by operating activities: Provision for loan and lease losses..... 9,773 5,450 5,150 (Recovery) provision for operational losses................................. -- (1,819) 2,000 Restructuring Provision................. 3,800 -- -- Depreciation............................ 3,483 2,657 1,846 Amortization............................ 2,996 3,725 2,921 Accretion of discount................... (8,350) (2,608) -- Gain on sale of servicing rights........ (7,591) (3,578) (30,837) Gain on sale of loans................... (88,156) (39,557) (8,628) Gains on sale of SPFC stock............. (64,625) -- -- Loss on sale of OREO.................... 2,843 -- -- Writedowns of capitalized excess servicing.............................. 4,675 -- -- Writedowns of fixed assets.............. 886 -- -- Stock option compensation expense....... -- 653 436 Writedowns on other real estate owned... 3,252 2,085 369 Provision for deferred income taxes..... 22,104 2,120 2,678 Gain on repurchase of senior notes...... -- -- (1,538) Net change in loans held for sale....... 266,373 (579,730) 982,827 Net change in accrued interest on loans. (3,683) (4,247) (1,342) Net change in retained interest in loan and lease securitizations.............. (21,481) (14,012) (239) Net change in interest only and residual certificates........................... (75,896) (10,840) -- Net change in capitalized excess servicing.............................. 33,234 (37,500) (3,790) Net change in other assets.............. 15,550 (4,222) (11,924) Net change in other liabilities......... 24,236 (1,436) 14,126 --------- ---------- ----------- Net cash provided by (used in) operating activities............................... 199,407 (668,666) 961,579 --------- ---------- ----------- Cash flows from investing activities: Net change in interest bearing deposits. 264,407 (257,176) 79,400 Purchase of servicing rights............ -- (8,128) (14,764) Proceeds from sale of servicing rights.. 10,011 12,815 26,899 Proceeds from sale of other real estate owned.................................. 1,202 7,072 1,174 Purchase of trading securities.......... (25,180) -- -- Net change in securities available for sale................................... (56,901) -- -- Net change in loans held for investment. (224,792) 61,656 (882,390) Purchases of premises and equipment..... (5,442) (1,367) (6,140) Sales (purchases) of Federal Home Loan Bank stock............................. 5,598 (3,933) (817) Cash utilized for acquisitions.......... (20,020) (175,015) -- --------- ---------- ----------- Net cash used in investing activities..... (51,117) (364,076) (796,638) --------- ---------- ----------- Cash flows from financing activities: Net change in deposits.................. (23,805) 158,368 (66,847) Net change in borrowings from Imperial Bank................................... (5,000) 5,000 (20,000) Advances from Federal Home Loan Bank.... 434,000 347,000 988,000 Repayments of advances from Federal Home Loan Bank.............................. (483,500) (452,000) (1,013,000) Proceeds from issuance of convertible subordinated debentures................ 72,162 -- -- Net change in other borrowings.......... (181,463) 875,815 (147,611) Issuance of bonds....................... -- 111,995 -- Repayment of bonds...................... (111,995) -- -- Proceeds from offering of 9 3/4% Senior Notes due 2004 ........................ -- -- 88,593 Repurchase of 9 3/4% Senior Notes due 2004................................... -- -- (6,545) Proceeds from resale of 9 3/4% Senior Notes due 2004......................... 7,384 -- -- Proceeds from sale of SPFC stock........ 64,625 -- -- Proceeds from issuance of common stock.. 59,228 -- -- Net change in minority interest......... 53,484 -- -- Proceeds from exercise of stock options. 1,671 826 96 --------- ---------- ----------- Net cash (used in) provided by financing activities (113,209) 1,047,004 (177,314) Net change in cash........................ 35,081 14,262 (12,373) Cash at beginning of year................. 39,166 24,904 37,277 --------- ---------- ----------- Cash at end of year....................... $ 74,247 $ 39,166 $ 24,904 ========= ========== ===========
See accompanying notes to consolidated financial statements. F-6 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. ORGANIZATION Imperial Credit Industries, Inc., incorporated in 1986 in the State of California, is 24.5% owned by Imperial Bank. In 1991 Imperial Bank recapitalized the Company to conduct a full service mortgage banking operation. The consolidated financial statements include Imperial Credit Industries, Inc. ("ICII"), its wholly-owned subsidiaries and majority-owned subsidiaries (collectively the "Company"). The wholly-owned subsidiaries include Southern Pacific Thrift and Loan Association ("SPTL"), Imperial Business Credit, Inc. ("IBC") and Imperial Credit Advisors, Inc. ("ICAI"). The majority-owned consolidated subsidiaries include Southern Pacific Funding Corporation ("SPFC"), Franchise Mortgage Acceptance Company, LLC ("FMAC"), and ICI Funding Corporation ("ICIFC"). SPFC is owned 51.2% by the Company and 48.8% by public investors. FMAC is owned two-thirds by the Company and one-third by the President of FMAC. The Company owns 100% of the voting common stock of ICIFC which entitles it to a 1% economic interest. Imperial Credit Mortgage Holdings, Inc. ("IMH"), an unconsolidated affiliated company, owns all of the ICIFC non-voting preferred stock which entitles it to a 99% economic interest. All material intercompany balances and transactions have been eliminated. STRATEGIC DIVESTITURES In 1995, the Company began to diversify away from the conforming residential mortgage lending business, the Company's traditional focus, and into other select lending businesses. The Company expanded several existing businesses and commenced several new businesses, including non-conforming residential mortgage banking, commercial mortgage banking, business lending and consumer lending. The Company's loans and leases by sector consist primarily of the following: non-conforming residential mortgage banking; commercial mortgage banking--franchise loans and income producing loans; business lending-- equipment leasing and asset-based lending; consumer loans--sub-prime auto loans and Title I home improvement loans. The Company solicits loans and leases from brokers on a wholesale and portfolio basis and directly from borrowers. The majority of the Company's loans and leases, other than those held by SPTL for investment, are sold in secondary markets through securitizations and whole loan sales. During the fourth quarter of 1995, the Company sold its mortgage conduit operations and SPTL's warehouse lending operations to IMH, a newly formed Maryland corporation that subsequently engaged in an initial public offering of its common stock. In exchange for these assets, the Company received approximately 11.8% of the common stock of IMH. At December 31, 1996, the Company owned approximately 5.0% of the common stock of IMH. This investment is included in securities available for sale on the consolidated balance sheet. Additionally, ICAI entered into a management agreement with IMH pursuant to which it advises upon the day-to-day operations of IMH and for which it is paid a management fee. During the first quarter of 1996 the Company sold substantially all of its conforming residential mortgage loan servicing rights and the majority of its wholesale mortgage origination offices related to its conforming residential mortgage lending business. The Company's wholesale offices in Florida, Colorado, Washington and Oregon have been converted to SPFC offices. Additionally, the Company has transferred all servicing rights related to its residential non-conforming mortgage banking business to independent subservicers. The Company intends to continue servicing all loans and leases originated by its equipment leasing and franchise mortgage lending businesses as well as all loans held for investment at SPTL. STRATEGIC FOCUSES AND ACQUISITIONS The Company, through SPFC, has refocused its residential mortgage operations on the origination, purchase and sale of non-conforming residential mortgage loans secured primarily by one-to-four family residences. The F-7 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) majority of SPFC's loans are made to owners of single family residences who use a portion of the loan proceeds for such purposes as debt consolidation or financing of home improvements and educational expenditures. In May 1995, the Company substantially expanded its existing equipment leasing business, through the acquisition of First Concord Acceptance Corporation ("FCAC"). IBC conducts its business equipment leasing operations from its headquarters in Rancho Bernardo, California. In June 1995, the Company established FMAC which acquired the Franchise Mortgage Acceptance Company division of Greenwich Financial Capital Products, Inc. Through FMAC, the Company originates, securitizes and services franchise mortgage loans, primarily to nationally recognized restaurant franchisees. FMAC's headquarters and operations center are located in Greenwich, Connecticut. In September 1995, the Company acquired CoastFed Business Credit Corporation ("CBCC") from Coast Federal Bank, Federal Savings Bank. CBCC, now a division of SPTL operating under the name Coast Business Credit Corporation ("CBC"), provides asset-based lending to middle market companies located mainly in California. CBC's predecessor corporation began operations in 1955 under the management of its current chief executive officer and is headquartered in Los Angeles, California. In October 1996, IBC acquired substantially all of the assets of Avco Leasing Services, Inc. and all of the assets of Avco Financial Services of Southern California, Inc. related to its business of originating and servicing business equipment leases and agreed to assume certain related liabilities in connection therewith from Avco Financial Services, Inc. (the "Avco Acquisition"). The net purchase price for AVCO's net assets was approximately $94.8 million. 2. BASIS OF PRESENTATION The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods presented. Significant balance sheet items which could be materially effected by such estimates include: loans held for investment, which is presented net of the allowance for loan and lease losses and the valuation of the Company's securitization related assets. Actual results could differ significantly from management's estimates. Prior years' consolidated financial statements have been reclassified to conform to the 1996 presentation. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Investment Securities The Company classifies investments as held-to-maturity, trading securities, and/or available-for-sale securities. Held-to-maturity investments are reported at amortized cost, trading securities are reported at fair value, with unrealized gains and losses included in operations, and available-for- sale securities are reported at fair value with unrealized gains and losses, net of related income taxes, included as a separate component of shareholders' equity. Investment securities held-to-maturity are those securities that management has the positive intent and ability to hold to maturity. Trading securities include mortgage-backed securities resulting from certain mortgage banking related activities. F-8 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Investment securities available-for-sale are those securities which are not held in the trading portfolio and are not held in the held-to-maturity portfolio. Realized gains and losses on securities available-for-sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Loans Held for Sale Loans held for sale are carried at the lower of aggregate cost or market. Loans which are ineligible for sale, generally those 90 days past due, are transferred to loans held for investment at the lower of cost or market on the day of transfer. Loans Held for Investment Loans held for investment are stated at the principal amount outstanding. Interest income is recorded on the accrual basis in accordance with the terms of the loans, except that accruals are discontinued when the payment of principal or interest is 90 or more days past due. Future collections of interest are included in interest income or applied to the loan balance based on an assessment of the likelihood that the loan will be repaid. Additionally, unearned income on installment contracts and leases is recognized in interest income over the life of the related loans using the interest method. On an ongoing basis, management monitors the loan portfolio and evaluates the adequacy of the allowance for loan and lease losses. In determining the adequacy of the allowance for loan and lease losses, management considers such factors as historical loan loss experience, underlying collateral values, known problem loans, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate data to identify the risks in the loan portfolio. Loans deemed by management to be uncollectible are charged to the allowance for loan and lease losses. Recoveries on loans previously charged off are credited to the allowance. Provisions for loan losses are charged to expense and credited to the allowance in amounts deemed appropriate by management based upon its evaluation of the known and inherent risks in the loan portfolio. The Company considers a loan to be impaired when, based upon current information and events, it believes it will be unable to collect all amounts due according to the contractual terms of the loan agreement. The value of impaired loans is established by discounting the expected future cash flows at the loan's effective interest rate, or by the current observable market price or the fair value of its collateral. Many factors are considered in the determination of impairment. The measurement of collateral dependent impaired loans is based on the fair value of the loan's collateral. Non-collateral dependent loans are valued based on a present value calculation of expected future cash flows, discounted at the loan's effective rate. Cash receipts on impaired loans not performing according to contractual terms are generally used to reduce the carrying value of the loan, unless the Company believes it will recover the remaining principal balance of the loan. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Adjustments to impairment losses due to changes in the fair value of collateral of impaired loans are included in the provision for loan losses. Upon disposition of an impaired loan, loss of principal, if any, is recorded through a charge-off to the allowance for loan losses. In originating or acquiring loans, the Company evaluates the borrower's credit worthiness and debt ratios, the property appraisal and the loan-to- value ratio. The maximum amount of credit risk related to the Company's investment in loans is represented by the outstanding principal balance of the loans plus accrued interest. F-9 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Purchased and Originated Servicing Rights The Company adopted Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122") starting in 1995. SFAS 122 requires that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. The adoption of SFAS 122 resulted in an increase in the Company's revenues and net income of $6.2 million, and $3.6 million, respectively, in 1995. Purchased servicing represents the cost of acquiring the right to service mortgage loans. Originated servicing rights are recorded when mortgage loans are originated and subsequently sold or securitized with the servicing rights retained. The total cost of the mortgage loans is allocated to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The cost relating to purchased and originated servicing is capitalized and amortized in proportion to, and over the period of, estimated future net servicing income. The Company assesses the impairment of the purchased and originated servicing portfolio based on the fair value of those rights on a stratum-by- stratum basis with any impairment recognized through a valuation allowance for each impaired stratum. For the purpose of measuring impairment, the Company has stratified the capitalized mortgage servicing rights using the following risk characteristics: loan program type and interest rate tranche in 100 basis point increments. In order to determine the fair value of the servicing rights, the Company uses market prices under comparable servicing sales contracts, when available, or alternatively, it uses a valuation model that calculates the present value of future cash flows. Assumptions used in the valuation model include market discount rates and anticipated prepayment speeds. The prepayment speeds are determined from market sources for fixed rate mortgages with similar coupons and prepayment rates for comparable variable rate loans. In addition, the Company uses market comparables for estimates of the cost of servicing per loan, an inflation rate, ancillary income per loan and default rates. Amounts capitalized are recorded at cost, net of accumulated amortization and valuation allowance. Capitalized Excess Servicing Fees Receivable The Company has created capitalized excess servicing fees receivable as a result of the sale of loans, and to a lesser extent leases, into various trust vehicles. These various trust vehicles are majority owned by an independent third party who has made a substantial capital investment and has substantial risks and rewards of ownership of the assets of the trust; therefore, these trust vehicles are not consolidated with the Company. Capitalized excess servicing fees receivable on the sale of loans and leases are determined by computing the present value of the excess of the weighted average coupon on the loans and leases sold over the sum of: (1) the coupon in the pass through certificates, (2) a base servicing fee paid to the loan or lease servicer, (3) expected losses to be incurred on the portfolio of loans or leases sold and considering (4) prepayment assumptions. Prepayment assumptions are based on recent evaluations of the actual prepayments of the Company's servicing portfolio or on market prepayment rates on new portfolios and consideration of the current interest rate environment and its potential impact on prepayment rates. The cash flows expected to be received by the Company, not considering the expected losses, are discounted at an interest rate that the Company believes an unaffiliated third-party purchaser would require as a rate of return on such a financial instrument. Expected losses are discounted using a rate equivalent to the risk-free rate for securities with a duration similar to that estimated for the underlying loans and leases sold. The excess servicing cash flows are available to the Company to the extent that there is no impairment of the credit enhancements established at the time the loans and leases are sold. Such credit enhancements are classified as retained interest F-10 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) in loan and lease securitizations on the consolidated balance sheets and represent the amount of overcollateralization of the certificates. Capitalized excess servicing fees receivable are amortized using the interest method. To the extent that actual future performance results are different from the excess cash flows the Company estimated, the Company's capitalized excess servicing fees receivable will be adjusted quarterly with corresponding adjustments made to income in that period. The carrying value of the Company's capitalized excess servicing fees receivable was subject to a relative fair value allocation and is presented net of an allowance for credit losses. Retained Interest in Loan and Lease Securitizations Loan and lease securitizations have specific credit enhancement requirements in the form of overcollateralization which must be met before the Company receives cash flows due. As the securitized assets generate excess servicing fees, they are initially used to pay down the balance of the pass-through certificates until such time as the ratio of securitized assets to pass- through certificates reaches the overcollateralization requirement specified in each securitization. This overcollateralization amount is carried on the balance sheet as retained interest in loan and lease securitizations. After the overcollateralization requirement and the other requirements specified in the pooling and servicing agreement have been met, the Company begins to receive the excess servicing fees and a portion of the retained interest on a monthly basis. Interest-only and Residual Certificates Assets reflected in the accompanying balance sheet as interest-only and residual certificates in real estate mortgage investment conduits are recorded as a result of SPFC's securitization of loans through various trust vehicles. SPFC is subject to certain recourse provisions in connection with its securitizations which are measured using a risk free rate. SPFC estimates future cash flows from these interest-only and residual certificates and values them utilizing assumptions that it believes are consistent with those that would be utilized by an unaffiliated third party purchaser and records them as trading securities at fair value in accordance with SFAS No. 115, "Accounting for Certain Debt and Equity Securities." Unrealized gains and losses are included in other income in the accompanying consolidated financial statements. To SPFC's knowledge, there is no active market for the sale of these interest-only and residual certificates. The fair value of interest-only and residual certificates is determined by computing the present value of the excess of the weighted average coupon on the loans sold over the sum of: (1) the coupon on the senior interests, (2) a base servicing fee paid to the loan servicer, (3) expected losses to be incurred on the portfolio of loans sold over the lives of the loans, and (4) fees payable to the trustee and monoline insurer. Prepayment assumptions used in the present value computation are based on recent evaluations of the actual prepayments of SPFC's servicing portfolio or on market prepayment rates on new portfolios, taking into consideration the current interest rate environment and its expected impact on prepayment rates. The cash flows expected to be received by SPFC, not considering the expected losses, are discounted at an interest rate that SPFC believes an unaffiliated third-party purchaser would require as a rate of return on such a financial instrument. Expected losses are discounted using a rate equivalent to the risk-free rate for securities with a duration similar to that estimated for the underlying loans sold and a discounted recourse liability is recorded. The undiscounted recourse liability relating to interest-only and residual certificates as of December 31, 1996 and 1995 was $11.2 million and $3.9 million, respectively. The overall effect of discounting the cash flows expected to be received by SPFC using an interest rate that SPFC believes an unaffiliated third party purchaser would require, and a rate equivalent to a risk-free rate for expected credit losses is a discount rate of approximately 15%. To the extent that actual future excess cash flows are different from estimated excess cash flows, the fair value of SPFC's interest-only and residual certificates will be adjusted quarterly with corresponding adjustments made to earnings in that period. F-11 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In certain of its securitizations, SPFC provided an initial overcollateralization on the securities sold and in all its securitizations SPFC builds overcollateralization as cash flows projected as described above are used by the trustee to reduce the outstanding balance of the securities sold by SPFC. The amount of overcollateralization is recorded by SPFC as part of its interest-only and residual certificates. Sales of Servicing Rights The Company recognizes gain or loss on the sale of servicing rights when the sales contract has been executed and the risks and rewards of ownership are determined to have passed to the purchasing party. Sales of Loans The Company divides gains or losses on sales of loans into two categories: cash gains and securitization gains. Cash gain or loss is the difference between the Company's carrying value net of commitment fees paid for a mortgage loan and the proceeds from the sale of a loan. If the mortgage loans are sold with servicing released to the purchaser of the loans, the value of the servicing will be reflected in the cash gain on the sale of such loans. If the loans are sold with servicing retained by the Company, the Company will recognize the value of the originated mortgage servicing rights. Present value computations utilize estimated interest rates, prepayment, default, and loss assumptions that management believes market participants would use for similar instruments. The Company recognizes gain or loss on the sale of loans when the sales transaction settles and the risks and rewards of ownership are determined to have passed to the purchasing party. Loan Origination Income Origination fees received on loans held for sale, net of direct costs related to the origination of the loans, are deferred until the time of sale and are included in the computation of the gain or loss on the sale of the related loans. Commitment fee income is deferred until each loan is funded and sold, and recorded as a part of the gain on sale of the loan in the same percentage as such loan is to the total commitment. Any remaining deferred commitment fee income is recognized at expiration of the commitment. When exercise of such commitment is deemed remote, the fee is recognized over the remaining commitment period. Origination fees on loans held for investment, net of direct costs related to the origination of the loans, are deferred and amortized over the contractual lives of the related loans using the interest method. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation on premises and equipment is recorded using the straight-line method over the estimated useful lives of individual assets (3 to 7 years). Leasehold improvements are amortized over the terms of their related leases or the estimated useful lives of improvements, whichever is shorter. Interest Bearing Deposits Interest bearing deposits consist of time certificates, investment in federal funds and money market accounts. Amounts are carried at cost. F-12 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Other Real Estate Owned Foreclosed real estate is transferred from the loan portfolio at fair value and classified as other real estate owned ("OREO"). The excess carrying value, if any, of the loan over the estimated fair value of the collateral less estimated selling costs is charged to the allowance for loan losses. Any subsequent impairments in value are recognized through a valuation allowance. Subsequent increases in fair value are credited to income and reduce the valuation allowance. Subsequent increases in the fair value of an asset are only recognized to the extent that decreases in fair value were recorded through the valuation allowance. Gains and losses from sales of OREO, provisions for losses on OREO, and net operating expenses of OREO are recorded in operations and included in the caption "net expenses of other real estate owned" in the accompanying consolidated statements of income. Income Taxes The Company files a combined California franchise tax return and a consolidated Federal income tax return with all of its subsidiaries except SPFC, ICIFC, and FMAC. The Company accounts for income taxes using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Goodwill Goodwill is amortized on a straight-line basis over its estimated useful life of 15 years. Goodwill is reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. At December 31, 1996, Goodwill is presented net of accumulated amortization of $2.2 million. Stock Based Compensation In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123 applies to all transactions in which the Company acquires goods or services by issuing equity instruments or by incurring liabilities where the payment amounts are based on the Company's common stock price. A new method of accounting for stock based compensation arrangements with employees is established by SFAS 123. The new method is based on the fair value method rather than the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS 123 does not require companies to adopt the new fair value method for stock issuances to employees and directors. Issuance of stock to non- employees, however, must be measured at fair value. Entities are allowed to either continue to use the APB 25 method or adopt the fair value method set forth in SFAS 123. Companies that do not adopt the new fair value method in SFAS 123 for purposes of preparing their consolidated financial statements are required to include pro-forma disclosures in the notes to the consolidated financial statements. The pro-forma disclosures should include the impact of the fair value method on net income and income per share as if SFAS 123 had been adopted. During 1996, the Company adopted the proforma disclosure requirements set forth in SFAS 123 for purposes of preparing its consolidated financial statements. F-13 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Income Per Share Primary and fully diluted income per common share are computed based on the weighted average number of shares outstanding during the year plus common stock equivalents deemed to be dilutive. The number of shares used in the computations are given retroactive effect for stock dividends and splits for all periods presented. Sale of Stock in Subsidiary The issuance of common stock by SPFC, a subsidiary of the Company, to the public in 1996 was recorded in the Company's consolidated statement of income as a "Gain on sale of stock by subsidiary" of $31.4 million at the time the stock was sold. The gain represents the difference between the benefit received by the Company relating to the price paid for the stock in the offering in excess of book value, offset by the Company's ownership dilution. The Company has adopted the provisions of Staff Accounting Bulletin Topic 5H for the accounting of SPFC stock. The sale of a portion of the Company's shares of stock in SPFC in 1996 is recorded as "Gain on sale of SPFC stock" of $51.2 million in the accompanying consolidated statement of income. The gain represents the actual proceeds from the sale of stock reduced by the Company's recorded investment in those shares and expenses related to the sale. After the sales of SPFC's common stock by the Company, its ownership percentage in SPFC was approximately 51.2% of the issued and outstanding shares of SPFC's common stock, excluding shares issuable upon exercise of options granted or to be granted pursuant to SPFC's stock option plans and shares issuable upon conversion of the $75.0 million of convertible subordinated notes due 2006 issued in November 1996. Recent Accounting Pronouncements In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), which establishes accounting for transfers and servicing of financial assets and extinguishment of liabilities. This statement specifies when financial assets and liabilities are to be removed from an entity's financial statements, the accounting for servicing assets and liabilities and the accounting for assets that can be contractually prepaid in such a way that the holder would not recover substantially all of its recorded investment. Under SFAS 125, an entity recognizes only assets it controls and liabilities it has incurred, discontinues recognition of assets only when control has been surrendered, and discontinues recognition of liabilities only when they have been extinguished. SFAS 125 requires that the selling entity continue to carry retained interests, including servicing assets, relating to assets it no longer recognizes. Such retained interests are based on the relative fair values of the retained interests of the subject assets at the date of transfer. Transfers not meeting the criteria for sale recognition are accounted for as a secured borrowing with a pledge of collateral. SFAS 125 requires an entity to recognize its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset or liability. The servicing asset or liability is to be amortized in proportion to, and over the period of, net servicing income or loss. Servicing assets and liabilities are to be assessed for impairment based on their fair value. SFAS 125 modifies the accounting for interest-only strips or retained interests in securitizations, such as capitalized servicing fees receivable, that can be contractually prepaid or otherwise settled in such a way that the F-14 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) holder would not recover substantially all of its recorded investment. In this case, it requires that they be classified as available for sale or as trading securities. Interest-only strips and retained interests are to be recorded at market value. Under the provisions of SFAS 125, management has determined that mortgage backed securities retained by the Company as a result of securitization transactions will be classified as trading securities. All other retained securities will be classified as available for sale or trading as determined at the time of securitization. Changes in market value are included in operations, if classified as trading securities, or in shareholders' equity as unrealized gains or losses, net of the related tax effect, if classified as available for sale. SFAS 125 was effective for the Company on January 1, 1997. Management has determined that the implementation of SFAS 125 will not have a material impact on the Company's financial condition or results of operations. 4. ACQUISITIONS AVCO Leasing Services The Avco Acquisition was recorded using the purchase method of accounting. Under this method of accounting the purchase price was allocated to the respective assets acquired with a fair value of $94.8 million and no liabilities assumed at the date of the purchase transaction. The excess of the purchase price over the fair value of the net assets acquired has been recorded as goodwill of approximately $12.5 million. Coast Business Credit On September 30, 1995, the Company completed the acquisition of CBCC for a purchase price of $150 million. The acquisition was recorded using the purchase method of accounting. Under this method of accounting the purchase price was allocated to the respective assets acquired with a fair value of $139 million and liabilities assumed with a fair value of $5 million at the date of the purchase transaction. The excess of the purchase price over the fair value of the net assets acquired has been recorded as goodwill of approximately $16 million. The unaudited consolidated information below indicates on a proforma basis the Company's results of operations as if CBCC had been acquired by the Company as of January 1, 1995 and 1994.
YEAR ENDED DECEMBER 31, --------------- 1995 1994 ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenue............................................... $93,317 $83,321 Net income.................................................. 17,183 11,480 Fully diluted net income per share.......................... $ 0.49 $ 0.34
FMAC On June 30, 1995, the Company completed the acquisition of certain net assets of FMAC for a net purchase price of $7.6 million which included $3.8 million in contingent consideration for loans in the pipeline at the time of acquisition and additional fundings up to a maximum principal amount of such loans equal to $250,000,000. F-15 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The acquisition was recorded using the purchase method of accounting. Under this method of accounting the purchase price was allocated to the respective assets acquired with a fair value of $3.8 million at the date of the purchase transaction. The excess of the purchase price over the fair value of the net assets acquired has been recorded as goodwill of approximately $4 million. First Concord Acceptance Corp. On May 31, 1995, the Company completed the acquisition of net assets of FCAC for a purchase price of approximately $21 million. The acquisition was recorded using the purchase method of accounting. Under this method of accounting the purchase price was allocated to the respective assets acquired with a fair value of $41 million and liabilities assumed with a fair value of $20 million at the date of the purchase transaction. 5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The following information supplements the statement of cash flows:
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Cash paid during the period for: Interest....................................... $134,251 $ 93,223 $ 51,844 Income taxes................................... 24,134 8,283 4,016 Significant non-cash activities: Loans transferred from held for investment to held for sale................................. -- 505,037 -- Loans transferred to OREO...................... 14,203 12,302 3,431 Loans transferred from held for sale to held for investment................................ 197,141 83,398 787,902 Loans to facilitate the sale of OREO........... 1,871 1,315 2,357 Retained interest in loan and lease securitizations............................... 6,908 14,002 239 Unrealized gain on securities available for sale.......................................... 3,112 5,443 --
6. INVESTMENT IN FHLB STOCK As a member of the FHLB system, the Company's wholly owned subsidiary, SPTL, is required to maintain an investment in the capital stock of the FHLB in an amount at least equal to the greater of 1% of residential mortgage assets, or 5% of outstanding borrowings (advances), or 0.3% of total assets. FHLB stock and loans are pledged to secure FHLB advances. 7. SECURITIES AVAILABLE FOR SALE Securities available for sale consist of asset backed securities and equity securities of $50.0 million and $9.1 million, respectively, at December 31, 1996. Securities available for sale consist of equity securities of $6.0 million at December 31, 1995. There were unrealized gains of $5.4 million as of December 31, 1995. 8. TRADING SECURITIES Trading securities consist of mortgage backed securities of $25.2 million at December 31, 1996. There were no unrealized gains or losses as of December 31, 1996. There were no securities held for trading at December 31, 1995. F-16 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. LOANS HELD FOR SALE Loans held for sale consisted of the following at December 31, 1996 and 1995:
1996 1995 -------- ---------- (IN THOUSANDS) Loans secured by real estate: Single family 1-4..................................... $562,002 $1,083,038 Multi-family.......................................... 186,391 171,199 -------- ---------- 748,393 1,254,237 Leases.................................................. 8,547 17,787 Commercial loans........................................ 183,156 69,786 -------- ---------- $940,096 $1,341,810 ======== ==========
10. LOANS HELD FOR INVESTMENT, NET Loans held for investment consisted of the following at December 31, 1996 and 1995:
1996 1995 ---------- -------- (IN THOUSANDS) Loans secured by real estate: Single family 1-4.................................... $ 375,476 $228,721 Multi-family......................................... 2,527 7,028 Commercial........................................... 11,011 133,189 ---------- -------- 389,014 368,938 Leases................................................. 99,717 7,297 Installment loans...................................... 34,248 1,900 Franchise loans........................................ 115,910 46,766 Asset based loans...................................... 288,528 154,252 Commercial loans....................................... 173,932 110,104 ---------- -------- 1,101,349 689,257 Unearned income........................................ (6,336) (5,217) Deferred loan fees..................................... (6,415) (1,540) ---------- -------- 1,088,598 682,500 Allowance for loan and lease losses.................. (19,999) (13,729) ---------- -------- $1,068,599 $668,771 ========== ========
The Company's loans held for investment are primarily comprised of first and second lien mortgages secured by residential and income producing real property in California, leases secured by equipment, asset based loans to middle market companies mainly in California, and loans to experienced franchisees of nationally recognized restaurant concepts. As a result, the loan portfolio has a high concentration in the same geographic region. Although the Company has a diversified portfolio, a substantial portion of its debtor's ability to honor their contracts is dependent upon the economy of California. F-17 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Activity in the allowance for loan and lease losses was as follows:
YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Balance, beginning of year........................ $13,729 $ 7,054 $ 3,255 Provision for loan and lease losses............... 9,773 5,450 5,150 Business acquisitions and bulk loan purchases..... 4,500 4,320 -- Loans charged off................................. (8,326) (3,106) (1,436) Recoveries on loans previously charged off........ 323 11 85 ------- ------- ------- Net charge-offs................................... (8,003) (3,095) (1,351) ------- ------- ------- Balance, end of period............................ $19,999 $13,729 $ 7,054 ======= ======= =======
As of December 31, 1996 and 1995 and 1994, non-accrual loans totaled $50.1 million, $31.0 million, and $13.1 million, respectively. Interest income foregone on nonaccrual loans was $1.1 million and $492,000 for the years ended December 31, 1996 and 1995, respectively. Interest foregone on loans for the year ended December 31, 1994 was not material. At December 31, 1996 and 1995, impaired loans recognized in accordance with SFAS No. 114 and the related specific allowance for loan and lease losses were as follows:
1996 1995 ----------------------------- ----------------------------- SPECIFIC SPECIFIC ALLOWANCE ALLOWANCE RECORDED FOR CARRYING RECORDED FOR CARRYING INVESTMENT LOSSES VALUE INVESTMENT LOSSES VALUE ---------- --------- -------- ---------- --------- -------- (IN THOUSANDS) Nonaccrual loans $38,297 $3,671 $34,626 $30,988 $5,616 $25,372 Restructured loans 800 4 796 870 3 867 ------- ------ ------- ------- ------ ------- Total impaired loans $39,097 $3,675 $35,422 $31,858 $5,619 $26,239 ======= ====== ======= ======= ====== =======
Impaired loans averaged $33.3 million and $21.1 million during 1996 and 1995, respectively. During 1996, total interest income recognized on impaired loans was $2.0 million. There were no impaired loans without a related allowance for losses at December 31, 1996 and 1995. For 1995, total interest income recognized on impaired loans was not material. 11. RESTRUCTURING Restructuring charges of $3.8 million were recognized during the year ended December 31, 1996. The charge represents those costs incurred in connection with the Company's exit from the conforming mortgage banking business. During the first quarter of 1996, the Company committed itself to, and began the execution of, an exit plan that specifically identified the necessary actions to be taken to complete the exit from the origination, sale and servicing of conforming residential mortgage loans. During 1996, the Company sold the majority of its wholesale mortgage origination offices and disposed of fixed assets related to its former conforming residential mortgage lending business. The Company believes that significant changes to the exit plan are not likely, and that the exit plan should be completed in the second quarter of 1997. F-18 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Activity in the allowance for restructuring charges during 1996 was as follows:
ALLOWANCE CHARGES REMAINING PROVIDED INCURRED BALANCE --------- -------- --------- (IN THOUSANDS) Disposition of Wholesale Mortgage Origination Offices ..................................... $2,500 $2,354 $146 Disposal of Fixed Assets...................... 1,000 886 114 Other......................................... 300 -- 300 ------ ------ ---- Total....................................... $3,800 $3,240 $560 ====== ====== ====
12. CAPITALIZED EXCESS SERVICING FEES RECEIVABLE Changes in capitalized excess servicing fees receivable were as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- ------ (IN THOUSANDS) Beginning Balance............................... $ 33,181 $ 4,319 $ 529 Present value of excess servicing fees on loans sold........................................... 19,448 40,353 4,261 Amortization.................................... (24,812) (11,491) (471) Writedowns...................................... (4,675) -- -- -------- -------- ------ Ending balance.................................. $ 23,142 $ 33,181 $4,319 ======== ======== ======
Capitalized excess servicing fees receivable include an allowance for credit losses of $4.5 million and $6.7 million at December 31, 1996 and 1995, respectively. 13. PURCHASED AND ORIGINATED SERVICING RIGHTS Changes in purchased and originated servicing rights were as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- ------- ------- (IN THOUSANDS) Beginning Balance................................ $ 18,428 $16,746 $ 9,966 Additions........................................ 10,970 7,340 8,781 Increase as a result of the FMAC acquisition..... -- 3,805 -- Bulk purchase of servicing....................... -- 757 5,983 Sales of servicing rights........................ (13,390) (6,234) (4,808) Amortization--accelerated........................ -- (1,176) (313) Amortization--scheduled.......................... (1,121) (2,810) (2,863) -------- ------- ------- Ending balance................................... $ 14,887 $18,428 $16,746 ======== ======= =======
The servicing portfolio associated with purchased and originated servicing rights at December 31, 1996 and 1995 was $1.0 billion and $2.6 billion, respectively. F-19 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 14. PREMISES AND EQUIPMENT, NET Premises and equipment consisted of the following at December 31, 1996 and 1995:
1996 1995 ------- ------- (IN THOUSANDS) Premises and equipment..................................... $19,606 $17,295 Leasehold improvements..................................... 1,394 706 ------- ------- 21,000 18,001 Less accumulated depreciation and amortization............. (8,558) (6,632) ------- ------- $12,442 $11,369 ======= =======
15. DEPOSITS Deposits of $100,000 and over totaled approximately $220.8 million, $286.8 million, and $382.3 million at December 31, 1996, 1995, and 1994, respectively. Interest expense associated with certificates of deposit of $100,000 and over was approximately $13.6 million, $15.4 million, and $16.8 million for the years ended December 31, 1996, 1995, and 1994, respectively. 16. BORROWINGS FROM IMPERIAL BANK In November 1995, the Company renewed a $10 million line of credit with Imperial Bank. At December 31, 1996 and 1995, $0 million and $5 million, respectively, was outstanding, which accrues interest at the prime lending rate. This line expired and was not renewed during 1996. 17. BORROWINGS FROM FEDERAL HOME LOAN BANK SPTL is approved as a member of the Federal Home Loan Bank ("FHLB") to borrow up to a maximum of 35% of the assets of SPTL. These borrowings must be fully collateralized by qualifying mortgage loans and may be in the form of overnight funds or term borrowings at SPTL's option. At December 31, 1996, all of the outstanding borrowings from the Federal Home Loan Bank were scheduled to mature within one year. The FHLB advances are secured by the investment in stock of the FHLB and certain real estate loans with a carrying value of $228.5 million and $275.0 million at December 31, 1996 and 1995. At December 31, 1996 and 1995 FHLB borrowings are summarized as follows:
1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Balance at year end...................................... $140,500 $190,000 Maximum outstanding at any month end..................... 338,000 435,000 Average balance during the year.......................... 188,765 292,000 Weighted average rate during the year.................... 6.10% 6.26% Weighted average rate at year end........................ 6.30% 6.10%
18. OTHER BORROWINGS Other borrowings primarily consist of revolving warehouse lines of credit to fund the Company and its subsidiaries lending activities. At December 31, 1996, approximately $700 million of loans were pledged as collateral for other borrowings. These lines of credit are short term and management believes these lines will be renewed in the normal course of business. Certain covenants exist in regards to these lines of credit with which the Company was in compliance at December 31, 1996. F-20 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ICII and its subsidiaries have various revolving warehouse lines of credit available at December 31, 1996, as follows:
INTEREST RATE COMMITMENT OUTSTANDING -------- ------------ ----------- (DOLLARS IN THOUSANDS) PaineWebber (ICII)........................ 6.81% $ 200,000 $ 5,686 Banco Santander (FMAC).................... 7.63 50,000 16,229 First Boston (FMAC)....................... 7.31 200,000 48,773 Greenwich Capital Markets (FMAC).......... 7.36 unspecified 35,158 Lehman Brothers (SPFC).................... -- 200,000 -- Imperial Warehouse Lending Group (ICIFC).. 8.25 600,000 337,380 Core States (IBC)......................... 7.61 10,000 1,111 Conti (IBC)............................... 7.50 100,000 87,657 Morgan Stanley Mortgage Capital (SPFC).... 6.16 150,000 152,681 Imperial Warehouse Lending Group (ICII)... 8.00 20,000 5,077 Warehouse Lending Corporation of America (ICII)................................... 7.94 20,000 4,600 ------------ -------- 7.55 $ 1,550,000 $694,352 ============ ========
ICII and its subsidiaries had various revolving warehouse lines of credit available at December 31, 1995, as follows:
INTEREST RATE COMMITMENT OUTSTANDING -------- ---------- ----------- (DOLLARS IN THOUSANDS) DLJ (ICII).................................. 6.38% $ 400,000 $173,056 DLJ (SPFC).................................. 6.74 50,000 41,182 PaineWebber (ICII).......................... 6.40 200,000 30,402 Banco Santander (FMAC)...................... 7.94 25,000 22,668 Lehman Brothers (SPFC)...................... 5.48 200,000 54,949 Imperial Warehouse Lending Group (ICIFC).... 8.50 600,000 550,290 Warehouse Lending Corporation of America (ICII)..................................... 8.19 20,000 3,268 ---------- -------- 7.72 $1,495,000 $875,815 ========== ========
19. BONDS In December 1995, the Company, through a special purpose entity (SPE) issued pass through certificates (the Bonds) secured by $101 million of franchise mortgage loans to various investors. The debentures consist of three separate classes, Class A, Class B and Class C, with principal balances at December 31, 1995 of approximately $92.6 million, $4.2 million and $4.2 million, respectively. The Class C bonds are subordinate to Class B and both Class B and C are subordinate to Class A. The Bonds have a weighted average loan rate of 9.63%, a pass through rate of 8.59%, and stated maturity of 13 years. The premium associated with the Bonds of $11 million is being amortized as an adjustment to interest expense over the anticipated life of the Bonds. Due to the Company's retained interest in the SPE and the disproportionate payments on the pass through certificates, the Company accounted for this transaction as a financing. In March 1996, the Company sold its interest in the SPE and deconsolidated the SPE from the Company's consolidated balance sheet and income statement. As a result of the sale, the Company recognized a $3.6 million gain on sale of loans. F-21 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 20. SENIOR NOTES
DECEMBER 31, ---------------- 1996 1995 ------- ------- (IN THOUSANDS) Senior notes............................................... $90,000 $81,500 Unamortized discount....................................... (1,791) (1,028) ------- ------- Net balance, senior notes.................................. $88,209 $80,472 ======= =======
In January 1994, the Company issued $90.0 million of senior notes with a stated interest rate of 9 3/4% which mature on January 15, 2004 (the "9 3/4% Senior Notes"). In October 1994, the Company repurchased $8.5 million of the senior notes, recognizing a pre-tax gain of $1.5 million, and recording an extraordinary gain, net of taxes of $919,286. In March 1996, the Company sold the $8.5 million of the 9 3/4% Senior Notes repurchased in 1994. At December 31, 1996 and 1995, $90.0 million and $81.5 million of the Senior Notes were outstanding, respectively. The 9 3/4% Senior Notes may be redeemed after January 15, 1999 at the option of the Company until maturity at a declining premium, plus accrued interest. The 9 3/4% Senior Notes are unsecured and rank pari passu with all other senior unsecured indebtedness of the Company, but are effectively subordinated to the liabilities of Southern Pacific Thrift and Loan Association, the Company's wholly-owned subsidiary. The Trust Indenture (the Indenture) for the 9 3/4% Senior Notes includes provisions which limit the ability of the Company to incur additional indebtedness or issue certain stock of the Company, to make certain investments, engage in certain transactions with affiliates, create restrictions on the ability of subsidiaries to pay dividends or certain other distributions, create liens and encumbrances, or allow its subsidiaries to issue certain classes of stock. As of December 31, 1996, the Company was in compliance with the debt covenants related to the 9 3/4% Senior Notes. Total interest expense on the 9 3/4% Senior Notes for the years ended December 31, 1996 and 1995 was $8,602,344 and $8,380,115 respectively. During December 1996, the Company announced that it commenced a cash tender offer and consent solicitation for all $90 million principal amount of its 9 3/4% Senior Notes at $1,040 per note. Subsequent to December 31, 1996, the Company successfully completed a $200.0 million offering of 9 7/8% senior notes offering due 2007, (the "9 7/8% Senior Notes"). A portion of the proceeds from the offering were used to repurchase $69.8 million of the outstanding 9 3/4% Senior Notes. The remaining proceeds will be used to make capital contributions to subsidiaries, strategic acquisitions, investments, and for general corporate purposes. The effective interest rate on the tendered notes was approximately 10.8% after the amortization of original issue discount and deferred bond issue costs. The effective interest rate on the new notes is approximately 10.4% after the amortization of deferred bond issue costs. The Company engaged in the tender offer and new issuance in order to obtain a more favorable debt covenant package, and to raise new capital to support its growing businesses. F-22 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 21. CONVERTIBLE SUBORDINATED DEBENTURES Convertible subordinated debentures at December 31, 1996 consists of the following:
1996 -------------- (IN THOUSANDS) SPFC convertible subordinated debentures, interest at 6.75%, due semi-annually, principal due October 15, 2006........... $75,000
The convertible subordinated debentures are convertible into 3,151,125 shares of common stock of the Company's subsidiary, SPFC, at a conversion price of $23.80 per share, at any time prior to maturity. Interest on the convertible subordinated debentures is payable semi-annually. Debt issuance costs of $2.8 million associated with the convertible subordinated debentures are being amortized over ten years using the effective interest method. Total interest expense on the convertible subordinated debentures for the year ended December 31, 1996 was $887,093. 22. PREFERRED AND COMMON STOCK The Company has authorized 8,000,000 shares of Preferred Stock. The Board has the authority to issue the preferred stock in one or more series, and to fix the designations, rights, preferences, privileges, qualifications and restrictions, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the Common Stock. During 1996, the Company issued an additional 2.4 million shares to the public generating net proceeds of $59.2 million, which is net of expenses of $891,000. On October 22, 1996, the Company effected a 2-for-1 stock split to shareholders of record as of October 15, 1996. On February 26, 1996, the Company paid a stock dividend to shareholders of record as of February 12, 1996. One new share of Common Stock was issued for each, 10 shares currently held by shareholders. On October 24, 1995, the Company effected a 3-for-2 stock split to shareholders of record as of October 10, 1995. Per Share Information: The weighted average number of shares including common stock equivalents was 38,699,954 in 1996, 34,458,268 in 1995, and 33,581,134 in 1994 for primary income per share, and 38,974,834 in 1996, 35,121,662 in 1995, and 33,582,030 in 1994 for fully diluted income per share. F-23 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 23. INCOME TAXES The Company's income taxes for the years ended December 31, 1996, 1995 and 1994 were as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 1994 ------- ------- ------ (IN THOUSANDS) Current: Federal............................................ $31,138 $ 7,803 $1,483 State.............................................. 12,210 2,452 524 ------- ------- ------ Total current.................................... 43,348 10,255 2,007 ------- ------- ------ Deferred: Federal............................................ 16,009 1,846 2,079 State.............................................. 6,095 274 599 ------- ------- ------ Total deferred................................... 22,104 2,120 2,678 ------- ------- ------ Taxes credited (charged) to shareholders' equity..... 4,422 (2,231) -- ------- ------- ------ Taxes on income before extraordinary item............ 69,874 10,144 4,685 Current taxes--extraordinary item.................... -- -- 619 ------- ------- ------ Income taxes......................................... $69,874 $10,144 $5,304 ======= ======= ======
The Company's current income taxes payable totaled approximately $25.7 million and $5.5 million at December 31, 1996 and 1995, respectively. Deferred income taxes arise from differences in the timing of recognition of income and expense for tax and financial reporting purposes. The following table shows the primary components of the Company's net deferred tax liability at December 31, 1996 and 1995.
1996 1995 -------- -------- (IN THOUSANDS) Deferred tax receivables: Allowance for loan losses.............................. $ 4,365 $ 5,295 Unrealized gain on loans and securities................ 1,671 3,871 State taxes............................................ 5,677 -- Executive stock options................................ 548 738 Other.................................................. 1,309 299 -------- -------- Total................................................ 13,570 10,203 -------- -------- Valuation allowance.................................... -- -- -------- -------- Deferred tax receivable, net of valuation allowance.... 13,570 10,203 -------- -------- Deferred tax liabilities: Investment in majority owned subsidiaries.............. (12,934) -- Purchased and originated servicing rights.............. (5,222) (5,809) Gain on sale of servicing.............................. (8,934) (1,027) Excess servicing gains................................. (6,162) (5,069) Leases................................................. (3,930) (2,509) Deferred loan fees..................................... (510) (1,902) Depreciation........................................... (468) -- Debt Securities........................................ (3,473) -- Other.................................................. (1,522) (1,368) -------- -------- Total................................................ (43,155) (17,684) -------- -------- Net deferred tax liability............................... $(29,585) $ (7,481) ======== ========
F-24 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities and available tax carrybacks and future taxable income, in making this assessment. Based upon the schedule of reversals, future taxable income and available tax carrybacks, management believes it is more likely than not the Company will realize the benefits of the deferred tax assets. A reconciliation of the statutory Federal corporate income tax rate of 35% to the effective income tax rate is as follows:
YEAR ENDED DECEMBER 31, ---------------- 1996 1995 1994 ---- ---- ---- Statutory U.S. federal income tax rate..................... 35.0% 35.0% 35.0% Increase (reduction) in rate resulting from: State income taxes, net of Federal benefit............... 7.5 7.3 7.2 Other, net............................................... 1.8 (0.3) (0.7) ---- ---- ---- Effective income tax rate.................................. 44.3% 42.0% 41.5% ==== ==== ====
24. EMPLOYEE BENEFIT PLANS Profit Sharing and 401(k) Plan Under the Company's 401(k) plan, employees may elect to enroll on the first of any month, provided that they have been employed for at least six months. Employees may contribute up to 14% of their salaries. The Company will match 50% of the first 4% of employee contributions. The Company recorded 401(k) matching expense of $305,000, $208,991, and $218,984 for the years ended December 31, 1996, 1995 and 1994, respectively. An additional Company contribution may be made at the discretion of the Company. Should a discretionary contribution be made, the contribution would first be allocated to those employees deferring salaries in excess of 4%. The matching contribution would be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. Should discretionary contribution funds remain following the allocation outlined above, any remaining Company matching funds would be allocated as a 50% match of employee contributions, on the first 4% of the employee's deferrals. Discretionary contributions of $350,000, $200,000, and $200,000 were charged to operations in each of the years ending December 31, 1996 and 1995, and 1994. Company matching contributions are made as of December 31st each year. 1992 STOCK OPTION PLAN A total of 2,292,632 shares of the Company's Common Stock has been reserved for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own terms in 2002. A total of 1,550,673 options were outstanding at December 31, 1996. The 1992 Stock Option Plan provides for the grant of "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options ("NQSOs") to employees, officers, directors and consultants of the Company. Incentive stock options may be granted only to employees. The 1992 Stock Option Plan is administered by the Board of Directors or a F-25 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) committee appointed by the Board, which determines the terms of options granted, including the exercise price, the number of shares subject to the option, and the option's exercisability. The exercise price of all options granted under the 1992 Stock Option Plan must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the 1992 Stock Option Plan is 10 years. With respect to any participant who owns stock representing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price of any option must be at least equal to 110% of the fair market value on the date of grant. 1996 STOCK OPTION PLAN The Company has adopted the 1996 Stock Option, Deferred Stock and Restricted Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards consisting of deferred stock, restricted stock, stock appreciation rights and limited stock appreciation rights ("Awards"). The 1996 Stock Option Plan is administered by a committee of directors appointed by the Board of Directors (the "Committee"). ISOs may be granted to the officers and key employees of the Company or any of its subsidiaries. The exercise price for any option granted under the 1996 Stock Option Plan may not be less than 100% (110% in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the outstanding Common Stock) of the fair market value of the shares of Common Stock at the time the option is granted. The purpose of the 1996 Stock Option Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to those whose job performance affects the Company. The effective date of the 1996 Stock Option Plan was June 21, 1996. A total of 3,000,000 shares of the Company's Common Stock has been reserved for issuance under the 1996 Stock Option Plan and a total of 1,038,200 options were outstanding at December 31, 1996. If an option granted under the 1996 Stock Option Plan expires or terminates, or an Award is forfeited, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the 1996 Stock Option Plan. Unless previously terminated by the Board of Directors, no options or Awards may be granted under the 1996 Stock Option Plan after June 21, 2006. Options granted under the 1996 Stock Option Plan will become exercisable upon the terms of the grant made by the Committee. Awards will be subject to the terms and restrictions of the Award made by the Committee. The Committee has discretionary authority to select participants from among eligible persons and to determine at the time an option or Award is granted and in the case of options, whether it is intended to be an ISO or a NQSO. Under current law, ISOs may not be granted to any individual who is not also an officer or employee of the Company or any subsidiary. Each option must terminate no more than 10 years from the date it is granted (or five years in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the combined voting power of the Company's outstanding Common Stock). Options may be granted on terms providing for exercise in whole or in part at any time or times during their respective terms, or only in specified percentages at stated time periods or intervals during the term of the option, as determined by the Committee. The exercise price of any option granted under the 1996 Stock Option Plan is payable in full (i) in cash, (ii) by surrender of shares of the Company's Common Stock already owned by the option holder having a market F-26 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) value equal to the aggregate exercise price of all shares to be purchased including, in the case of the exercise of NQSOs, restricted stock subject to an Award under the 1996 Stock Option Plan, (iii) by cancellation of indebtedness owed by the Company to the optionholder, or (iv) by any combination of the foregoing. The Board of Directors may from time to time revise or amend the 1996 Stock Option Plan, and may suspend or discontinue it at any time. However, no such revision or amendment may impair the rights of any participant under any outstanding options or Award without such participant's consent or may, without shareholder approval, increase the number of shares subject to the 1996 Stock Option Plan or decrease the exercise price of a stock option to less than 100% of fair market value on the date of grant (with the exception of adjustments resulting from changes in capitalization), materially modify the class of participants eligible to receive options or Awards under the 1996 Stock Option Plan, materially increase the benefits accruing to participants under the 1996 Stock Option Plan or extend the maximum option term under the 1996 Stock Option Plan. A summary of changes in outstanding stock options follows:
DECEMBER 31, ------------------- 1996 1995 1994 ----- ----- ----- (IN THOUSANDS) Options outstanding, beginning of year.................. 1,637 1,758 1,233 Options granted......................................... 1,609 394 835 Options exercised....................................... (295) (323) (46) Options canceled........................................ (362) (192) (264) ----- ----- ----- Options outstanding, end of year........................ 2,589 1,637 1,758 ===== ===== =====
There were 2,013,250 options available for future grants at December 31, 1996. Information as to stock option activity and prices of shares is as follows:
WEIGHTED NUMBER OF PRICE RANGE AVERAGE SHARES PER SHARE OPTION PRICE --------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Shares under option at: December 31, 1996...................... 2,589 $2.09-$10.56 $8.58 December 31, 1995...................... 1,637 $2.09-$ 8.56 $2.94 December 31, 1994...................... 1,758 $2.09-$ 3.33 $2.45 Options exercised during the year: December 31, 1996...................... 295 $2.09-$ 6.10 $2.61 December 31, 1995...................... 323 $2.09-$ 3.33 $2.55 December 31, 1994...................... 46 $2.09 $2.09 Options exercisable at: December 31, 1996...................... 551 $2.09-$ 7.56 $2.47 December 31, 1995...................... 467 $2.09-$ 3.33 $2.24 December 31, 1994...................... 379 $2.09-$ 3.03 $2.24
The stock option information presented in the above tables reflects the 2- for-1 stock split and 1-for-10 stock dividend in 1996, 3-for-2 stock split paid in 1995, the 1-for-10 stock dividend paid in 1993, and the 1-for-19 stock dividend paid in 1992. F-27 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Effective January 1, 1996, The Company adopted the disclosure requirements of SFAS 123, and continued to measure its employee stock-based compensation arrangements under the provisions of APB 25. Accordingly, no compensation expense has been recognized for the stock option plan. Had compensation expense for the Company's stock option plan been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS 123, the Company's net income and income per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, --------------- 1996 1995 ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income: As reported.................................................. $75,984 $14,193 Pro forma.................................................... 74,733 14,089 Primary income per share: As reported.................................................. $ 1.96 $ 0.41 Pro forma.................................................... 1.93 0.41 Fully diluted income per share: As reported.................................................. $ 1.95 $ 0.40 Pro forma.................................................... 1.90 0.40
The weighted average fair value at date of grant of options granted during 1996 and 1995 was $6.22 and $3.09 per option, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
YEAR ENDED DECEMBER 31, ------------ 1996 1995 ----- ----- Expected life (years)............................................. 3.40 3.43 Interest rate..................................................... 5.48% 5.14% Volatility........................................................ 57.51 60.80 Dividend yield.................................................... 0.00% 0.00%
25. EXECUTIVE COMPENSATION Employment Agreements On July 1, 1994, the Company entered into three year employment contracts with three senior officers which provide for, in the aggregate, minimum annual compensation in the aggregate of $800,000, subject to adjustment for inflation, plus an annual bonus of up to 3.5% of the Company's pre tax profits in excess of $10 million. The total compensation of the three senior officers is limited in the aggregate to $2,350,000 annually. These amendments canceled all previous employment agreements. Under these employment agreements, the officers are entitled to receive bonuses approved by the Company's Board of Directors based on performance and the attainment of defined Company goals. Stock Options On January 1, 1992, options were granted to three senior officers of the Company to purchase a total of 2,292,628 shares, adjusted for stock dividends and splits, of the Company's Common Stock. The exercise price of these options is $0.89 per share of common stock for one-half of the options, with the other half exercisable at $1.40 per share. These options became exercisable in September 1995 (vesting was accelerated from January 1, 1997), they expire on December 1, 2001 and are not covered by the Company's stock option plan. F-28 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Compensation expense relating to these options has been recorded in the Company's consolidated financial statements over a four year period ending December 31, 1995 for an amount representing the difference between the exercise price of the options and the market price of the Company's stock at the grant date. The aggregate amount of compensation expense recognized on these stock options since their grant date is $2,178,000. The amount of compensation expense recorded for the years ended December 31, 1996, 1995, and 1994 related to the stock options was $0, $871,200, and $435,600, respectively. 26. INTEREST RATE SWAPS The Company may enter into interest rate cap, floor, and swap transactions to manage its exposure to fluctuations in interest rates and market movements in securities values. These instruments involve, to varying degrees, elements of credit and interest rate risk. The contract or notional amounts do not represent exposure to credit loss. Risk originates from the inability of counterparties to meet the terms of the contracts and from market movements in securities values and interest rates. The Company controls the credit risk of its interest rate cap, floor and swap agreements through credit approvals, limits and monitoring procedures. As a part of the SPTL securitization of $277.0 million of multi-family and commercial mortgage loans, the Company delivered subordinate bonds of approximately $22 million into a total rate of return swap with JP Morgan. The provisions for the swap entitle the Company to receive the total return on the subordinate bonds delivered in exchange for a floating payment of Libor plus a spread of 1.95%. The termination date of the swap, September 30, 1997, could be accelerated in the event the securities delivered into the swap decline in value more than $3.0 million over a three month period. In the event of the early termination of the swap, the Company would be required to pay a fee representing 1.95% of the calculated value of the underlying securities over the period from the accelerated termination date to September 30, 1997. The remaining deposit associated with the swap was $3.7 million at December 31, 1996. The swap is an off balance sheet instrument. 27. COMMITMENTS AND CONTINGENCIES Loan Servicing As of December 31, 1996 and 1995 the Company was servicing loans for others, directly and through sub-servicing arrangements, totaling approximately $2.1 billion and $4.6 billion, respectively. Related fiduciary funds held in trust for investors in non-interest bearing accounts totaled $1.3 million and $36.1 million at December 31, 1996 and 1995, respectively. These funds are segregated in special bank accounts and are held as deposits at SPTL. Sales of Loans and Servicing Rights In the ordinary course of business, the Company is exposed to liability under representations and warranties made to purchasers and insurers of mortgage loans and the purchasers of servicing rights. Under certain circumstances, the Company is required to repurchase mortgage loans if there has been a breach of representations or warranties. During the year ended December 31, 1996, the Company retained servicing rights on $35.1 million of mortgage loans sold through traditional secondary market channels and $1.3 billion on loans and leases sold through securitizations. Additionally, the Company released servicing rights to the purchasers on $627.0 million of mortgage loans sold. During the year ended December 31, 1995, the Company retained servicing rights on $794.9 million of mortgage loans sold, and released servicing rights to the purchasers on $1.1 billion of mortgage loans sold. During the year ended December 31, 1994, the Company retained servicing rights on $3.7 billion of mortgage loans sold and released servicing rights to the purchasers on $721.4 million. F-29 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Loan Commitments As of December 31, 1996 and 1995, the Company had unfunded open loan commitments (excluding ICIFC) amounting to $642.8 million and $93.7 million, respectively, to fund mortgage loan applications in process subject to credit approval. There is no exposure to credit loss in this type of commitment until the loans are funded. Interest rate risk is mitigated by the use of forward contracts to sell loans to investors. ICIFC establishes mortgage loan purchase commitments (master commitments) with sellers that, subject to certain conditions, entitle the seller to sell and obligate ICIFC to purchase a specified dollar amount of non-conforming mortgage loans over a period generally ranging from six months to one year. The terms of each master commitment specify whether a seller may sell loans to ICIFC on a mandatory, best efforts or optional basis, or a combination thereof. Master commitments generally do not obligate ICIFC to purchase loans at a specific price, but rather provide the seller with a future outlet for the sale of its originated loans based on ICIFC's quoted prices at the time of purchase. As of December 31, 1996 and December 31, 1995, ICIFC had outstanding short term master commitments with 68 and 18 sellers to purchase mortgage loans in the aggregate principal amount of $826.5 million and $241.0 million over periods ranging from six months to one year, of which $304.9 million and $35.7 million, respectively, had been purchased or committed to be purchased pursuant to rate locks. These rate-locks were made pursuant to master commitments, bulk rate-locks and other negotiated rate-locks. There is no exposure to credit loss in this type of commitment until the loans are funded, and interest rate risk associated with the short-term commitments is mitigated by the use of forward contracts to sell loans to investors. Forward Contracts The Company sold mortgage-backed securities through forward delivery contracts with major dealers in such securities, primarily through its former mortgage banking operations. At December 31, 1996 and 1995, the Company had $143.0 million and $279.2 million, respectively, in outstanding commitments to sell mortgage loans through mortgage-backed securities. Included in the outstanding commitments to sell mortgage loans through mortgage backed securities are commitments relating to ICIFC of $141.0 million and $86.7 million for December 31, 1996 and 1995, respectively. These commitments allow the Company to enter into mandatory commitments when the Company notifies the investor of its intent to exercise a portion of the forward delivery contracts. The Company was obligated under mandatory commitments to deliver loans to such investors at December 31, 1996 and 1995 in the amounts of $0 and $97.0 million, respectively. The credit risk of forward contracts relates to the counterparties' ability to perform under the contract. The Company evaluates counterparties based on their ability to perform prior to entering into any agreements. The Company regularly securitizes and sells fixed and variable-rate mortgage loans. To offset the effects of interest rate fluctuations on the value of its fixed-rate loans held for sale, the Company in certain cases will hedge its interest rate risk related to loans held for sale by selling U.S. Treasury securities short or in the forward market. As of December 31, 1996, the Company had open positions of $183.7 million related to the sales of United States Treasury securities in the forward market. At December 31, 1996, the Company's unrealized loss on open positions was $1.7 million. F-30 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Options The Company may purchase put options or write covered call options to hedge against adverse movements in the value of the loans held for sale portfolio. The Company will realize a gain or loss upon the expiration or closing of the option transaction. When an option is exercised, the proceeds on sales for a written call option, the purchase cost for a written put option, or the cost of the security for a purchased put or call option is adjusted by the amount of premium received or paid. The risk in writing a call option is that the Company gives up the opportunity for profit if the market price of the security increases and the option is exercised. The risk in buying an option is that the Company pays a premium whether or not the option is exercised. The Company had $70.0 million and $20.0 million notional amount of written call option contracts outstanding at December 31, 1996 and 1995, respectively. The Company received $366,000 and $82,600 in premiums related to the options outstanding at December 31, 1996 and 1995, respectively. There were no option contracts exercised during the year. Lease Commitments Minimum rental commitments under all noncancelable operating leases at December 31, 1996 were as follows:
(IN THOUSANDS) 1997............................................................. $ 3,868 1998............................................................. 3,109 1999............................................................. 2,186 2000............................................................. 1,736 2001............................................................. 1,515 Thereafter....................................................... 443 ------- Total.......................................................... $12,857 =======
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $4.2 million, $3.6 million, and $3.1 million, respectively. Legal Proceedings The predecessor entity to FMAC, and an officer of such entity and of FMAC, among others, are named as defendants in De Wald et al. vs. Knyal et al. filed on November 15, 1996 in the Los Angeles Superior Court. The complaint seeks an accounting, monetary and punitive damages for alleged breach of contract, breach of fiduciary duty, breach of implied covenant of good faith and fair dealing and fraud arising from an alleged business relationship. The Company has not been named as a defendant in this lawsuit. On September 6, 1996, a former employee filed suit against the Company in Sanders vs. ICII, filed in the U.S. District Court for the Middle District of Florida, alleging sexual harassment and sexual discrimination. The complaint seeks compensatory damages, non-economic damages and punitive damages as a result of the alleged misconduct. Discovery has only recently commenced, but the Company believes the claims to be invalid. The Company is a defendant in Fortune Mortgage Corporation et al. vs. ICII et al., filed in Orange County Superior Court on March 5, 1997. The complaint alleges breach of contract, breach of implied covenant of good F-31 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) faith and fair dealing, negligent misrepresentation, fraud, conspiracy to commit fraud, aiding and abetting fraud, contractual indemnity and reimbursement, money had and received, and unjust enrichment arising from the Company's sale of a group of loan production offices to plaintiffs. The plaintiffs seek rescission, restitution and general, specific and/or consequential damages, and also exemplary and punitive damages as relate to the claims regarding fraud. In Agoura Willow Creek, Ltd. vs. SPTL, filed on February 27, 1997, the plaintiff seeks damages from SPTL for alleged breach of written contract and breach of fiduciary duty arsing out of a loan commitment agreement. All of the above referenced actions are being actively defended. The Company is involved in additional litigation arising in the normal course of business. Management believes based in part upon the advice of legal counsel, none of these proceedings will have a material effect on the Company's financial condition or results of operations. 28. FAIR VALUE OF FINANCIAL INSTRUMENTS FASB Statement 107, "Disclosures about Fair Values of Financial Instruments," (SFAS 107) requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Such instruments include securities, loans receivable, time deposits and various off-balance sheet items. Because no market exists for a portion of the Company's loans held for investment and securitization related assets, fair value estimates are based on judgments regarding credit risk, investor expectation of future economic conditions, normal cost of administration and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates presented do not include the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and interest bearing deposits: The carrying values reported in the consolidated balance sheet approximate fair values due to the short-term nature of the assets. Investment Securities: The carrying value reported on the consolidated balance sheet is the fair value, based on quoted market prices. Investment in Federal Home Loan Bank stock: The carrying value reported in the consolidated balance sheet approximates fair value. Capitalized excess servicing fees receivable: The carrying value reported in the consolidated balance sheet approximates fair value. The fair value was estimated by discounting future cash flows using rates that an unaffiliated third-party purchaser would require on instruments with similar terms and remaining maturities. Purchased and originated servicing rights: The carrying value reported in the consolidated balance sheet approximates fair value. F-32 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Retained interest in loan and lease securitizations: The carrying value reported in the consolidated balance sheet approximates fair value. The fair value was estimated by discounting future cash flows using rates that an unaffiliated third-party purchaser would require on instruments with similar terms and remaining maturities. Interest-only and residual certificates: Fair value is determined using estimated discounted future cash flows taking into consideration anticipated prepayment rates and loss experience. Loans held for sale: Fair value of the Company's portfolio of loans held for sale is based on forward delivery contract prices or quoted market prices. Loans held for investment: The fair value of the loan portfolio is generally estimated by discounting expected future cash flows at an estimated market rate of interest. A market rate of interest is estimated based on the AAA Corporate Bond Rate, adjusted for credit risk and the Company's cost to administer such loans. Expected future cash flows are estimated using maturity dates for performing loans, with cash flows on non-performing loans estimated on an individual basis. For non-performing and potential problem loans secured by real property, estimated fair value has been determined on an individual basis, considering the value of the collateral as determined by a current third party appraisal and estimated foreclosure, holding and selling costs. For consumer loans, market rates of interest are based on current market rates charged for these loans. Deposits: Fair values disclosed are estimated by discounting the expected cash flows at current market rates over expected maturities. Borrowings from Imperial Bank: The carrying value reported in the consolidated balance sheet approximates fair value, due to the short-term nature of the borrowing. Borrowings from Federal Home Loan Bank: The carrying value reported in the consolidated balance sheet approximates fair value, due to the relatively short term maturities, and the variable interest rates on the borrowings. Other borrowings: The carrying value reported in the consolidated balance sheet approximates fair value, due to the variable interest rates on the borrowings. Bonds: The carrying value reported in the consolidated balance sheet approximates fair value. Senior Notes: Fair values of the Company's Senior Notes are based on quoted market prices of the notes. Convertible subordinated debentures: Fair values of SPFC's convertible subordinated debentures are based on quoted market prices of the notes. Off-balance sheet instruments: Fair values of the Company's mandatory forward commitments and mortgage loan applications in process are based on quoted market prices of the related loans. The fair value of the options approximate the unamortized premium. Fair values of loan commitments to extend credit are based on fees currently charged to enter into similar agreements. Fair values of the Company's interest rate swaps are based on quoted market prices. F-33 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The estimated fair values of the Company's financial instruments are as follows:
1996 1995 ---------------------- --------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) ASSETS: Cash............................ $ 74,247 $ 74,247 $ 39,166 $ 39,166 Interest bearing deposits....... 3,369 3,369 267,776 267,776 Investment in Federal Home Loan Bank stock..................... 17,152 17,152 22,750 22,750 Investment securities........... 91,204 91,204 5,963 5,963 Loans held for sale............. 940,096 954,299 1,341,810 1,345,509 Loans held for investment, net.. 1,068,599 1,081,053 668,771 672,025 Purchased and originated servicing rights............... 14,887 14,887 18,428 18,428 Capitalized excess servicing fees receivable................ 23,142 23,142 33,181 33,181 Retained interest in loan and lease securitizations.......... 42,640 42,640 14,251 14,251 Interest only and residual certificates................... 87,017 87,017 10,840 10,840 LIABILITIES: Deposits........................ $1,069,184 $1,069,624 $1,092,989 $1,095,287 Borrowings from Imperial Bank... -- -- 5,000 5,000 Borrowings from Federal Home Loan Bank...................... 140,500 140,500 190,000 190,000 Other borrowings................ 694,352 694,352 875,815 875,815 Bonds........................... -- -- 111,995 111,995 Senior notes.................... 88,209 93,150 80,472 76,610 Convertible subordinated debentures..................... 75,000 75,000 -- -- OFF BALANCE SHEET ITEMS: Mortgage loan applications in process........................ $ -- $ -- $ -- $ 1,708 Mandatory forward commitments... -- -- -- (930) Options......................... 366 366 83 83 Loan commitments................ -- 866 -- 3,641 Interest rate swap.............. -- 1,166 -- -- Forward treasury contracts...... (1,700) (1,700) -- --
F-34 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 29. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
THREE MONTHS ENDED ------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Year ended December 31, 1996 Gain on sale of loans.............. $21,711 $19,166 $28,640 $18,639 Net interest income................ 12,737 13,405 22,163 24,130 Gain (loss) on sale of servicing... 8,065 (257) -- (217) Other revenues..................... 3,212 65,843 2,987 26,482 Provision for loan losses.......... 1,500 2,025 2,617 3,631 Other expenses..................... 27,168 20,652 24,924 26,305 Net income......................... 8,616 43,041 9,433 14,894 Income per share: Primary.......................... $ 0.24 $ 1.11 $ 0.23 $ 0.38 Fully diluted.................... $ 0.24 $ 1.11 $ 0.23 $ 0.37 Year ended December 31, 1995 Gain on sale of loans.............. $ 6,229 $ 8,794 $14,929 $ 9,605 Net interest income................ 4,834 6,000 7,947 14,973 Gain on sale of servicing.......... 2,426 496 -- 656 Other revenues..................... 3,081 2,350 2,283 6,156 Provision for loan losses.......... 900 1,700 1,350 1,500 Other expenses..................... 12,283 12,808 16,384 19,705 Net income......................... 1,958 1,832 4,311 6,092 Income per share: Primary.......................... $ 0.06 $ 0.06 $ 0.12 $ 0.17 Fully diluted.................... $ 0.06 $ 0.05 $ 0.12 $ 0.17
30. SELECTED FINANCIAL INFORMATION OF SUBSIDIARIES The following represents summarized financial information with respect to the operations of SPTL, a significant wholly-owned subsidiary of ICII.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- (IN THOUSANDS) Total assets................................... $1,384,008 $1,432,554 $1,367,130 Deposits....................................... 1,072,266 1,093,250 946,860 Borrowings from Federal Home Loan Bank......... 140,500 190,000 295,000 Equity......................................... 144,798 126,599 108,845 Interest income................................ 131,184 103,112 81,751 Interest expense............................... 73,141 70,819 52,961 Operating income............................... 15,149 17,790 10,215 Operating expense.............................. 21,846 13,942 15,597 Provision for loan losses...................... 8,938 5,450 5,150 Income before taxes............................ 42,408 30,691 18,259 Net income..................................... 24,399 17,753 10,534
F-35 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following represents summarized consolidating financial information as of and for the year ended December 31, 1996 and 1995 with respect to the operations of ICII and its wholly owned and majority owned subsidiaries. On January 17, 1997, the Company sold $200 million of 9 7/8% Senior Notes. The 9 7/8% Senior Notes are guaranteed by two of the Company's wholly-owned subsidiaries IBC and ICAI (the "Other Guarantor Subsidiaries"), and the Company's 66 2/3% owned subsidiary, FMAC. CONSOLIDATING BALANCE SHEET YEAR ENDED DECEMBER 31, 1996
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) ASSETS ------ Cash.................... $ 5,213 $ -- $ 7,973 $ 64,926 $ (3,865) $ 74,247 Interest bearing deposits............... -- 2,594 163 -- 612 3,369 Investments in Federal Home Loan Bank stock... -- -- -- 17,152 -- 17,152 Investment and trading securities............. 8,802 39,349 887 35,824 (566) 84,296 Loans held for sale..... 4,839 98,915 8,547 853,023 (25,228) 940,096 Loans held for investment, net........ 34,505 -- 86,214 948,567 (687) 1,068,599 Purchased and originated servicing rights....... -- -- 637 14,250 -- 14,887 Capitalized excess servicing fees receivable............. -- -- -- 23,142 -- 23,142 Retained interest in loan and lease securitizations........ -- 6,908 19,646 22,994 -- 49,548 Interest-only and residual certificates.. -- -- -- 87,017 -- 87,017 Accrued interest on loans.................. 1,425 560 -- 11,862 -- 13,847 Premises and equipment, net.................... 4,922 1,162 404 5,954 -- 12,442 Other real estate owned, net.................... 3,508 -- -- 8,706 -- 12,214 Investment in subsidiaries........... 269,651 -- -- -- (269,651) -- Goodwill................ -- 4,332 14,115 20,044 -- 38,491 Other assets............ 96,746 (11,372) (15,385) (36,855) (1,842) 31,292 -------- -------- -------- ---------- --------- ---------- Total assets........... $429,611 $142,448 $123,201 $2,076,606 $(301,227) $2,470,639 ======== ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Deposits................ $ -- $ -- $ -- $1,072,266 $ (3,082) $1,069,184 Borrowings from Federal Home Loan Bank......... -- -- -- 140,500 -- 140,500 Other borrowings........ 15,363 125,240 88,768 480,103 (15,122) 694,352 Senior notes............ 88,209 -- -- -- -- 88,209 Convertible subordinated debentures............. -- -- -- 75,000 -- 75,000 Minority interest in consolidated subsidiaries........... 45,149 -- -- -- 9,787 54,936 Other liabilities....... 41,382 2,751 9,222 68,854 (13,259) 108,950 -------- -------- -------- ---------- --------- ---------- Total liabilities....... 190,103 127,991 97,990 1,836,723 (21,676) 2,231,131 -------- -------- -------- ---------- --------- ---------- Shareholders' equity: Preferred stock......... -- -- -- 9,143 (9,143) -- Common stock............ 145,521 5,792 21,501 134,590 (161,883) 145,521 Retained earnings....... 88,977 8,665 3,525 96,150 (108,340) 88,977 Unrealized gain on securities available for sale............... 5,010 -- 185 -- (185) 5,010 -------- -------- -------- ---------- --------- ---------- Total shareholders' equity................. 239,508 14,457 25,211 239,883 (279,551) 239,508 -------- -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity... $429,611 $142,448 $123,201 $2,076,606 $(301,227) $2,470,639 ======== ======== ======== ========== ========= ==========
F-36 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONSOLIDATING INCOME STATEMENT YEAR ENDED DECEMBER 31, 1996
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------- ------------ ------------ ------------ ------------ (IN THOUSANDS) REVENUE: Gain on sale of loans... $ (937) $18,671 $ 2,617 $ 67,419 $ 386 $ 88,156 ------- ------- ------- -------- -------- -------- Interest income......... 14,877 16,130 3,811 177,833 (5,180) 207,471 Interest expense........ 16,696 14,489 1,901 112,692 (10,742) 135,036 ------- ------- ------- -------- -------- -------- Net interest income..... (1,819) 1,641 1,910 65,141 5,562 72,435 Provision for loan losses................. -- -- -- 9,625 148 9,773 ------- ------- ------- -------- -------- -------- Net interest income after provision for loan loss............ (1,819) 1,641 1,910 55,516 5,414 62,662 ------- ------- ------- -------- -------- -------- Loan servicing income... (3,706) 1,191 3,095 10,253 (9,153) 1,680 Gain (loss) on sale of servicing rights....... 6,249 -- -- -- 1,342 7,591 Gain on sale of SPFC stock.................. 82,690 -- -- -- -- 82,690 Dividends received from subsidiaries........... 6,200 -- -- -- (6,200) -- Other income............ 741 63 3,214 6,099 4,037 14,154 ------- ------- ------- -------- -------- -------- Total other income.... 92,174 1,254 6,309 16,352 (9,974) 106,115 ------- ------- ------- -------- -------- -------- Total revenues........ 89,418 21,566 10,836 139,287 (4,174) 256,933 ------- ------- ------- -------- -------- -------- EXPENSES: Personnel expense....... 8,757 8,270 2,997 28,567 (236) 48,355 Amortization of PMSRs and OMSRs.............. 402 -- 106 613 -- 1,121 Occupancy expense....... 1,994 310 229 2,042 78 4,653 Data processing expense. 1,094 49 62 958 -- 2,163 Net expenses of other real estate owned...... 4,969 -- -- 765 1,280 7,014 General, administrative and other expense...... 13,652 3,613 3,583 14,264 631 35,743 ------- ------- ------- -------- -------- -------- Total expenses........ 30,868 12,242 6,977 47,209 1,753 99,049 ------- ------- ------- -------- -------- -------- Income before income taxes, minority interest, deferred inter-company gains and extraordinary item..... 58,550 9,324 3,859 92,078 (5,927) 157,884 Income taxes............ 28,830 -- 1,606 39,135 303 69,874 ------- ------- ------- -------- -------- -------- Income before minority interest, deferred inter-company expense and extraordinary item. 29,720 9,324 2,253 52,943 (6,230) 88,010 Minority interest in of consolidated subsidiaries........... 12,026 -- -- -- -- 12,026 ------- ------- ------- -------- -------- -------- Income before deferred inter-company expense.. 17,694 9,324 2,253 52,943 (6,230) 75,984 Deferred inter-company expense, net of income taxes.................. (1,383) -- -- -- 1,383 -- Income before equity in undistributed income of subsidiaries........... 19,077 9,324 2,253 52,943 (7,613) 75,984 Equity in undistributed income of subsidiaries. 56,907 -- -- -- (56,907) -- ------- ------- ------- -------- -------- -------- Net income.............. $75,984 $ 9,324 $ 2,253 $ 52,943 $(64,520) $ 75,984 ======= ======= ======= ======== ======== ========
F-37 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONSOLIDATING BALANCE SHEET YEAR ENDED DECEMBER 31, 1995
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) ASSETS ------ Cash.................... $ 8,593 $ 526 $(1,937) $ 32,981 $ (997) $ 39,166 Interest bearing deposits............... -- -- -- 267,776 -- 267,776 Investments in Federal Home Loan Bank stock... -- -- -- 22,750 -- 22,750 Securities available for sale, at market........ 5,963 -- -- -- -- 5,963 Loans held for sale..... 180,232 181,254 -- 1,129,576 (149,252) 1,341,810 Loans held for investment, net........ 29,195 -- -- 541,390 98,186 668,771 Purchased and originated servicing rights....... 13,718 -- 743 3,967 -- 18,428 Capitalized excess servicing fees receivable............. 7,259 -- -- 26,129 (207) 33,181 Retained interest in loan and lease securitizations........ 1,420 -- 220 10,377 2,234 14,251 Interest-only and residual certificates.. -- -- -- 22,469 (11,629) 10,840 Accrued interest on loans.................. 449 1,108 19 10,067 (1,479) 10,164 Premises and equipment, net.................... 8,574 235 16 2,544 -- 11,369 Other real estate owned, net.................... 2,419 -- -- 4,760 -- 7,179 Investment in subsidiaries........... 135,316 -- -- -- (135,316) -- Goodwill................ -- 4,226 -- 16,024 96 20,346 Other assets............ 19,991 1,699 4,756 11,591 604 38,641 -------- -------- ------- ---------- --------- ---------- Total assets........... $413,129 $189,048 $ 3,817 $2,102,401 $(197,760) $2,510,635 ======== ======== ======= ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Deposits................ $ -- $ -- $ (450) $1,093,250 $ 189 $1,092,989 Borrowings from Imperial Bank................... 5,000 -- -- -- -- 5,000 Borrowings from Federal Home Loan Bank......... -- -- -- 190,000 -- 190,000 Other borrowings........ 206,726 69,637 -- 655,504 (56,052) 875,815 Bonds................... -- 111,995 -- -- -- 111,995 Senior notes............ 80,472 -- -- -- -- 80,472 Minority interest in consolidated subsidiaries........... 1,452 -- -- -- -- 1,452 Other liabilities....... 25,377 3,643 1,996 23,285 4,509 58,810 -------- -------- ------- ---------- --------- ---------- Total liabilities.... 319,027 185,275 1,546 1,962,039 (51,354) 2,416,533 -------- -------- ------- ---------- --------- ---------- Shareholders' equity: Preferred stock......... -- -- -- 1,015 (1,015) -- Common stock............ 51,981 4,432 1,000 81,251 (86,683) 51,981 Retained earnings (accumulated deficit).. 38,910 (659) 1,271 58,096 (58,708) 38,910 Unrealized gain on securities available for sale............... 3,211 -- -- -- -- 3,211 -------- -------- ------- ---------- --------- ---------- Total shareholders' equity................. 94,102 3,773 2,271 140,362 (146,406) 94,102 -------- -------- ------- ---------- --------- ---------- Total liabilities and shareholders' equity... $413,129 $189,048 $ 3,817 $2,102,401 $(197,760) $2,510,635 ======== ======== ======= ========== ========= ==========
F-38 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONSOLIDATING INCOME STATEMENT YEAR ENDED DECEMBER 31, 1995
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------ ------------ ------------ ------------ ------------ (IN THOUSANDS) REVENUE Gain on sale of loans... $ 12,999 $ -- $1,803 $ 36,051 $(11,296) $ 39,557 -------- ------ ------ -------- -------- -------- Interest income......... 15,677 1,929 76 108,666 3,134 129,482 Interest expense........ 20,900 1,690 17 76,018 (2,897) 95,728 -------- ------ ------ -------- -------- -------- Net interest income..... (5,223) 239 59 32,648 6,031 33,754 Provision for loan losses................. -- -- -- 5,450 -- 5,450 -------- ------ ------ -------- -------- -------- Net interest income after provision for loan loss............ (5,223) 239 59 27,198 6,031 28,304 -------- ------ ------ -------- -------- -------- Loan servicing income... 14,007 318 27 6,352 (7,986) 12,718 Gain on sale of servicing rights....... 4,889 31 -- 370 (1,712) 3,578 Other income............ (885) -- 2,465 2,676 (3,104) 1,152 -------- ------ ------ -------- -------- -------- Total other income.... 18,011 349 2,492 9,398 (12,802) 17,448 -------- ------ ------ -------- -------- -------- Total revenues........ 25,787 588 4,354 72,647 (18,067) 85,309 -------- ------ ------ -------- -------- -------- EXPENSES: Personnel expense....... 20,281 356 1,606 12,433 (623) 34,053 Amortization of PMSRs and OMSRs.............. 3,986 -- -- 2,892 (2,892) 3,986 Occupancy expense....... 2,874 94 54 971 (89) 3,904 Data processing expense. 1,191 -- 1 358 (89) 1,461 Net expense of other real estate owned...... 191 -- -- 1,706 16 1,913 General, administrative and other expense...... 9,938 797 493 8,480 (3,845) 15,863 -------- ------ ------ -------- -------- -------- Total expenses........ 38,461 1,247 2,154 26,840 (7,522) 61,180 -------- ------ ------ -------- -------- -------- Income before income taxes, minority interest, deferred inter-company gains and extraordinary item..... (12,674) (659) 2,200 45,807 (10,545) 24,129 Income taxes............ (5,443) -- 929 19,212 (4,554) 10,144 -------- ------ ------ -------- -------- -------- (Loss) income before minority interest, deferred inter-company gains and extraordinary item................... (7,231) (659) 1,271 26,595 (5,991) 13,985 Minority interest in loss of consolidated subsidiaries........... (208) -- -- -- -- (208) -------- ------ ------ -------- -------- -------- (Loss) income before deferred inter-company gains.................. (7,023) (659) 1,271 26,595 (5,991) 14,193 Deferred inter-company gains, net of income taxes.................. 1,710 -- -- -- (1,710) -- (Loss) income before equity in undistributed income of subsidiaries. (8,733) (659) 1,271 26,595 (4,281) 14,193 Equity in undistributed income of subsidiaries. 22,926 -- -- -- (22,926) -- -------- ------ ------ -------- -------- -------- Net income (loss)....... $ 14,193 $ (659) $1,271 $ 26,595 $(27,207) $ 14,193 ======== ====== ====== ======== ======== ========
F-39 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 31. SPTL REGULATORY MATTERS In August 1989, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, ("FIRREA") was enacted. This legislation was adopted in order to reform the regulation and supervision of financial institutions. Additionally legislation was adopted in 1991 with the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA provided for increased funding for Federal Deposit Insurance Commission ("FDIC") deposit insurance and for expanded regulation of financial institutions. Specifically, FDICIA requires the federal regulations to take prompt corrective action with respect to depository institutions which do not meet the minimum capital requirements. FDICIA established five capital ratio categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating and may be reclassified to a lower category by action based on other supervisory criteria. For an institution to be well capitalized it must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, and a leverage ratio of at least 5% and not be subject to any specific capital order or directive. At December 31, 1996, SPTL was categorized as well capitalized. Restrictions on Availability of Funds from SPTL Under the California industrial loan law, a thrift and loan may declare dividends on its capital stock only if it has at least $750,000 of unimpaired capital stock plus additional capital stock of $50,000 for each branch office maintained. In addition, no distribution of dividends is permitted unless: (i) such distribution would not exceed a thrift and loan's retained earnings, (ii) any payment would not result in a violation of the approved minimum capital to thrift and loan certificate of deposit ratio and (iii) after giving effect to the distribution, either (y) the sum of a thrift and loan's assets (net of goodwill, capitalized research and development expenses and deferred charges) would be not less than 125% of its liabilities (net of deferred taxes, deferred income and other deferred credits), or (z) current assets would be not less than current liabilities (except that if a thrift and loan's average earnings before taxes for the last two fiscal years had been less than average interest expense, current assets must be not less than 125% of current liabilities). Subject to the above limitations, and according to SPTL's by- laws, at December 31, 1996, all of SPTL's capital and surplus in excess of $80.5 million is available for the payment of dividends. Additionally, SPTL generally may not make any loan to, or hold an obligation of, any of its directors or officers or any director or officer of its holding company or affiliates, except in specified cases and subject to regulation by the California Commissioner of Corporations. In addition, SPTL may not make any loan to, or hold an obligation of, any of its shareholders or any shareholder of its holding company or affiliates, except that this prohibition does not apply to persons who own less than 10% of the stock of a holding company or an affiliate that is listed on a national securities exchange. Recent Development The California Department of Corporations and the Federal Deposit Insurance Commission ("FDIC") recently completed a joint examination of SPTL. As a result of such examination, SPTL entered into a joint memorandum of understanding with the FDIC and the California Department of Corporations. The memorandum of understanding requires certain measures to be taken in the areas of: (i) hiring and retention of management, (ii) adoption of systems to monitor and control risk, (iii) correction of certain violations of law, (iv) credit review and (v) enhancement of other operational policies. SPTL does not believe that the memorandum of understanding will have a material adverse effect on the Company. F-40 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In the event that SPTL fails to comply with the memorandum of understanding, SPTL and its affiliates, officers and directors could be subject to various enforcement actions, including cease and desist orders, criminal and civil penalties, removal from office, termination of deposit insurance or the revocation of SPTL's charter. Any such enforcement action could have a material adverse effect on the Company. Management believes SPTL has complied fully with the terms of the memorandum of understanding at December 31, 1996. SPTL is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary-- actions by regulators that, if undertaken, could have a direct material effect on SPTL's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, SPTL must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. SPTL's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require SPTL to maintain minimum amounts and ratios, set forth in the table below, of total and Tier I capital to risk-weighted assets and Tier I capital to average assets. Management believes, as of December 31, 1996, that SPTL meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the FDIC categorized SPTL as well capitalized under the regulatory framework for prompt and corrective action. To be categorized as well capitalized SPTL must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The following table presents SPTL's actual capital ratios and the corresponding minimum and well capitalized capital ratio requirements under the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier 1 Capital regulations, and (iii) the FDIC Leverage ratio regulation as of December 31, 1996.
WELL MINIMUM CAPITALIZED ACTUAL REQUIREMENT REQUIREMENT -------------- -------------- -------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- -------- ----- (DOLLARS IN THOUSANDS) California Leverage Limitation... $144,798 13.50% $ 53,613 5.00% $ -- -- Risk-based Capital............... 145,018 10.87% 106,715 8.00% 133,393 10.00% Risk-based Tier 1 Capital........ 129,497 9.71% 53,357 4.00% 80,036 6.00% FDIC Leverage Ratio.............. 129,497 9.35% 55,397 4.00% 69,247 5.00%
F-41 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 32. IMPERIAL CREDIT INDUSTRIES, INC. (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS
DECEMBER 31, ----------------- 1996 1995 -------- -------- (IN THOUSANDS) ASSETS ------ Cash......................................................... $ 5,213 $ 8,593 Securities available for sale................................ 8,802 5,963 Loans held for sale.......................................... 4,839 180,232 Loans held for investment, net............................... 34,505 29,195 Premises and equipment, net.................................. 4,922 8,574 Other real estate owned, net................................. 3,508 2,419 Capitalized excess servicing fees receivable................. -- 7,259 Retained interest in loan and lease securitizations.......... -- 1,420 Investment in subsidiaries................................... 269,651 135,316 Purchased and originated servicing rights.................... -- 13,718 Accrued interest on loans.................................... 1,425 449 Other assets................................................. 96,746 19,991 -------- -------- Total assets............................................. $429,611 $413,129 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Borrowings from Imperial Bank................................ $ -- $ 5,000 Other borrowings............................................. 15,363 206,726 Senior notes................................................. 88,209 80,472 Minority interest in consolidated subsidiaries............... 45,149 1,452 Accrued interest payable..................................... 4,022 3,642 Income taxes payable......................................... 28,301 7,755 Other liabilities............................................ 9,059 13,980 -------- -------- Total liabilities............................................ 190,103 319,027 -------- -------- Shareholders' equity: Preferred stock, 8,000,000 shares authorized; none issued or outstanding............................................ -- -- Common stock, no par value, authorized 40,000,000 shares; 38,291,112 and 14,578,481 shares issued and outstanding at December 31, 1996 and 1995, respectively.................. 145,521 51,981 Retained earnings.......................................... 88,977 38,910 Unrealized gain on securities available for sale, net...... 5,010 3,211 -------- -------- Total shareholders' equity............................... 239,508 94,102 -------- -------- Total liabilities and shareholders' equity............... $429,611 $413,129 ======== ========
F-42 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONDENSED STATEMENTS OF INCOME
DECEMBER 31, ------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Revenues: (Loss) gain on sale of loans...................... $ (937) $12,999 $ (397) ------- ------- ------- Interest income................................... 14,877 15,677 1,626 Interest expense.................................. 16,696 20,900 9,319 ------- ------- ------- Net interest expense............................ (1,819) (5,223) (7,693) ------- ------- ------- Loan servicing (expense) income................... (3,706) 14,007 13,155 Gain on sale of servicing rights.................. 6,249 4,889 30,028 Gains on sale of SPFC stock....................... 82,690 -- -- Dividends received from subsidiaries.............. 6,200 -- -- Other income (loss)............................... 741 (885) 708 ------- ------- ------- Total other income.............................. 92,174 18,011 43,891 ------- ------- ------- Total revenue..................................... 89,418 25,787 35,801 ------- ------- ------- Expenses: Personnel expense................................. 8,757 20,281 26,519 Occupancy expense................................. 1,994 2,874 2,884 Other expense..................................... 20,117 15,306 13,367 ------- ------- ------- Total expenses.................................. 30,868 38,461 42,770 ------- ------- ------- Income (loss) before income taxes, minority interest, deferred inter-company gains and extraordinary item............................... 58,550 (12,674) (6,969) Income taxes...................................... 28,830 (5,443) (3,039) ------- ------- ------- Income (loss) before minority interest, deferred inter-company gains and extraordinary item....... 29,720 (7,231) (3,930) Minority interest in income (loss) of consolidated subsidiaries..................................... 12,026 (208) -- Deferred inter-company (expense) income, net of income taxes..................................... (1,383) 1,710 -- ------- ------- ------- Income (loss) before extraordinary item........... 19,077 (8,733) (3,930) Extraordinary item--repurchase of Senior Notes.... -- -- 919 ------- ------- ------- Income (loss) before equity in undistributed income of subsidiaries........................... 19,077 (8,733) (3,011) Equity in undistributed income of subsidiaries.... 56,907 22,926 10,535 ------- ------- ------- Net income...................................... $75,984 $14,193 $ 7,524 ======= ======= =======
F-43 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- (IN THOUSANDS) Net cash provided by (used in) operating activities $ 50,521 $(273,961) $ 114,537 --------- --------- --------- Cash flows from investing activities: Proceeds from bulk sale of servicing rights.................................... 31,799 12,815 26,899 Purchase of servicing rights............... -- (8,128) (14,478) Proceeds from sale of other real estate owned..................................... 2,953 -- -- Net change in loans held for investment.... (5,310) 51,784 (131) Investment in subsidiaries................. -- -- (25,000) Purchase of premises and equipment......... 809 (182) (4,949) --------- --------- --------- Net cash provided by (used in) investing activities 30,251 56,289 (17,659) --------- --------- --------- Cash flows from financing activities: Net change in borrowings from Imperial Bank...................................... (5,000) 5,000 (20,000) Proceeds from issuance of 9 3/4% Senior Notes..................................... -- -- 88,593 Cash used to repurchase 9 3/4% Senior Notes..................................... -- -- (6,545) Proceeds from resale of 9 3/4% Senior Notes..................................... 7,615 -- -- Proceeds from issuance of common stock..... 59,228 -- -- Proceeds from exercise of stock options.... 1,671 826 96 Net change in other borrowings............. (191,363) 206,725 (147,611) Net change in minority interest............ 43,697 1,452 -- --------- --------- --------- Net cash (used in) provided by financing activities (84,152) 214,003 (85,467) --------- --------- --------- Net change in cash........................... (3,380) (3,669) 11,410 Cash at beginning of year.................... 8,593 12,262 852 --------- --------- --------- Cash at end of year.......................... $ 5,213 $ 8,593 $ 12,262 ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The following information supplements the condensed statements of cash flows:
DECEMBER 31, ----------------------- 1996 1995 1994 -------- ------- ------ (IN THOUSANDS) Cash paid during the period for: Interest............................................. $ 16,315 $20,898 $5,679 Significant non-cash activities: Loans transferred to OREO............................ $ 8,479 $ 2,419 -- Loans transferred from held for sale to held for investment.......................................... 197,141 83,398 -- Servicing rights transferred from subsidiary......... -- 3,774 -- Unrealized gain on securities available for sale, net................................................. 3,112 5,443 -- Contribution of fixed assets to ICIFC................ -- 525 --
Sale of Residual Interests Effective December 31, 1996, ICII sold $46.9 million of residual interests to ICIFC. In connection therewith, ICII lent ICIFC 100% of the purchase price. This loan bears interest at a rate of 12% per annum, and is secured by the residual interests. F-44 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 33. SUBSEQUENT EVENTS In the first quarter of 1997, the Company sold 370,000 shares of its common stock investment in SPFC. This sale resulted in a reduction of the company's ownership in SPFC to 49.4%. As such, beginning with the first quarter of 1997, the Company will no longer consolidate SPFC in its consolidated financial statements. The Company will report its investment in SPFC under the equity method. In the first quarter of 1997, the Company disposed of its investment in the common stock of ICIFC. As a result of the disposition, beginning with the first quarter of 1997, the Company will no longer consolidate ICIFC in its consolidated financial statements. F-45 IMPERIAL CREDIT INDUSTRIES, INC. UNAUDITED CONDENSED FINANCIAL STATEMENTS UNAUDITED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 1997 1996 ---------- ------------ ASSETS Cash.................................................. $ 29,093 $ 74,247 Interest bearing deposits............................. 88,670 3,369 Investment in Federal Home Loan Bank stock............ 6,530 17,152 Trading securities, at market......................... 23,734 25,180 Securities available for sale, at market.............. 24,180 59,116 Loans held for sale................................... 700,110 940,096 Loans held for investment, net........................ 1,013,359 1,068,599 Purchased and originated servicing rights............. 6,079 14,887 Capitalized excess servicing fees receivable.......... -- 23,142 Retained interest in loan and lease securitizations... 33,000 49,548 Interest-only and residual certificates............... -- 87,017 Accrued interest on loans............................. 13,090 13,847 Premises and equipment, net........................... 9,501 12,442 Other real estate owned, net.......................... 14,393 12,214 Goodwill.............................................. 47,903 38,491 Investment in Southern Pacific Funding Corporation.... 48,263 -- Other assets.......................................... 38,336 31,292 ---------- ---------- Total assets........................................ $2,096,241 $2,470,639 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits.............................................. $1,161,357 $1,069,184 Borrowings from Federal Home Loan Bank................ 79,500 140,500 Other borrowings...................................... 304,902 694,352 Senior Notes.......................................... 219,782 88,209 Convertible subordinated debentures................... -- 75,000 Accrued interest payable.............................. 14,391 14,034 Accrued income taxes payable.......................... 34,351 55,327 Minority interest in consolidated subsidiaries........ 3,654 54,936 Other liabilities..................................... 30,663 39,589 ---------- ---------- Total liabilities................................... 1,848,600 2,231,131 ---------- ---------- Shareholders' equity: Preferred stock, 8,000,000 shares authorized; none issued or outstanding................................ -- -- Common stock, no par value. Authorized 80,000,000 shares; 38,476,418 and 38,291,112 shares issued and outstanding at March 31, 1997 and December 31, 1996, respectively......................................... 146,767 145,521 Retained earnings..................................... 96,014 88,977 ---------- ---------- Unrealized gain on securities available for sale, net. 4,860 5,010 ---------- ---------- Total shareholders' equity............................ 247,641 239,508 ---------- ---------- Total liabilities and shareholders' equity............ $2,096,241 $2,470,639 ========== ==========
See accompanying notes to consolidated financial statements. F-46 IMPERIAL CREDIT INDUSTRIES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, -------------------- 1997 1996 --------- --------- Revenue: Gain on sale of loans and leases........................ $ 8,666 $ 21,711 Interest on loans....................................... 42,930 45,194 Interest on investments................................. 5,625 2,185 Interest on other finance activities.................... 657 2,141 --------- --------- Total interest income................................. 49,212 49,520 Interest expense........................................ 28,404 36,783 --------- --------- Net interest income..................................... 20,808 12,737 Provision for loan and lease losses..................... 2,870 1,500 --------- --------- Net interest income after provision for loan and lease losses................................................. 17,938 11,237 --------- --------- Loan servicing income................................... 1,280 2,010 Gain on sale of servicing rights........................ -- 8,065 Gain on sale of SPFC stock.............................. 4,306 -- Loss on sale of investment.............................. (403) -- Equity in net income of Southern Pacific Funding Corpo- ration................................................. 6,253 -- Other income............................................ 2,255 1,202 --------- --------- Total other income.................................... 13,691 11,277 --------- --------- Total revenue....................................... 40,295 44,225 --------- --------- Expenses: Personnel expense....................................... 10,671 12,435 Amortization of PMSR's and OMSR's....................... 19 718 Occupancy expense....................................... 907 1,320 Data processing expense................................. 427 355 Net expenses of other real estate owned................. 757 2,768 Professional services................................... 2,588 1,146 FDIC insurance premiums................................. -- 45 Telephone and other communications...................... 429 907 Restructuring provision--Exit from mortgage banking op- erations............................................... -- 3,800 General and administrative expense...................... 5,336 3,674 --------- --------- Total expenses........................................ 21,134 27,168 --------- --------- Income before income taxes, minority interest and ex- traordinary item....................................... 19,161 17,057 Income taxes............................................ 7,976 6,901 Minority interest in income of consolidated subsidiar- ies.................................................... 153 1,540 --------- --------- Income before extraordinary item........................ 11,032 8,616 --------- --------- Extraordinary item--Loss on early extinguishment of debt, net of income taxes.............................. (3,995) -- --------- --------- Net income............................................ $ 7,037 $ 8,616 ========= ========= Primary and fully diluted income per share: Income before extraordinary item........................ $ 0.27 $ 0.24 Extraordinary item--Loss on early extinguishment of debt, net of income taxes.............................. (0.10) -- --------- --------- Net income per common share........................... $ 0.17 $ 0.24 ========= =========
See accompanying notes to consolidated financial statements. F-47 IMPERIAL CREDIT INDUSTRIES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED ----------------------------- MARCH 31, 1997 MARCH 31, 1996 -------------- -------------- Cash flows from operating activities: Net income..................................... $ 7,037 $ 8,616 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Provision for loan and lease losses............ 2,870 1,500 Depreciation................................... 1,110 540 Amortization................................... 620 170 Accretion of discount.......................... (647) (2,141) Gain on sale of Southern Pacific Funding Corpo- ration stock.................................. (6,151) -- Gain on sale of servicing rights............... -- (8,065) Gain on sale of loans and leases............... (8,666) (21,711) Equity in net earnings of Southern Pacific Funding Corp.................................. (6,253) -- Loss on sale of OREO........................... 956 978 Writedowns of other real estate owned.......... 543 -- Net change in loans held for sale.............. 247,461 304,479 Net change in accrued interest on loans........ 757 (242) Net change in retained interest in loan and lease securitizations......................... 16,548 6,177 Net change in interest only and residual cer- tificates..................................... 87,017 -- Net change in capitalized excess servicing..... 23,142 4,859 Net change in purchased and originated servic- ing rights.................................... 8,789 (7,451) Net change in other assets..................... 1,632 (12,822) Net change in other liabilities................ (19,241) 9,490 --------- --------- Net cash provided by operating activities: 357,524 284,377 --------- --------- Cash flows from investing activities: Net change in interest bearing deposits........ (85,301) 132,600 Purchase of servicing rights................... -- (2,744) Proceeds from sale of servicing rights......... -- 4,573 Proceeds from sale of other real estate owned.. 1,761 1,798 Net change in trading securities............... 1,446 -- Sale of securities available for sale.......... 36,130 141,197 Net change in loans held for investment........ 48,122 19,568 Purchases of premises and equipment............ (2,039) (1,221) Net change in investment in Southern Pacific Funding Corporation........................... (42,010) -- Sales of Federal Home Loan Bank stock.......... 10,622 -- Cash utilized for acquisitions................. (14,699) -- --------- --------- Net (used in) cash provided by investing activi- ties: (45,968) 295,771 --------- --------- Cash flows from financing activities: Net change in deposits......................... 92,173 (69,083) Advances from Federal Home Loan Bank........... 30,000 120,000 Repayments of advances from Federal Home Loan Bank.......................................... (91,000) (115,000) Net change in convertible subordinated deben- tures......................................... (75,000) -- Net change in other borrowings................. (389,450) (425,783) Proceeds form offering of Senior Notes due 2007.......................................... 194,500 -- Repayment of Senior Notes due 2004............. (73,241) -- Sale of bonds.................................. -- (111,995) Net change in minority interest................ (51,282) 9,667 Proceeds from sale of SPFC stock............... 6,151 -- Proceeds from resale of Senior Notes........... -- 7,615 Proceeds from exercise of stock options........ 439 211 --------- --------- Net cash used in financing activities: (356,710) (584,368) --------- --------- Net change in cash.............................. (45,154) (4,220) Cash at beginning of year....................... 74,247 39,166 --------- --------- Cash at end of period........................... $ 29,093 $ 34,946 ========= ========= Supplemental disclosure of cash flow informa- tion: Income taxes paid during the period............ $ 2,160 $ 1,506 Interest paid during the period................ 15,522 39,207
See accompanying notes to consolidated financial statements. F-48 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION Imperial Credit Industries, Inc. (the "Company" or "ICII"), incorporated in 1986 in the State of California, is 24.5% owned by Imperial Bank. In 1991 Imperial Bank recapitalized the Company to conduct a full service mortgage banking operation. Since then, the Company has transformed itself from a full service mortgage banking operation to a diversified commercial and consumer finance holding company. The consolidated financial statements include ICII, its wholly owned subsidiaries and a majority owned consolidated subsidiary (collectively the "Company"). The wholly-owned subsidiaries include Southern Pacific Thrift and Loan Association ("SPTL"), Imperial Business Credit, Inc. ("IBC"), Imperial Credit Advisors, Inc. ("ICAI") and Auto Marketing Network, Inc. ("AMN"). The majority-owned consolidated subsidiary is Franchise Mortgage Acceptance Company, LLC ("FMAC"). FMAC is owned two-thirds by the Company and one-third by the President of FMAC. The Company also has a 49.4% ownership percentage in Southern Pacific Funding Corporation ("SPFC") (NYSE: SFC). The Company accounts for this investment using the equity method of accounting. All material intercompany balances and transactions have been eliminated. 2. DECONSOLIDATION OF SOUTHERN PACIFIC FUNDING CORPORATION AND ICI FUNDING CORPORATION During the first quarter of 1997, the Company sold 370,000 shares of the common stock of Southern Pacific Funding Corporation ("SPFC") reducing its ownership of SPFC from 51.2% at December 31, 1996 to 49.4% at March 31, 1997. Therefore, the results of SPFC operations are now accounted for in the Company's financial statements under the equity method of accounting. The equity investment in SPFC is carried at cost adjusted for equity in undistributed earnings. During the first quarter of 1997, ICII disposed of its common stock interest in ICI Funding Corporation (ICIFC), a subsidiary engaged in mortgage conduit operations for Imperial Credit Mortgage Holdings ("ICMH"). At December 31, 1996, ICII owned 100% of the common stock of ICIFC which represented a 1% economic interest since ICMH (NYSE: IMH) a former subsidiary and now a separate publicly held mortgage real estate investment trust, owned all of the nonvoting preferred stock of ICIFC, which gave ICMH a 99% economic interest in ICIFC. The Company's disposal of its remaining economic interest in ICIFC concludes its exit from the mortgage banking business. 3. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods presented. Actual results could differ significantly from those estimates. Prior year's consolidated financial statements have been reclassified to conform to the 1997 presentation. F-49 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) 4. NET INCOME PER SHARE INFORMATION Net income per common share is computed based on the weighted average number of shares outstanding during the periods presented plus common stock equivalents deemed to be dilutive. Common stock equivalents deemed to be dilutive were calculated based on the average price per share during the periods presented for primary net income per share and based on the ending stock price per share, if greater than the average stock price per share, for fully diluted net income per share for the periods presented. The number of shares used in the computations give retroactive effect to stock dividends and stock splits for all periods presented, including the Company's most recent 2- for-1 stock split on October 23, 1996. The weighted average number of shares including common stock equivalents for the three months ended March 31, 1997 and 1996 was 40,884,908 and 35,360,806 for fully diluted income per share, respectively. The weighted average number of shares including common stock equivalents for the three months ended March 31, 1997 and 1996 was 40,884,820 and 35,271,044 for primary income per share, respectively. 5. ACCOUNTING PRONOUNCEMENT The Company has adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), which establishes accounting for transfers and servicing of financial assets and extinguishment of liabilities. This statement specifies when financial assets and liabilities are to be removed from an entity's financial statements, the accounting for servicing assets and liabilities and the accounting for assets that can be contractually prepaid in such a way that the holder would not recover substantially all of its recorded investment. Under SFAS 125, an entity recognizes only assets it controls and liabilities it has incurred, discontinues recognition of assets only when control has been surrendered, and discontinues recognition of liabilities only when they have been extinguished. SFAS 125 requires that the selling entity continue to carry retained interests, including servicing assets, relating to assets it no longer recognizes. Such retained interests are based on the relative fair values of the retained interests of the subject assets at the date of transfer. Transfers not meeting the criteria for sale recognition are accounted for as a secured borrowing with a pledge of collateral. SFAS 125 requires an entity to recognize its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset or liability. The servicing asset or liability is to be amortized in proportion to, and over the period of, net servicing income or loss. Servicing assets and liabilities are to be assessed for impairment based on their fair value. SFAS 125 modifies the accounting for interest-only strips or retained interests in securitizations, such as capitalized servicing fees receivable, that can be contractually prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment. In this case, it requires that they be classified as available for sale or as trading securities. Interest-only strips and retained interests are recorded at market value. Under the provisions of SFAS 125, management has determined that mortgage backed securities retained by the Company as a result of securitization transactions will be classified as trading securities. All other retained securities will be classified as available for sale or trading as determined at the time of securitization. Changes in market value are included in operations, if classified as trading securities, or in shareholders' equity as unrealized gains or losses, net of the related tax effect, if classified as available for sale. SFAS 125 was effective for the Company on January 1, 1997. The implementation of SFAS 125 did not have a material impact on the Company's financial condition or results of operations. F-50 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) 6. LOANS HELD FOR SALE Loans held for sale consisted of the following at March 31, 1997 and December 31, 1996:
AT MARCH 31, AT DECEMBER 31, 1997 1996 ------------ --------------- (IN THOUSANDS) Loans secured by real estate: Single family 1-4........................... $ 5,607 $452,533 Multi-family................................ 248,300 186,391 Commercial.................................. 122,554 109,469 -------- -------- 376,461 748,393 Leases........................................ 19,082 8,547 Auto.......................................... 77,326 -- Commercial loans.............................. 227,241 183,156 -------- -------- $700,110 $940,096 ======== ========
7. CONSOLIDATING BALANCE SHEET AND INCOME STATEMENTS The following represents summarized consolidating financial information as of March 31, 1997 and December 31, 1996, and for the three months ended March 31, 1997 and 1996, with respect to the financial position and operations of the Company and its wholly-owned and majority-owned subsidiaries. On January 17, 1997, the Company sold $200 million of 9 7/8% senior notes due 2007. The senior notes are guaranteed by three of the Company's wholly-owned subsidiaries, IBC, ICAI, and AMN (the "Other Guarantor Subsidiaries"), and the Company's 66 2/3% owned subsidiary, FMAC. Each of the guarantees is full and unconditional and joint and several. The separate financial statements and other related disclosures of the wholly-owned subsidiary guarantors are not presented as management has determined that such information is not material to investors. FMAC has filed a Form 10-Q with the Commission as of and for the quarter ended March 31, 1997. None of the subsidiary guarantors are restricted from making distributions to the Company. F-51 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) CONSOLIDATING CONDENSED BALANCE SHEET MARCH 31, 1997 (IN THOUSANDS)
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ ------------ ------------ ASSETS ------ Cash.................... $ 54,671 $ -- $ 7,219 $ 16,261 $ (49,058) $ 29,093 Interest bearing deposits............... 5,128 2,630 200 80,712 -- 88,670 Investments in Federal Home Loan Bank stock... -- -- -- 6,530 -- 6,530 Investment and trading securities............. 8,568 2,684 863 36,364 (565) 47,914 Loans held for sale..... 5,607 249,220 19,082 448,180 (21,979) 700,110 Loans held for investment, net........ 115,148 -- 199 944,601 (46,589) 1,013,359 Purchased and originated servicing rights....... -- -- 618 5,461 -- 6,079 Capitalized excess servicing fees receivable............. -- -- -- -- -- -- Retained interest in loan and lease Securitizations........ -- 6,601 26,399 -- -- 33,000 Interest-only and residual certificates.. -- -- -- -- -- -- Investment in subsidiaries........... 223,999 -- -- -- (175,736) 48,263 Goodwill................ -- 4,251 13,931 29,721 -- 47,903 Other assets............ 73,954 8,356 (15,217) 29,283 (21,056) 75,320 -------- -------- -------- ---------- --------- ---------- Total assets........ $487,075 $273,742 $ 53,294 $1,597,113 $(314,983) $2,096,241 ======== ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Deposits................ $ -- $ -- $ -- $1,209,801 $ (48,444) $1,161,357 Borrowings from Federal Home Loan Bank......... -- -- -- 79,500 -- 79,500 Other borrowings........ -- 259,665 9,738 117,287 (81,788) 304,902 Senior notes............ 219,782 -- -- -- -- 219,782 Convertible subordinated debentures............. -- -- -- -- -- -- Minority interest in consolidated subsidiaries........... 2,856 -- -- -- 798 3,654 Other liabilities....... 24,739 2,411 14,695 49,388 (11,828) 79,405 -------- -------- -------- ---------- --------- ---------- Total liabilities....... 247,377 262,076 24,433 1,455,976 (141,262) 1,848,600 -------- -------- -------- ---------- --------- ---------- Shareholders' equity: Preferred stock......... -- -- -- -- -- -- Common stock............ 146,767 5,792 21,501 81,202 (108,495) 146,767 Retained earnings....... 88,243 5,874 7,188 59,935 (65,226) 96,014 Unrealized gain on securities available for sale............... 4,688 -- 172 -- -- 4,860 -------- -------- -------- ---------- --------- ---------- Total shareholders' equity............. 239,698 11,666 28,861 141,137 (173,721) 247,641 -------- -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity............. $487,075 $273,742 $ 53,294 $1,597,113 $(314,983) $2,096,241 ======== ======== ======== ========== ========= ==========
F-52 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 1996 (IN THOUSANDS)
OTHER GUARANTOR NON-GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------- ------------ ------------ ASSETS ------ Cash.................... $ 5,213 $ -- $ 7,973 $ 64,926 $ (3,865) $ 74,247 Interest bearing deposits............... -- 2,594 163 -- 612 3,369 Investments in Federal Home Loan Bank stock... -- -- -- 17,152 -- 17,152 Investment and trading securities............. 8,802 39,349 887 35,824 (566) 84,296 Loans held for sale..... 4,839 98,915 8,547 853,023 (25,228) 940,096 Loans held for investment, net........ 34,505 -- 86,214 948,567 (687) 1,068,599 Purchased and originated servicing rights....... -- -- 637 14,250 -- 14,887 Capitalized excess servicing fees receivable............. -- -- -- 23,142 -- 23,142 Retained interest in loan and lease Securitizations........ -- 6,908 19,646 22,994 -- 49,548 Interest-only and residual certificates.. -- -- -- 87,017 -- 87,017 Investment in subsidiaries........... 269,651 -- -- -- (269,651) -- Goodwill................ -- 4,332 14,115 20,044 -- 38,491 Other assets............ 106,601 8,078 (14,981) (10,333) (19,570) 69,795 -------- -------- -------- ---------- --------- ---------- Total assets.......... $429,611 $160,176 $123,201 $2,076,606 $(318,955) $2,470,639 ======== ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Deposits................ $ -- $ -- $ -- $1,072,266 $ (3,082) $1,069,184 Borrowings from Federal Home Loan Bank......... -- -- -- 140,500 -- 140,500 Other borrowings........ 15,363 143,139 88,768 480,103 (33,021) 694,352 Senior notes............ 88,209 -- -- -- -- 88,209 Convertible subordinated debentures............. -- -- -- 75,000 -- 75,000 Minority interest in consolidated subsidiaries........... 45,149 -- -- -- 9,787 54,936 Other liabilities....... 41,382 2,580 9,222 68,854 (13,088) 108,950 -------- -------- -------- ---------- --------- ---------- Total liabilities....... 190,103 145,719 97,990 1,836,723 (39,404) 2,231,131 -------- -------- -------- ---------- --------- ---------- Shareholders' equity: Preferred stock......... -- -- -- 9,143 (9,143) -- Common stock............ 145,521 5,792 21,501 134,590 (161,883) 145,521 Retained earnings....... 88,977 8,665 3,525 96,150 (108,340) 88,977 Unrealized gain on securities available for sale............... 5,010 -- 185 -- (185) 5,010 -------- -------- -------- ---------- --------- ---------- Total shareholders' equity............... 239,508 14,457 25,211 239,883 (279,551) 239,508 -------- -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity. $429,611 $160,176 $123,201 $2,076,606 $(318,955) $2,470,639 ======== ======== ======== ========== ========= ==========
F-53 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) CONSOLIDATING CONDENSED INCOME STATEMENT THREE MONTHS ENDED MARCH 31, 1997 (IN THOUSANDS)
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------- ------------ ------------ ------------ ------------ Revenue: Gain on sale of loans and leases............. $ (351) $ 390 $ 5,338 $ 40 $ 3,249 $ 8,666 ------- ------- ------- ------- ------- ------- Interest income......... 5,146 3,342 4,125 36,754 (155) 49,212 Interest expense........ 5,209 2,699 1,639 19,012 (155) 28,404 ------- ------- ------- ------- ------- ------- Net interest income..... (63) 643 2,486 17,742 -- 20,808 Provision for loan loss. -- -- -- 2,870 -- 2,870 ------- ------- ------- ------- ------- ------- Net interest income after provision for loan loss............ (63) 643 2,486 14,872 -- 17,938 ------- ------- ------- ------- ------- ------- Loan servicing income... (1,084) 640 936 788 -- 1,280 Equity in net income SPFC................... 6,253 -- -- -- -- 6,253 Gain on sale of SPFC stock.................. 4,306 -- -- -- -- 4,306 Dividends received from subsidiaries........... 8,540 -- -- -- (8,540) -- Other income............ (562) (403) 1,857 960 -- 1,852 ------- ------- ------- ------- ------- ------- Total other income.... 17,453 237 2,793 1,748 (8,540) 13,691 ------- ------- ------- ------- ------- ------- Total revenues...... 17,039 1,270 10,617 16,660 (5,291) 40,295 ------- ------- ------- ------- ------- ------- Expenses: Personnel expense....... 583 2,598 1,798 5,692 -- 10,671 Amortization of PMSR's and OMSR's............. -- -- 19 -- -- 19 Occupancy expense....... 281 116 110 400 -- 907 Data processing expense. 287 7 17 116 -- 427 Net expenses of other real estate owned...... 487 -- -- 270 -- 757 General, administrative and other expense...... 1,624 1,340 2,333 3,056 -- 8,353 ------- ------- ------- ------- ------- ------- Total expenses...... 3,262 4,061 4,277 9,534 -- 21,134 ------- ------- ------- ------- ------- ------- Income (loss) before income taxes, minority interest and extraordinary item..... 13,777 (2,791) 6,340 7,126 (5,291) 19,161 Income taxes............ 2,303 -- 2,677 2,996 -- 7,976 ------- ------- ------- ------- ------- ------- Income (loss) before minority interest and extraordinary item..... 11,474 (2,791) 3,663 4,130 (5,291) 11,185 Minority interest in income of consolidated subsidiaries........... 153 -- -- -- -- 153 ------- ------- ------- ------- ------- ------- Income (loss) before extraordinary item..... 11,321 (2,791) 3,663 4,130 (5,291) 11,032 Extraordinary item--Loss on early extinguishment of debt, net of income taxes.................. (3,995) -- -- -- -- (3,995) ------- ------- ------- ------- ------- ------- Income (loss) before equity in undistributed income of subsidiaries. 7,326 (2,791) 3,663 4,130 (5,291) 7,037 Equity in undistributed income of subsidiaries. (289) -- -- -- 289 -- ------- ------- ------- ------- ------- ------- Net (loss) income....... $ 7,037 $(2,791) $ 3,663 $ 4,130 $(5,002) $ 7,037 ======= ======= ======= ======= ======= =======
F-54 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) CONSOLIDATING CONDENSED INCOME STATEMENT THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS)
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------ ------------ ------------ ------------ ------------ Revenue: Gain on sale of loans and leases............. $ 3,799 $5,294 $ 480 $10,522 $ 1,616 $21,711 ------- ------ ------ ------- -------- ------- Interest income......... 4,724 730 15 44,464 (413) 49,520 Interest expense........ 6,245 699 193 29,641 5 36,783 ------- ------ ------ ------- -------- ------- Net interest income..... (1,521) 31 (178) 14,823 (418) 12,737 Provision for loan losses................. -- -- -- 1,500 -- 1,500 ------- ------ ------ ------- -------- ------- Net interest income after Provision for loan loss............ (1,521) 31 (178) 13,323 (418) 11,237 ------- ------ ------ ------- -------- ------- Loan servicing income... 1,205 282 404 119 -- 2,010 Dividends received from subsidiaries........... -- -- -- -- -- -- Gain (loss) on sale of servicing rights....... 6,723 -- -- -- 1,342 8,065 Other income............ 50 -- 645 507 -- 1,202 ------- ------ ------ ------- -------- ------- Total other income.. 7,978 282 1,049 626 1,342 11,277 ------- ------ ------ ------- -------- ------- Total revenues...... 10,256 5,607 1,351 24,471 2,540 44,225 ------- ------ ------ ------- -------- ------- Expenses: Personnel expense....... 4,138 1,918 740 5,639 -- 12,435 Amortization of PMSR's and OMSR's............. 401 -- 51 266 -- 718 Occupancy expense....... 804 57 44 415 -- 1,320 Data processing expense. 248 1 1 105 -- 355 Net expenses of other real estate owned...... 2,000 -- -- 768 -- 2,768 General, administrative and other expense...... 5,803 608 (101) 3,262 -- 9,572 ------- ------ ------ ------- -------- ------- Total expenses...... 13,394 2,584 735 10,455 -- 27,168 ------- ------ ------ ------- -------- ------- (Loss) income before income taxes and minority interest...... (3,138) 3,023 616 14,016 2,540 17,057 Income taxes............ (125) -- 255 5,699 1,072 6,901 ------- ------ ------ ------- -------- ------- (Loss) Income before minority interest and extraordinary item..... (3,013) 3,023 361 8,317 1,468 10,156 Minority interest in income of consolidated subsidiaries........... 1,540 -- -- -- -- 1,540 ------- ------ ------ ------- -------- ------- (Loss) Income before equity in undistributed income of subsidiaries. (4,553) 3,023 361 8,317 1,468 8,616 Equity in undistributed income of subsidiaries. 13,169 -- -- -- (13,169) -- ------- ------ ------ ------- -------- ------- Net income.............. $ 8,616 $3,023 $ 361 $ 8,317 $(11,701) $ 8,616 ======= ====== ====== ======= ======== =======
F-55 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC INDEX TO FINANCIAL STATEMENTS
PAGE ---- Audited Financial Statements: Independent Auditors' Report............................................. F-57 Balance Sheets........................................................... F-58 Statements of Operations................................................. F-59 Statements of Changes in Members' Equity................................. F-60 Statements of Cash Flows................................................. F-61 Notes to Financial Statements............................................ F-62 Unaudited Financial Statements: Balance Sheets........................................................... F-71 Statements of Income..................................................... F-72 Statements of Cash Flows................................................. F-73 Notes to Financial Statements............................................ F-74
F-56 INDEPENDENT AUDITORS' REPORT The Board of Managers Franchise Mortgage Acceptance Company LLC: We have audited the accompanying balance sheets of Franchise Mortgage Acceptance Company LLC as of December 31, 1996 and 1995, and the related statements of operations, changes in members' equity and cash flows for the year ended December 31, 1996 and for the period from June 30, 1995 (inception) through December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Franchise Mortgage Acceptance Company LLC as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the year ended December 31, 1996 and for the period from June 30, 1995 (inception) through December 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Los Angeles, California January 29, 1997 F-57 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ----------------- 1996 1995 -------- -------- ASSETS ------ Restricted cash.............................................. $ -- $ 526 Interest bearing deposits.................................... 2,594 -- Securities available for sale................................ 39,349 -- Franchise loans held for sale................................ 98,915 181,254 Retained interest in loan securitizations.................... 6,908 -- Premises and equipment, net.................................. 1,162 235 Goodwill..................................................... 4,332 4,226 Receivable from Southern Pacific Thrift & Loan............... -- 579 Receivable from Imperial Credit Industries, Inc.............. -- 924 Accrued interest receivable.................................. 560 1,108 Other investments............................................ 4,383 -- Other assets................................................. 1,973 196 -------- -------- Total assets............................................. $160,176 $189,048 ======== ======== LIABILITIES AND MEMBERS' EQUITY ------------------------------- Book overdraft............................................... $ 171 $ 445 Payable to Imperial Credit Industries, Inc. ................. 17,728 -- Borrowings................................................... 125,240 69,637 Bonds........................................................ -- 111,995 Accrued interest payable..................................... 148 1,062 Residual interest due to owner............................... -- 526 Other liabilities............................................ 2,432 1,610 -------- -------- Total liabilities........................................ 145,719 185,275 Commitments and contingencies (Note 14) Members' equity: Members' capital........................................... 5,792 4,432 Retained earnings (accumulated deficit).................... 8,665 (659) -------- -------- Total members' equity.................................... 14,457 3,773 -------- -------- Total liabilities and members' equity.................... $160,176 $189,048 ======== ========
See accompanying notes to financial statements. F-58 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC STATEMENTS OF OPERATIONS (IN THOUSANDS)
FOR THE PERIOD FROM JUNE 30, 1995 YEAR ENDED (INCEPTION) THROUGH DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ------------------- Revenues: Gain on sale of loans................... $18,671 $ -- ------- ------ Interest income......................... 16,130 1,929 Interest charges........................ 14,489 1,690 ------- ------ Net interest income................... 1,641 239 ------- ------ Loan servicing income................... 1,191 318 Gain on sale of servicing rights........ -- 31 Other income............................ 63 -- ------- ------ Total other income.................... 1,254 349 ------- ------ Total revenue......................... 21,566 588 ------- ------ Expenses: Personnel............................... 8,270 356 Professional services................... 1,093 106 Travel.................................. 614 155 Business promotion...................... 450 96 Occupancy............................... 310 94 Messenger service....................... 115 15 Goodwill amortization................... 411 146 General and Administrative.............. 979 279 ------- ------ Total expenses........................ 12,242 1,247 ------- ------ Net income (loss)..................... $ 9,324 $ (659) ======= ======
See accompanying notes to financial statements. F-59 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC STATEMENTS OF CHANGES IN MEMBERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE PERIOD FROM JUNE 30, 1995 (INCEPTION) THROUGH DECEMBER 31, 1996 (IN THOUSANDS)
ACCUMULATED (DEFICIT) TOTAL MEMBERS' RETAINED MEMBERS' CAPITAL EARNINGS EQUITY -------- ----------- -------- Balance, June 30, 1995 (inception).............. $ -- $ -- $ -- Members' contribution--ICII..................... 7,592 -- 7,592 Members' contribution--Knyal.................... 645 -- 645 Return of capital--ICII......................... (3,805) -- (3,805) Net loss........................................ -- (659) (659) ------- ------ ------- Balance, December 31, 1995...................... $ 4,432 $ (659) $ 3,773 Net income...................................... -- 9,324 9,324 Members' Contribution--ICII..................... 1,360 -- 1,360 ------- ------ ------- Balance, December 31, 1996...................... $ 5,792 $8,665 $14,457 ======= ====== =======
See accompanying notes to financial statements. F-60 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE PERIOD YEAR ENDED FROM JUNE 30, 1995 DECEMBER 31, (INCEPTION) THROUGH 1996 DECEMBER 31, 1995 ------------ ------------------- Cash flows from operating activities: Net income (loss)........................... $ 9,324 $ (659) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............. 2,883 153 Net change in loans held for sale......... 94,102 (181,254) Decrease (increase) in interest receivable............................... 548 (1,108) Gain on sale of loans..................... (11,763) -- Gain on sale of servicing rights.......... -- (31) Net change in other liabilities........... (618) 3,198 Net change in other assets................ (7,027) (2,214) --------- --------- Net cash provided by (used in) operating activities............................. 87,449 (181,915) --------- --------- Cash flows from investing activities: Purchases of premises and equipment......... (1,190) (162) Net change in interest bearing deposits..... (2,594) -- Purchase of securities available for sale... (41,704) -- Purchase of other investments............... (4,383) -- Sale of servicing rights.................... -- 3,805 --------- --------- Net cash (used in) provided by investing activities............................. (49,871) 3,643 --------- --------- Cash flows from financing activities: Issuance of bonds........................... -- 111,995 Repayment of bonds.......................... (111,995) -- Net change in borrowings from ICII.......... 19,088 -- Net change in borrowings.................... 55,603 69,637 Return of capital........................... -- (3,805) --------- --------- Net cash (used in) provided by financing activities............................. (37,304) 177,827 --------- --------- Net change in cash...................... 274 (445) Book overdraft at beginning of period......... (445) -- --------- --------- Book overdraft at end of period............... $ (171) $ (445) ========= =========
See accompanying notes to financial statements. F-61 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION On June 30, 1995, Imperial Credit Industries, Inc. (ICII) acquired from Greenwich Capital Financial Products, Inc. (Greenwich), certain assets of Greenwich's Franchise Mortgage Acceptance Company division (the FMAC Division), including all of Greenwich's rights under certain servicing contracts entered into by the FMAC Division (the Servicing Contracts). The Servicing Contracts pertain to the servicing of franchise loans that were previously securitized by Greenwich through the FMAC Division and other franchise loans owned by Greenwich not yet securitized. Concurrent with the closing of the transactions described above, ICII entered into an operating agreement with Wayne L. Knyal (Knyal), the former president of the FMAC Division, for the formation of a California limited liability company named Franchise Mortgage Acceptance Company, LLC (the Company). In connection with the acquisition, the Company or its affiliates assumed certain liabilities related to the Servicing Contracts and Greenwich agreed to act as the Company's exclusive agent in connection with the securitization of franchise loans for a period of 24 months. The Company was formed to originate, securitize and service franchise loans. Under the terms of the operating agreement, in exchange for a 66 2/3% ownership interest in the Company, ICII was obligated to contribute to the Company $1.3 million in cash and all of the assets purchased from Greenwich. In exchange for a 33 1/3% ownership interest in the Company, Knyal caused his wholly owned company, Franchise Mortgage Acceptance Corporation ("FMAC Corporation"), to contribute to the Company all of its rights under a servicing contract pertaining to franchise loans that were previously securitized by FMAC Corporation. On June 30, 1995, ICII completed the acquisition of certain net assets of the FMAC Division for a net purchase price of $7.6 million which included $3.8 million in contingent consideration based on loan originations after the date of acquisition up to a maximum principal amount of such loans equal to $250.0 million. The acquisition was recorded using the purchase method of accounting. Under this method of accounting, the purchase price was allocated to the respective assets acquired (primarily purchased servicing rights) with a fair value of $3.2 million at the date of the purchase transaction. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill of $4.4 million. 2. BASIS OF PRESENTATION The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheet and revenues and expenses for the periods presented. Significant balance sheet accounts which could be materially affected by such estimates include securities available for sale and retained interest in loan securitizations. Actual results could differ significantly from those estimates. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid investments with maturities of three months or less at date of acquisition to be cash equivalents. Restricted cash includes cash pledged as a reserve account for the FLRT 1995-B securitization. INVESTMENT SECURITIES The Company classifies investments as held-to-maturity, trading, and/or available-for-sale. Held-to-maturity investments are reported at amortized cost, trading securities are reported at fair value, with unrealized gains and F-62 FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) losses included in operations, and available-for-sale securities are reported at fair value with unrealized gains and losses included as a separate component of members' equity. Investments held-to-maturity are those securities that management has the positive intent and ability to hold to maturity. Investment securities available-for-sale are those securities which are not held in the trading portfolio and are not held in the held-to-maturity portfolio. Realized gains and losses on securities available-for-sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold. FRANCHISE LOANS HELD FOR SALE Loans held for sale are carried at the lower of aggregate cost or market. RETAINED INTEREST IN LOAN SECURITIZATIONS The Company may create retained interest in loan securitizations as a result of the sale of loans into securitization trusts. Retained interest in loan securitizations are carried at fair value. Each loan securitization has specific credit enhancement requirements in the form of overcollateralization which must be met before the Company receives cash flows due. As the securitized assets generate excess cash flows, they are initially used to pay down the balance of the pass-through certificates until such time as the ratio of securitized assets to pass-through certificates reaches the overcollateralization requirement specified in each securitization. This overcollateralization amount is carried on the balance sheet as retained interest in loan securitizations. After the overcollateralization requirement and the other requirements specified in the pooling and servicing agreement have been met, the Company begins to receive the excess cash flows and a portion of the retained interest on a monthly basis. Retained interest in loan securitizations are amortized using the interest method. To the extent that actual future performance results are less than the Company's original performance estimates, the Company's retained interest in loan securitizations will be written down through a charge to operations in that period. GAIN (LOSS) ON SALE OF LOANS Loans are sold through securitizations with the servicing retained by the Company. Securitizations typically require credit enhancements in the form of cash reserves or overcollateralization which are reflected as retained interest in loan securitizations on the balance sheet. Present value computations are used to estimate the value of the retained interest and considering such items as interest rates, prepayment, default and loss assumptions that management believes market participants would use for similar instruments. Gains are recognized to the extent that the sales price, less selling costs, exceeds the allocated basis of the portion of the loans sold. The Company recognizes the sale of loans when the sales transaction settles and the risks and rewards of ownership are determined to have passed to the purchasing party. SALES OF SERVICING RIGHTS The Company recognizes gain or loss on the sale of servicing rights when the sales contract has been executed, a substantial down payment has been made, and the risks and rewards of ownership are determined to have passed to the purchasing party. F-63 FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) LOAN ORIGINATION FEES Origination fees received on franchise loans held for sale, net of direct costs related to the origination of the loans, are deferred until the time of sale and are included in the computation of the gain or loss on the sale of the related loans. SERVICING FEES Servicing fees are earned on the cash flow streams from various pools of securitized loans serviced for others. Servicing fees are recognized as income when received. At December 31, 1996 and 1995, the Company serviced loans of $593.7 million and $207.7 million, respectively, for affiliates and others. PREMISES AND EQUIPMENT, NET Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation on premises and equipment is recorded using the straight-line method over the estimated useful lives of individual assets (three to seven years). Leasehold improvements are amortized over the terms of their related leases or the estimated useful lives of improvements, whichever is shorter. INCOME TAXES Under current Federal and applicable state limited liability company laws and regulations, limited liability companies are treated as partnerships for tax reporting purposes and, accordingly, are not subject to income taxes. Therefore, no provision for income taxes has been made in the Company's financial statements. For tax purposes, income or losses are included in the tax returns of the members. GOODWILL Goodwill is amortized on a straight-line basis over its estimated useful life of 15 years. Goodwill is reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. HEDGING PROGRAM The Company regularly securitizes and sells fixed and variable-rate mortgage loans. To offset the effects of interest rate fluctuations on the value of its fixed-rate loans held for sale, the Company in certain cases will hedge its interest rate risk related to loans held for sale by selling U.S. Treasury securities short or in the forward market. RECENT ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), which establishes accounting for transfers and servicing of financial assets and extinguishment of liabilities and which is effective for the Company on January 1, 1997. This statement specifies when financial assets and liabilities are to be removed from an entity's financial statements, the accounting for servicing assets and liabilities and the accounting for assets that can be contractually prepaid in such a way that the holder would not recover substantially all of its recorded investment. Under SFAS 125, an entity recognizes only assets it controls and liabilities it has incurred, discontinues recognition of assets only when control has been surrendered, and discontinues recognition of liabilities only F-64 FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) when they have been extinguished. SFAS 125 requires that the selling entity continue to carry retained interests, including servicing assets, relating to assets it no longer recognizes. Such retained interests are based on the relative fair values of the retained interests of the subject assets at the date of transfer. Transfers not meeting the criteria for sale recognition are accounted for as a secured borrowing with a pledge of collateral. SFAS 125 requires an entity to recognize its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset or liability. The servicing asset or liability is to be amortized in proportion to, and over the period of, net servicing income or loss. Servicing assets and liabilities are to be assessed for impairment based on their fair value. Management has determined that the implementation of SFAS 125 will not have a material impact on the Company's financial condition or results of operations. Under the provisions of SFAS 125, securitization interests retained by the Company as a result of securitization transactions will be held as either available for sale or trading. Changes in market value are included in operations, if classified as trading securities, or in members' equity as unrealized gains or losses, if classified as available for sale. 4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Noncash transactions included the contribution of all of the assets acquired by ICII from Greenwich including $80,000 of premises and equipment, $11,000 of prepaid expenses and approximately $3.1 million of servicing rights. In addition, servicing rights totaling $645,000 were contributed by Wayne Knyal for his interest in the Company. Cash paid for the period from June 30, 1995 (inception) through December 31, 1995, for interest totaled $1.4 million, including approximately $1.0 million paid to Southern Pacific Thrift and Loan (SPTL), an affiliate. During 1996, ICII contributed $1.4 million to the Company by decreasing the balances of the outstanding payable to ICII by the amount of the contribution. Cash paid for interest for the year ended December 31, 1996 was $15.6 million, including approximately $10.0 million paid to SPTL. 5. FRANCHISE LOANS HELD FOR SALE At December 31, 1996 and 1995, franchise loans held for sale consisted of the following:
1996 1995 ------- -------- (IN THOUSANDS) Franchise loans held for sale........................... $94,490 $174,879 Franchise equipment loans and leases held for sale...... 4,385 -- Premium on franchise loans held for sale................ -- 5,946 Net deferred loan fees.................................. (750) (203) Unearned lease income................................... (497) -- Deferred hedging loss................................... 1,287 632 ------- -------- Total franchise loans................................. $98,915 $181,254 ======= ========
The Company's franchise loans are primarily comprised of loans to experienced franchisees of nationally recognized restaurant concepts. A substantial portion of its debtors' ability to honor their contracts is dependent upon the cash flows generated by the franchise restaurant units themselves. The franchise loans generally are collateralized by the business property, and the real estate on which the franchises are located. During the year ended December 31, 1996 and the six-month period ending December 31, 1995, the Company originated or acquired $449.3 million and $163.5 million in franchise loans, respectively. During the year ended December 31, F-65 FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1996 and the six month period ended December 31, 1995, the Company securitized $325.1 million and $105.2 million of franchise mortgage loans, respectively. As of December 31, 1996 and 1995, $125.4 million and $174.9 million, respectively were pledged as collateral for the borrowings and bonds of the Company. As of December 31, 1996 and 1995, there were no nonaccrual, restructured or impaired loans. 6. PREMISES AND EQUIPMENT, NET Premises and equipment consisted of the following at December 31, 1996 and 1995:
1996 1995 ------ ---- (IN THOUSANDS) Premises and equipment....................................... $1,286 $242 Less accumulated depreciation and amortization............. (124) (7) ------ ---- Ending balance............................................... $1,162 $235 ====== ====
7. HEDGING As of December 31, 1996, the Company had open positions of $94.1 million related to the sales of United States Treasury securities in the forward market. The proceeds from the short sale are shown net of the related liability in the accompanying balance sheet at December 31, 1996. At December 31, 1996, the Company's unrealized loss on open positions was $1.3 million. The Company used the hedging program in anticipation of the formation of the FLRT 1995-B, a special purpose entity (SPE), into which the Company delivered $105.2 million of franchise loans. The Company incurred a loss on the hedging transaction of $632,000 which was recorded as an adjustment to the basis of the loans collateralizing the pass-through certificates and entered into the gain or loss on sale when the loans were sold in 1996. 8. BORROWINGS Borrowings consisted of the following credit facilities available at December 31, 1996, and 1995:
DECEMBER 31, 1996 DECEMBER 31, 1995 ---------------------------------- ---------------------------------- INTEREST COMMITMENT PRINCIPAL INTEREST COMMITMENT PRINCIPAL CREDIT FACILITY EXPIRATION DATE INDEX RATE AMOUNT OUTSTANDING RATE AMOUNT OUTSTANDING --------------- ----------------- ------------- -------- ------------- ----------- -------- ------------- ----------- Credit Suisse First December 31, 1997 Libor plus 7.31% $ 200,000 $ 48,673 -- $ -- $ -- Boston............ 125 basis points Banco Santander.... Under extension Libor plus 7.63% 50,000 16,181 8.00% 25,000 12,615 225 basis points Greenwich Capital 30 days on demand Libor plus 7.36% Not specified 35,158 7.25% Not specified 10,054 Financial Markets, 125 basis Inc............... points Southern Pacific Not specified Coupon less 9.17% 25,228 25,228 9.17% 46,968 46,968 Thrift & Loan..... approximately 50 basis points ------------- -------- ------------- ------- $ 275,228 $125,240 $ 71,968 $69,637 ============= ======== ============= =======
The proceeds from the Greenwhich Financial Capital Products, Inc. credit facility at December 31, 1996, were used to purchase asset backed securities totaling $39.3 million which are included in securities availble for sale in the accompanying balance sheets. F-66 FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 9. BONDS In December 1995, the Company, through a special purpose entity (SPE), issued pass-through certificates (the Bonds) secured by $105.2 million of franchise loans included in franchise loans held for sale to various investors. The debentures consist of three separate classes, Class A, Class B and Class C, with principal balances at December 31, 1995 of approximately $92.6 million, $4.2 million and $4.2 million, respectively. The Class C bonds are subordinate to Class B and both Class B and C are subordinate to Class A. The Bonds have a weighted average loan rate of 9.63%, a pass-through rate of 8.59%, and stated maturity of 13 years. The premium associated with the Bonds of $11.0 million is being amortized as an adjustment to interest expense over the anticipated life of the Bonds. Due to the Company's retained interest in the SPE and the disproportionate payments on the pass-through certificates, the Company accounted for this transaction as a financing. On March 28, 1996, the Company sold its interest in the SPE to Imperial Credit Mortgage Holdings, Inc. and affiliate, receiving proceeds from the sale of $2.8 million. As a result of the sale, the Company removed from its balance sheet the loans and related bonds of $111.2 million and $112.0 million, respectively, resulting in a net gain of $3.6 million. 10. RESIDUAL INTEREST DUE TO OWNER AND RESTRICTED CASH The SPE is required to maintain in a separate reserve account a cash balance equal to .5% of the original outstanding principal balance of the mortgage loans collateralizing the Bonds. The remaining balance in this account, if any, is payable to the residual owner of the SPE at the date the Bonds mature. The corresponding cash balance is reflected as restricted cash. 11. PROFIT SHARING AND 401(K) PLANS Beginning July 1, 1993, ICII initiated a 401(k) plan in which employees of the Company are eligible to participate. Under the plan, employees may elect to enroll at the beginning of any month in which the employee has been employed for at least six months. Employees may contribute up to 14% of their salaries. The Company will match 50% of the employee's contribution up to 4% of the employee's compensation. The Company may also make a discretionary contribution on an annual basis to be allocated to participants who have contributed in excess of 4% of their compensation. The allocation is based upon a formula set by the plan and requires a five-year vesting period. All forfeitures are allocated to the remaining participants in the plan. Distribution of vested benefits to a terminated participant in the 401(k) is made in accordance with the contribution allocation form signed by the employee. Distributions are made, by election of the participant, in either certificates of deposit, ICII common stock and stock or bond mutual funds or a combination thereof. The Company contributed $88,000 and $13,000 to the 401(k) plan in for the year ended December 31, 1996 and from June 30, 1995 (inception) through December 31, 1995, respectively. 12. TRANSACTIONS WITH AFFILIATES In the ordinary course of business, the Company has conducted transactions with affiliated companies. All such transactions are conducted at "arm's length" in accordance with the Company's policies. At December 31, 1995, the Company had a net receivable of principal and interest on franchise loans from SPTL of $579,000. In July 1995, the Company sold approximately $3.8 million of franchise servicing rights to SPTL, resulting in a gain of $31,000. The Company also had a receivable from ICII, a member, of $924,000 bearing interest at 10.4% as of December 31, 1995 and a payable of $526,000 relating to ICII's residual interest in the Franchise Loan Receivable Trust 1995-B (FLRT 1995-B). F-67 FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The Company provides subservicing on a contractual basis for servicing rights owned by SPTL. At December 31, 1996 and 1995, there was approximately $183 million and $262 million of loans outstanding underlying this subservicing arrangement. The Company receives approximately 13 basis points for providing such services. The Company purchased $55.3 million in franchise loans at a $6.0 million premium from SPTL on December 29, 1995. These franchise loans were purchased by SPTL from Greenwich on November 30, 1995. The selling price between the Company and SPTL approximated SPTL's carrying value which approximated fair value. SPTL has provided warehouse facilities for the Company under which the loans are closed under SPTL's name with the intent to resell the franchise loans to the Company for inclusion into securitizations. The rate charged is equivalent to the rate earned on the franchise loans less approximately 50 basis points, or 9.17%. As of December 31, 1996 and December 31, 1995, the Company had an outstanding balance of $25.2 million and $47.0 million, respectively with respect to this facility. During the year ended December 31, 1996 and from June 30, 1995 (inception) through December 31, 1995, the Company paid SPTL $10.3 million and $1.2 million in interest expense associated with this facility, respectively. At December 31, 1996, the Company had borrowings from ICII outstanding of $17.7 million. The Company pays interest at 15% on the outstanding balance. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments include, interest bearing deposits, securities available for sale, retained interest in loan securitizations, receivables from and payables to affiliate, borrowings and bonds. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates presented do not include the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Interest bearing deposits: The carrying values reported in the balance sheets approximate fair values due to the short-term nature of the assets. Franchise loans held for sale: The fair value of the loan portfolio is generally estimated by discounting expected future cash flows at an estimated market rate of interest. A market rate of interest is estimated based on the AAA Corporate Bond Rate, adjusted for credit risk and the Company's cost to administer such loans. Retained interest in loan securitizations and investments available for sale: The carrying value reported in the balance sheet approximates fair value. The fair value was estimated by discounting future cash flows using rates that an unaffiliated third-party purchaser would require on instruments with similar terms and remaining maturities. Receivable due from SPTL and receivable due from ICII: The fair values of these receivables approximate the carrying values due to their short-term nature. Payable due to Imperial Credit Industries: The fair values of these receivables approximate the carrying values due to their short-term nature. F-68 FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Borrowings: The carrying value reported in the balance sheet approximates fair value, due to the variable interest rates on these borrowings. Bonds: The carrying value reported in the balance sheet approximates fair value due to the proximity of issuance to year-end. The estimated fair values of the Company's financial instruments are as follows:
1996 1995 ------------------- ------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- (IN THOUSANDS) Assets: Interest-bearing deposits......... $ 2,594 $ 2,594 $ -- $ -- Franchise loans held for sale..... 98,915 102,872 181,254 185,165 Retained interest in loan securitizations.................. 6,908 6,908 -- -- Securities available for sale..... 39,349 39,349 -- -- Receivable due from affiliate..... -- -- 579 579 Receivable due from member........ -- -- 924 924 Forward Treasury contracts........ 1,287 1,287 632 632 Liabilities: Payable due to Imperial Credit Industries....................... $ 17,728 $ 17,728 $ -- $ -- Borrowings........................ 125,240 125,240 69,637 54,836 Bonds............................. -- -- 111,995 111,995 Residual interest due to member... -- -- 526 526
14. COMMITMENTS AND CONTINGENCIES Leases Minimum rental commitments under all noncancelable operating leases at December 31, 1996 were as follows:
(IN THOUSANDS) 1997.......................................................... $ 498 1998.......................................................... 521 1999.......................................................... 534 2000.......................................................... 550 2001.......................................................... 524 ------ Thereafter.................................................. 151 ------ Total....................................................... $2,778 ======
Rent expense for the year and six months ended December 31, 1996 and 1995 was $292,000 and $94,000, respectively. LITIGATION The Company is involved in litigation arising from the normal course of business. The Company is currently involved in a dispute with a vendor regarding the value of services rendered. Management does not believe that an adverse settlement, if any, would have a material impact on the Company's financial condition or results of operations. F-69 FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The predecessor entity to the Company, and an officer of such entity and of the Company, among others, are named as defendants in De Wald et al. vs. Knyal et al. filed on November 15, 1996 in the Los Angeles Superior Court. The complaint seeks an accounting, monetary and punitive damages for alleged breach of contract, breach of fiduciary duty, breach of implied covenant of good faith and fair dealing and fraud arising from an alleged business relationship. The Company has not been named as a defendant in this lawsuit. 15. SUBSEQUENT EVENT Effective January 19, 1997, the Company is a guarantor of ICII's $200 million 9 7/8% Senior Notes due January 15, 2007. F-70 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC UNAUDITED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, DECEMBER 31, 1997 1996 --------- ------------ ASSETS ------ Interest bearing deposits................................ $ 2,630 $ 2,594 Securities available for sale, at market................. 2,685 39,349 Loans held for sale...................................... 249,220 98,915 Retained interest in loan and lease securitizations...... 6,601 6,908 Accrued interest on loans................................ 1,190 560 Premises and equipment, net.............................. 1,341 1,162 Goodwill................................................. 4,251 4,332 Other assets............................................. 5,824 6,356 -------- -------- Total assets........................................... $273,742 $160,176 ======== ======== LIABILITIES AND MEMBERS' EQUITY ------------------------------- Book Overdraft........................................... $ 614 $ 171 Payable to Imperial Credit Industries, Inc............... 20,935 17,728 Other borrowings......................................... 238,116 125,240 Accrued interest payable................................. -- 148 Other liabilities........................................ 2,411 2,432 -------- -------- Total liabilities...................................... $262,076 145,719 -------- -------- Members' equity: Members' Capital......................................... $ 5,792 $ 5,792 Retained earnings........................................ 5,874 8,665 -------- -------- Total members' equity.................................. 11,666 14,457 -------- -------- Total liabilities and members' equity.................. $273,742 $160,176 ======== ========
See accompanying notes to financial statements. F-71 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC UNAUDITED STATEMENTS OF INCOME (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ----------------- 1997 1996 -------- ------- Revenue: Gain on sale of loans...................................... $ 390 $ 6,668 Interest income............................................ 3,342 656 -------- ------- Total interest income.................................... 3,342 656 Interest expense........................................... 2,699 633 -------- ------- Net interest income...................................... 643 23 -------- ------- Loan servicing income...................................... 640 282 Gain (loss) on sale of investment.......................... (403) -- Other income............................................... -- 63 -------- ------- Total other income....................................... 237 345 -------- ------- Total revenue............................................ 1,270 7,036 -------- ------- Expenses: Personnel expense.......................................... 2,598 2,691 Occupancy expense.......................................... 116 57 Data processing expense.................................... 7 1 Professional services...................................... 478 69 Telephone and other communications......................... 86 3 General and administrative expense......................... 776 602 -------- ------- Total expenses........................................... 4,061 3,423 -------- ------- Net income (loss).......................................... $ (2,791) $ 3,613 ======== =======
See accompanying notes to financial statements. F-72 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC UNAUDITED STATEMENTS OF CASH FLOW (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------- 1997 1996 --------- --------- Cash flows from operating activities: Net income............................................. $ (2,791) $ 3,613 Adjustments to reconcile net income to net cash, provided by (used in) operating activities: Depreciation......................................... 110 15 Amortization......................................... 81 78 Net change in loans held for sale.................... (150,305) 156,396 Net change in accrued interest on loans.............. (630) 915 Net change in retained interest in loan and lease securitizations..................................... 307 -- Net change in accrued interest payable............... (148) (1,062) Net change in residual interest due owner............ -- (526) Net change in other assets........................... 532 (524) Net change in other liabilities...................... (21) 371 --------- --------- Net cash provided by (used in) operating activities...... (152,865) 159,276 --------- --------- Cash flows from investing activities: Net change in interest bearing deposits................ (36) (724) Net change in securities available for sale............ 36,664 -- Purchases of premises and equipment.................... (289) (73) --------- --------- Net cash provided by (used in) investing activities...... 36,339 (797) --------- --------- Cash flows from financing activities: Net change in receivable from affiliates............... -- (1,113) Net change in payable to affiliates.................... 3,207 -- Net change in borrowings............................... 112,876 (44,924) Net change in bonds payable............................ -- 111,995) --------- --------- Net cash provided by (used in) financing activities...... 116,083 (158,032) --------- --------- Net change in cash....................................... (443) 447 Cash at beginning of year................................ (171) (445) --------- --------- Cash at end of period.................................... $ (614) $ 2 ========= =========
See accompanying notes to financial statements. F-73 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION On June 30, 1995, Imperial Credit Industries, Inc. (ICII) acquired from Greenwich Capital Financial Products, Inc. (Greenwich), certain assets of Greenwich's Franchise Mortgage Acceptance Company division (the FMAC Division), including all of Greenwich's rights under certain servicing contracts entered into by the FMAC Division (the Servicing Contracts). The Servicing Contracts pertain to the servicing of franchise loans owned by Greenwich not yet securitized. Concurrent with the closing of the transactions described above, ICII entered into an operating agreement with Wayne L. Knyal (Knyal), the former president of the FMAC Division, for the formation of a California limited liability company named Franchise Mortgage Acceptance Company LLC (the Company). In connection with the acquisition, the Company or its affiliates assumed certain liabilities related to the Servicing Contracts and Greenwich agreed to act as the Company's exclusive agent in connection with securitization of franchise loans for a period of 24 months. The Company was formed to originate, securitize and service franchise loans. Under the terms of the operating agreement, in exchange for a 66 2/3% ownership interest in the Company, ICII was obligated to contribute to the Company $1.3 million in cash and all of the assets purchased from Greenwich. In exchange for a 33 1/3% ownership interest in the Company, Knyal caused his wholly owned company, Franchise Mortgage Acceptance Corporation ("FMAC Corporation"), to contribute to the Company all of its rights under a servicing contract pertaining to franchise loans that were previously securitized by FMAC Corporation. On June 30, 1995, ICII completed the acquisition of certain net assets of the FMAC Division for a net purchase price of $7.6 million which included $3.8 million in contingent consideration based on loan originations after the date of acquisition up to a maximum principal amount of such loans equal to $250.0 million. 2. BASIS OF PRESENTATION The accompanying financial statements have been prepared in conformity with generally accepted accounting principles and with the instructions to form 10- Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods presented. Actual results could differ significantly from those estimates. Prior year's financial statements have been reclassified to conform to the 1997 presentation. F-74 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) 3. LOANS HELD FOR SALE Loans held for sale consisted of the following at March 31, 1997 and December 31, 1996:
AT MARCH 31, AT DECEMBER 31, 1997 1996 ------------ --------------- (IN THOUSANDS) Franchise loans held for sale................ $242,075 $94,490 Franchise equipment loans and leases held for sale........................................ 12,212 4,385 Net deferred loan fees....................... (3,249) (750) Unearned lease income........................ (2,053) (497) Deferred hedging loss........................ 235 1,287 -------- ------- $249,220 $98,915 ======== =======
4. ACCOUNTING PRONOUNCEMENT The Company has adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." ("SFAS 125"), which establishes accounting for transfers and servicing of financial assets and extinguishment of liabilities. This statement specifies when financial assets and liabilities are to be removed from an entity's financial statements, the accounting for servicing assets and liabilities and the accounting for assets that can be contractually prepaid in such a way that the holder would not recover substantially all of its recorded investment. Under SFAS 125, an entity recognizes only assets it controls and liabilities it has incurred, discontinues recognition of assets only when control has been surrendered, and discontinues recognition of liabilities only when they have been extinguished. SFAS 125 requires that the selling entity continue to carry retained interests, including servicing assets, relating to assets it no longer recognizes. Such retained interests are based on the relative fair values of the retained interests of the subject assets at the date of transfer. Transfers not meeting the criteria for sale recognition are accounted for as a secured borrowing with a pledge of collateral. SFAS 125 requires an entity to recognize its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset or liability. The servicing asset or liability is to be amortized in proportion to, and over the period of, net servicing income or loss. Servicing assets and liabilities are to be assessed for impairment based on their fair value. SFAS 125 modifies the accounting for interest-only strips or retained interests in securitizations, such as capitalized servicing fees receivable, that can be contractually prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment. In this case, it requires that they be classified as available for sale or as trading securities. Interest-only strips and retained interests are to be recorded at market value. Under the provisions of SFAS 125, management has determined that mortgage backed securities retained by the Company as a result of securitization transactions will be classified as trading securities. All other retained securities will be classified as available for sale or trading as determined at the time of securitization. Changes in market value are included in operations, if classified as trading securities, or in shareholders' equity as unrealized gains or losses, net of the related tax effect, if classified as available for sale. SFAS 125 was effective for the Company on January 1, 1997. The implementation of SFAS 125 did not have a material impact on the Company's financial condition or results of operations. F-75 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN- TATIONS IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTA- TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE TRUST OR THE SUBSIDIARY GUARANTORS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE TRUST, THE COMPANY OR THE SUBSIDIARY GUARANTORS SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECU- RITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURI- TIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. ----------------- TABLE OF CONTENTS
Page ---- Available Information...................................................... vi Incorporation by Reference................................................. vii Prospectus Summary......................................................... 1 Risk Factors............................................................... 17 Use of Proceeds............................................................ 31 Accounting Treatment....................................................... 31 Capitalization............................................................. 32 Selected Consolidated Financial Data....................................... 33 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................................ 36 Business................................................................... 60 Management................................................................. 90 Security Ownership of Certain Beneficial Owners and Management............. 97 Certain Transactions....................................................... 98 The Exchange Offer......................................................... 105 The Trust.................................................................. 115 Description of Securities.................................................. 116 Description of Debentures.................................................. 131 Description of Guarantee................................................... 160 Relationship Among the Par Securities, the Debentures and the Guarantee.... 162 Certain United States Federal Income Tax Consequences...................... 164 ERISA Considerations....................................................... 167 Plan of Distribution....................................................... 168 Legal Matters.............................................................. 168 Experts.................................................................... 168 Index to ICII Consolidated Financial Statements............................ F-1 Index to FMAC Financial Statements......................................... F-56
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $70,000,000 IMPERIAL CREDIT CAPITAL TRUST I REMARKETED PAR SECURITIES, SERIES B (Liquidation Amount $1,000 per Security) Fully and unconditionally guaranteed, to the extent set forth herein, by [LOGO OF IMPERIAL CREDIT INDUSTRIES, INC.] ----------------- PROSPECTUS , 1997 ----------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Declaration of Imperial Credit Capital Trust I (the "Trust") provides that no Regular Trustee, affiliate of the Regular Trustee, or any officers, directors, shareholders, members, partners, employees, representatives or agents of any Regular Trustee, or any employee or agent of the Trust or its affiliates (each, an "Indemnified Person") shall be liable, responsible or accountable in damages or otherwise to the Trust or any employee or agent of the Trust or its affiliates for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by such Declaration or by law, except that an Indemnified Person shall be liable for any loss, damage or claim incurred by reason of such Indemnified Person's gross negligence or willful misconduct with respect to such acts or omissions. The Declaration also provides that to the fullest extent permitted by applicable law, Imperial Credit Industries, Inc. shall indemnify and hold harmless each Indemnified Person from and against any loss, damage or claim incurred by such Indemnified Person by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by such Declaration or by law, except that an Indemnified Person shall be liable for any loss, damage or claim incurred by reason of such Indemnified Person's gross negligence or willful misconduct with respect to such acts or omissions. The Declaration further provides that, to the fullest extent permitted by applicable law, expenses (including legal fees) incurred by an Indemnified Person in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by Imperial Credit Industries, Inc., prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt of an undertaking by or on behalf of such Indemnified Person to repay such amount if it shall be determined that the Indemnified Person is not entitled to be indemnified for the underlying cause of action as authorized by the Declaration. Imperial Credit Industries, Inc., Imperial Business Credit, Inc. and Imperial Credit Advisors, Inc. are California corporations, and Franchise Mortgage Acceptance Company LLC is a California limited liability company (collectively, the "California Registrants"), all of such entities are governed by the California General Corporation Law (the "CGCL"). Under Section 317 of the CGCL, a California corporation is in certain circumstances permitted to indemnify its directors and officers against certain expenses (including attorneys' fees), judgements, fines, settlements and other amounts actually and reasonably incurred in connection with threatened, pending or completed civil, criminal, administrative or investigative actions, suits or proceedings (other than an action by or in the right of the California Registrants), in which such persons were or are parties, or are threatened to be made parties, by reason of the fact that they were or are directors or officers of the California Registrants, if such persons acted in good faith and in a manner they reasonably believed to be in the best interests of the California Registrants, and with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. In addition, the California Registrants is in certain circumstances permitted to indemnify its directors and officers against certain expenses incurred in connection with the defense or settlement of a threatened, pending or completed action by or in the right of the California Registrants, and against amounts paid in settlement of any such action, if such persons acted in good faith and in a manner they believed to be in the best interests of the California Registrants and their shareholders provided that the specified court approval is obtained. As permitted by Section 317 of the CGCL, the Articles of Incorporation and By-Laws of the California Registrants provide that the California Registrants are authorized to provide indemnification for their directors and officers for breach of their duty to the California Registrants and their shareholders through bylaw provisions or through agreements with the directors and officers, or both, in excess of the indemnification otherwise permitted by Section 317 of the CGCL. The California Registrants's By-laws each provide for indemnification II-1 of its directors and officers to the maximum extent permitted by Section 317 of the CGCL. In addition, agreements entered into by each of the California Registrants with its directors and its executive officers require the California Registrants to indemnify such persons against expenses, judgments, fines settlements and other amounts reasonably incurred in connection with any proceeding to which any such person may be made a party by reason of the fact that such person was an agent of the California Registrants (including judgments, fines and settlements in or of a derivative action, unless indemnification is otherwise prohibited by law), provided such person acted in good faith and in a manner he reasonably believed to be in the best interests of the California Registrants and, in the case of a criminal proceeding, had no reason to believe his conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. The Articles of Incorporation of each of the California Registrants provide that the personal liability of the directors of the California Registrants for monetary damages shall be eliminated to the fullest extent permissible under California law. Under Section 204(a)(10) of the CGCL, the personal liability of a director for monetary damages in an action brought by or in the right of the corporation for breach of the director's duty to the corporation may be eliminated, except for the liability of a director resulting from (I) acts or omissions involving intentional misconduct or the absence of good faith, (ii) any transaction from which a director derived an improper personal benefit, (iii) acts or omissions showing a reckless disregard for the director's duty, (iv) acts or omissions constituting an unexcused pattern of inattention to the director's duty or (v) the making of an illegal distribution to shareholders or an illegal loan or guaranty. Auto Marketing Network, Inc., a Florida corporation ("AMN"), is governed by the Florida Business Corporation Act. Section 607.0850 of the Florida Business Corporation Act, provides that a corporation may indemnify any person who was or is a party (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against liability incurred in connection with such proceeding, including any appeal thereof, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Section 0850 further provides that a corporation similarly may indemnify any such person serving in any such capacity who was or is a party in the right of the corporation to procure a judgment in its favor, against the estimated expense of litigating the proceeding to conclusion actually and reasonably incurred in connection with the defense or settlement of such proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable unless, and only to the extent that the court in which such proceeding was brought, or any other court of competent jurisdiction, shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such other court shall deem proper. Section 607.0831 of the Florida Business Corporation Act provides that a director is not personally liable for monetary damages to the corporation or any other person for any statement, vote, decision, or failure to act, regarding corporate management or policy, by a director, unless (i) the director breached or failed to perform his duties as a director, (ii) the director's breach or failure to perform constitutes a violation of criminal law unless the director had no reasonable cause to believe his conduct was unlawful, the director derived an improper personal benefit directly or indirectly, (iii) the director's conduct triggers the liability provisions of Section 0834 (relating to unlawful distributions), (iv) the director's conduct constitutes a conscious disregard for the best interest of the corporation, or will misconduct in a proceeding by or in the right of the corporation or a shareholder, or (v) the director's conduct constitutes recklessness or an act or omission committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety, or property in a proceeding by or in the right of someone other than the corporation or a shareholder. II-2 The AMN's Articles of Incorporation provide that it is authorized to indemnify any director or officer, or former director or officer, in the manner provided in it's bylaws and to the fullest extent permitted by the laws of the State of Florida. There are no further provisions in AMN's bylaws for indemnification of directors and officers. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 3.1(a)* Articles of Incorporation, as amended, of Imperial Credit Industries, Inc. 3.1(b)** Articles of Incorporation of Imperial Business Credit, Inc. 3.1(c)** Articles of Incorporation of Imperial Credit Advisors, Inc. 3.1(d)** Amended Articles of Organization of Franchise Mortgage Acceptance Company LLC 3.1(e)** Amended and Restated Articles of Organization of Auto Marketing Network, Inc. 3.2(a)* Bylaws of Imperial Credit Industries, Inc. 3.2(b)** Amended Bylaws of Imperial Business Credit, Inc. 3.2(c)** Bylaws of Imperial Credit Advisors, Inc. 3.2(d)** Operating Agreement of Franchise Mortgage Acceptance Company 3.2(e)** Amended and Restated Bylaws of Auto Marketing Network, Inc. 4.1 Certificate of Trust of Imperial Credit Capital Trust I 4.2 Amended and Restated Declaration of Trust of Imperial Credit Capital Trust I, with form of Remarketed Par Securities, dated June 9, 1997. 4.3 Indenture, by and among, Imperial Credit Industries, Inc., Imperial Business Credit, Inc., Imperial Credit Advisors, Inc., Franchise Mortgage Acceptance Company, LLC, Auto Marketing Network, Inc., and the Chase Trust Company of California, dated as of June 9, 1997, with forms of Resettable Rate Debentures 4.4 Registration Rights Agreement, by and among, Imperial Credit Capital Trust I, Imperial Credit Industries, Inc., Imperial Business Credit, Inc., Imperial Credit Advisors, Inc., Franchise Mortgage Acceptance Company, LLC, Auto Marketing Network, Inc., and Lehman Brothers, Inc., dated as of June 9, 1997 4.5 Remarketing Agreement, by and among, Imperial Credit Capital Trust I, Imperial Credit Industries, Inc., and Lehman Brothers, Inc., dated as of June 9, 1997 4.6 Form of Guarantee Agreement to be executed by Imperial Credit Industries, Inc., for the benefit of the Holders of Remarketed Par Securities, Series B 5.1 Opinion of Richards, Layton & Finger, P.A., regarding the legality of the Remarketed Par Securities 5.2 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein regarding the legality of the Resettable Rate Debentures 8.1 Opinion of Simpson Thacher & Bartlett regarding tax matters 21.1 Subsidiaries of Imperial Credit Industries, Inc. 23.1(a) Consent of KPMG Peat Marwick LLP regarding Imperial Credit Industries, Inc. 23.1(b) Consent of KPMG Peat Marwick LLP regarding Franchise Mortgage Acceptance Company LLC 23.2 Consent of Richards, Layton & Finger, P.A. (contained in Exhibit 5.1) 23.3 Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in Exhibit 5.2) 23.4 Consent of Simpson Thacher & Bartlett (contained in Exhibit 8.1)
II-3 24.1 Power of Attorney (included on signature page of Registration Statement) 25.1 Statement of Eligibility of Trustee under the Trust Indenture Act of 1939, as amended, of the Chase Trust Company of California as Property Trustee for the Amended and Restated Declaration of Trust of Imperial Credit Capital Trust I 25.2 Statement of eligibility of Trustee under the Trust Indenture Act of 1939, as amended, of the Chase Trust Company of California as Trustee under the Indenture 25.3 Statement of Eligibility of Trustee under the Trust Indenture Act of 1939, as amended, of the Chase Trust Company of California as Guarantee Trustee to the Guarantee Agreement 99.1 Form of Letter of Transmittal 99.2 Form of Notice of Guaranteed Delivery 99.3 Form of Exchange Agent Agreement by and between Imperial Credit Capital Trust I and Chase Trust Company of California
- -------- * Incorporated by reference to Imperial Credit Industries, Inc.'s Registration Statement on Form S-1 (Registration No. 33-45606) declared effective May 26, 1992. ** Incorporated by reference to the Registration Statement on Form S-4 (Registration No. 333-22141) declared effective March 31, 1997. ITEM 22. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrants pursuant to the foregoing provisions, or otherwise, the Registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrants of expenses incurred or paid by a director, officer or controlling person of the Registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrants will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The Registrants hereby undertake to respond to requests for information that is incorporated by reference into the Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means, including information contained in documents filed subsequent to the effective date of the Registration Statement. (c) The Registrants hereby undertake to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANTS HAVE DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA ON JUNE 30, 1997. Imperial Credit Industries, Inc. /s/ H. Wayne Snavely By: _________________________________ CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints H. Wayne Snavely and Irwin L. Gubman and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post- effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorneys-in-fact and agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED. SIGNATURE TITLE DATE --------- ----- ---- /s/ H. Wayne Snavely Chairman, Chief June 30, 1997 - ------------------------------------- Executive Officer, H. WAYNE SNAVELY President (Principal Executive Officer) /s/ Kevin E. Villani Executive Vice June 30, 1997 - ------------------------------------- President and Chief KEVIN E. VILLANI Financial Officer (Principal Financial and Accounting Officer) /s/ Stephen J. Shugerman Director June 30, 1997 - ------------------------------------- STEPHEN J. SHUGERMAN /s/ Joseph R. Tomkinson Director June 30, 1997 - ------------------------------------- JOSEPH R. TOMKINSON II-5 SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert S. Muehlenbeck Director June 30, 1997 - ------------------------------------- ROBERT S. MUEHLENBECK /s/ G. Louis Graziadio, III Director June 30, 1997 - ------------------------------------- G. LOUIS GRAZIADIO, III /s/ Perry A. Lerner Director June 23, 1997 - ------------------------------------- PERRY A. LERNER /s/ James Clayburn LaForce, Jr. Director June 30, 1997 - ------------------------------------- JAMES CLAYBURN LAFORCE, JR. II-6 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANTS HAVE DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA ON JUNE 30, 1997. Imperial Business Credit, Inc. /s/ H. Wayne Snavely By: _________________________________ CHAIRMAN POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints H. Wayne Snavely and Irwin L. Gubman and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post- effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorneys-in-fact and agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED. SIGNATURE TITLE DATE --------- ----- ---- /s/ H. Wayne Snavely Chairman June 30, 1997 - ------------------------------------- H. WAYNE SNAVELY /s/ Philip Walden Director and Chief June 30, 1997 - ------------------------------------- Executive Officer PHILIP WALDEN (Principal Executive Officer) /s/ Stephen J. Olson Chief Financial June 30, 1997 - ------------------------------------- Officer (Principal STEPHEN J. OLSON Financial and Accounting Officer) /s/ Stephen J. Shugerman Director June 30, 1997 - ------------------------------------- STEPHEN J. SHUGERMAN II-7 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANTS HAVE DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA ON JUNE 30, 1997. Imperial Credit Advisors, Inc. /s/ H. Wayne Snavely By: _________________________________ CHAIRMAN POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints H. Wayne Snavely and Irwin L. Gubman and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post- effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorneys-in-fact and agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED. SIGNATURE TITLE DATE --------- ----- ---- /s/ H. Wayne Snavely Chairman (Principal June 30, 1997 - ------------------------------------- Executive Officer) H. WAYNE SNAVELY /s/ Thomas Markel Director and Chief June 30, 1997 - ------------------------------------- Financial Officer THOMAS MARKEL (Principal Financial and Accounting Officer) /s/ Stephen J. Shugerman Director June 30, 1997 - ------------------------------------- STEPHEN J. SHUGERMAN /s/ Glenn Wilson, Jr. Director June 30, 1997 - ------------------------------------- GLENN WILSON, JR. II-8 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANTS HAVE DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA ON JUNE 30, 1997. Franchise Mortgage Acceptance Company LLC /s/ H. Wayne Snavely By: _________________________________ CHAIRMAN AND MANAGER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints H. Wayne Snavely and Irwin L. Gubman and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post- effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorneys-in-fact and agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED. SIGNATURE TITLE DATE --------- ----- ---- /s/ H. Wayne Snavely Chairman June 30, 1997 - ------------------------------------- H. WAYNE SNAVELY /s/ Wayne Knyal Manager and Chief June 30, 1997 - ------------------------------------- Executive Officer WAYNE KNYAL (Principal Executive Officer) /s/ Raedelle Walker Chief Financial June 30, 1997 - ------------------------------------- Officer (Principal RAEDELLE WALKER Financial Officer) Manager June , 1997 - ------------------------------------- RONALD V. DAVIS /s/ Michael Matkins Manager June 24, 1997 - ------------------------------------- MICHAEL MATKINS /s/ Stephen J. Shugerman Manager June 30, 1997 - ------------------------------------- STEPHEN J. SHUGERMAN II-9 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANTS HAVE DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA ON JUNE 30, 1997. Auto Marketing Network, Inc. /s/ H. Wayne Snavely By: _________________________________ CHAIRMAN POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints H. Wayne Snavely and Irwin L. Gubman and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post- effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorneys-in-fact and agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED. SIGNATURE TITLE DATE --------- ----- ---- /s/ H. Wayne Snavely Chairman June 30, 1997 - ------------------------------------- H. WAYNE SNAVELY /s/ Stephen S. Raskin Director and Chief June 30, 1997 - ------------------------------------- Executive Officer STEPHEN S. RASKIN (Principal Executive Officer) /s/ Glenn Yesner Chief Financial June 30, 1997 - ------------------------------------- Officer (Principal GLENN YESNER Financial and Accounting Officer) /s/ Patricia Magee Daly Director June 30, 1997 - ------------------------------------- PATRICIA MAGEE DALY /s/ Irwin Gubman Director June 30, 1997 - ------------------------------------- IRWIN GUBMAN /s/ Kevin E. Villani Director June 30, 1997 - ------------------------------------- KEVIN E. VILLANI II-10 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER ------- ----------- ----------- 3.1(a)* Articles of Incorporation, as amended, of Imperial Credit Industries, Inc. 3.1(b)** Articles of Incorporation of Imperial Business Credit, Inc. 3.1(c)** Articles of Incorporation of Imperial Credit Advisors, Inc. 3.1(d)** Amended Articles of Organization of Franchise Mortgage Acceptance Company LLC 3.1(e)** Amended and Restated Articles of Organization of Auto Marketing Network, Inc. 3.2(a)* Bylaws of Imperial Credit Industries, Inc. 3.2(b)** Amended Bylaws of Imperial Business Credit, Inc. 3.2(c)** Bylaws of Imperial Credit Advisors, Inc. 3.2(d)** Operating Agreement of Franchise Mortgage Acceptance Company 3.2(e)** Amended and Restated Bylaws of Auto Marketing Network, Inc. 4.1 Certificate of Trust of Imperial Credit Capital Trust I 4.2 Amended and Restated Declaration of Trust of Imperial Credit Capital Trust I, with form of Remarketed Par Securities, dated June 9, 1997 4.3 Indenture, by and among, Imperial Credit Industries, Inc., Imperial Business Credit, Inc., Imperial Credit Advisors, Inc., Franchise Mortgage Acceptance Company, LLC, Auto Marketing Network, Inc., and the Chase Trust Company of California, dated as of June 9, 1997, with forms of Resettable Rate Debentures 4.4 Registration Rights Agreement, by and among, Imperial Credit Capital Trust I, Imperial Credit Industries, Inc., Imperial Business Credit, Inc., Imperial Credit Advisors, Inc., Franchise Mortgage Acceptance Company, LLC, Auto Marketing Network, Inc., and Lehman Brothers, Inc., dated as of June 9, 1997 4.5 Remarketing Agreement, by and among, Imperial Credit Capital Trust I, Imperial Credit Industries, Inc., and Lehman Brothers, Inc., dated as of June 9, 1997 4.6 Form of Guarantee Agreement to be executed by Imperial Credit Industries, Inc., for the benefit of the Holders of Remarketed Par Securities, Series B 5.1 Opinion of Richards, Layton & Finger, P.A., regarding the legality of the Remarketed Par Securities 5.2 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein regarding the legality of the Resettable Rate Debentures 8.1 Opinion of Simpson Thacher & Bartlett regarding tax matters 21.1 Subsidiaries of Imperial Credit Industries, Inc. 23.1(a) Consent of KPMG Peat Marwick LLP regarding Imperial Credit Industries, Inc. 23.1(b) Consent of KPMG Peat Marwick LLP regarding Franchise Mortgage Acceptance Company LLC 23.2 Consent of Richards, Layton & Finger, P.A. (contained in Exhibit 5.1) 23.3 Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in Exhibit 5.2) 23.4 Consent of Simpson Thacher & Bartlett (contained in Exhibit 8.1) 24.1 Power of Attorney (included on signature page of Registration Statement) 25.1 Statement of Eligibility of Trustee under the Trust Indenture Act of 1939, as amended, of the Chase Trust Company of California as Property Trustee for the Amended and Restated Declaration of Trust of Imperial Credit Capital Trust I
INDEX TO EXHIBITS--(CONTINUED)
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER ------- ----------- ----------- 25.2 Statement of Eligibility of Trustee under the Trust Indenture Act of 1939, as amended, of the Chase Trust Company of California as Trustee under the Indenture 25.3 Statement of Eligibility of Trustee under the Trust Indenture Act of 1939, as amended, of the Chase Trust Company of California as Guarantee Trustee to the Guarantee Agreement 99.1 Form of Letter of Transmittal 99.2 Form of Notice of Guaranteed Delivery 99.3 Form of Exchange Agent Agreement by and between Imperial Credit Capital Trust I and Chase Trust Company of California
- ------- * Incorporated by reference to Imperial Credit Industries, Inc.'s Registration Statement on Form S-1 (Registration No. 33-45606) declared effective May 26, 1992. ** Incorporated by reference to the Registration Statement on Form S-4 (Registration No. 333-22141) declared effective March 31, 1997. EX-4.1 2 CERTIFICATE OF TRUST EXHIBIT 4.1 CERTIFICATE OF TRUST OF IMPERIAL CREDIT CAPITAL TRUST I THIS Certificate of Trust of Imperial Credit Capital Trust I (the "Trust"), dated May 28, 1997, is being duly executed and filed by Chase Trust Company of -- California, Chase Manhattan Bank Delaware, Irwin L. Gubman, Kevin E. Villani and Paul B. Lasiter, as trustees, with the Secretary of State of the State of Delaware to form a business trust under the Delaware Business Trust Act (12 Del C. (S) 3801 et seq.). ----- ------ 1. Name. The name of the business trust formed hereby is Imperial Credit ---- Capital Trust I. 2. Delaware Trustee. The name and business address of the trustee of the ---------------- Trust in the State of Delaware is Chase Manhattan Bank Delaware, 1201 Market Street, Wilmington, Delaware 19801, Attention Corporate Trustee Administration. 3. Effective Date. This Certificate of Trust shall be effective upon -------------- filing with the Secretary of State. IN WITNESS WHEREOF, the undersigned, being the trustees of the Trust, have executed this Certificate of Trust as of the date first above written. CHASE TRUST COMPANY OF CALIFORNIA, as trustee By: /s/ Hans H Helley ---------------------------- Name: Hans H Helley Title: Assistant Vice President CHASE MANHATTAN BANK DELAWARE, as trustee By: /s/ John J. Gashin ---------------------------- Name: John J. Gashin Title: Vice President /s/ Irwin L. Gubman ------------------------------- IRWIN L. GUBMAN, as trustee /s/ Kevin E. Villani ------------------------------- KEVIN E. VILLANI, as trustee /s/ Paul B. Lasiter ------------------------------ PAUL B. LASITER, as trustee 2 State of Delaware Office of the Secretary of State -------------------------------- PAGE 1 I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF BUSINESS TRUST REGISTRATION OF "IMPERIAL CREDIT CAPITAL TRUST I", FILED IN THIS OFFICE ON THE TWENTY-EIGHTH DAY OF MAY, A.D. 1997, AT 4 O'CLOCK P.M. /s/ Edward J. Freel ----------------------------------- Edward J. Freel, Secretary of State [SEAL OF SECRETARY'S OFFICE, STATE OF DELAWARE] 2755421 8100 AUTHENTICATION: 8484790 971173785 DATE: 05-28-97 EX-4.2 3 AMENDED AND RESTATED DECLARATION OF TRUST EXHIBIT 4.2 - -------------------------------------------------------------------------------- AMENDED AND RESTATED DECLARATION OF TRUST of Imperial Credit Capital Trust I Dated as of June 9, 1997 - -------------------------------------------------------------------------------- CROSS REFERENCE TABLE*
Section of Trust Indenture Act of Section of 1939, as amended Agreement - ---------------- ---------- 310(a).................................................................6.3 310(b).........................................................6.3(c); 6.3(d) 310(c)...........................................................Inapplicable 311(a).................................................................2.2(b) 311(b).................................................................2.2(b) 311(c)...........................................................Inapplicable 312(a).................................................................2.2(a) 312(b).................................................................2.2(b) 312(c)...........................................................Inapplicable 313(a).................................................................2.3 313(b).................................................................2.3 313(c).................................................................2.3 313(d).................................................................2.3 314(a).................................................................2.4 314(b)...........................................................Inapplicable 314(c).................................................................2.5 314(d)...........................................................Inapplicable 314(e).................................................................2.5 314(f)...........................................................Inapplicable 315(a).........................................................3.9(b); 3.10(a) 315(b)..................................................................2.7(a) 315(c)..................................................................3.9(a) 315(d)..................................................................3.9(b) 316(a).....................................................2.6; 7.6(b); 7.7(c) 316(b)...........................................................Inapplicable 316(c)...........................................................Inapplicable 317(a)...................................................................3.16 317(b)...........................................................Inapplicable 318(a)................................................................2.1(c)
- --------------------- * This Cross-Reference Table does not constitute part of the Agreement and shall not have any bearing upon the interpretation of any of its terms or provisions. TABLE OF CONTENTS
Page ---- ARTICLE 1 INTERPRETATION AND DEFINITIONS................ 1 SECTION 1.1 Interpretation and Definitions...................... 1 Additional Interest.............................................. 2 Affiliate........................................................ 2 Applicable Distribution Rate..................................... 2 Authorized Officer............................................... 2 Beneficial Owners................................................ 2 Business Day..................................................... 2 Business Trust Act............................................... 2 Cedel............................................................ 3 Certificate...................................................... 3 Certificate of Trust............................................. 3 Change of Control................................................ 3 Closing Date..................................................... 3 Code............................................................. 3 Commission....................................................... 3 Common Securities Holder......................................... 3 Common Security.................................................. 4 Common Security Certificate...................................... 4 Corporate Trust Office........................................... 4 Covered Person................................................... 4 Debenture Issuer................................................. 4 Debenture Issuer Indemnified Person.............................. 4 Debenture Trustee................................................ 4 Debentures....................................................... 4 Delaware Trustee................................................. 4 Depositary....................................................... 4 Depositary Participant........................................... 4 Direct Action.................................................... 4 Distribution..................................................... 4 Distribution Date................................................ 4 DWAC............................................................. 5 Election Date.................................................... 5 Euroclear........................................................ 5 Excess Proceeds.................................................. 5 Fiduciary Indemnified Person..................................... 5 Fiscal Year...................................................... 5 Global Security.................................................. 5 Guarantee........................................................ 5 Holder........................................................... 5 Indemnified Person............................................... 5 Indenture........................................................ 5 Initial Distribution Rate........................................ 5 Initial Purchaser................................................ 5 Investment Company............................................... 6 i
Page ---- Investment Company Act........................................... 6 Investment Company Event......................................... 6 Legal Action..................................................... 6 List of Holders.................................................. 6 Majority in Liquidation Amount................................... 6 Maximum Adjusted Distribution Rate............................... 6 Moody's.......................................................... 6 New Preferred Securities......................................... 6 New Preferred Security Certificate............................... 6 New York Stock Exchange.......................................... 6 Notice of Election............................................... 6 Officers' Certificate............................................ 6 Paying Agent..................................................... 7 Person........................................................... 7 Preferred Security............................................... 7 Preferred Security Certificate................................... 7 Private Placement Legend......................................... 7 Property Account................................................. 7 Property Trustee................................................. 7 Pro Rata......................................................... 7 Qualified Institutional Buyer.................................... 8 Quorum........................................................... 8 Redemption/Distribution Notice................................... 8 Redemption Price................................................. 8 Registration Rights Agreement.................................... 8 Regular Trustee.................................................. 8 Regulation S..................................................... 8 Regulation S Global Security..................................... 8 Related Party.................................................... 8 Remarketing...................................................... 8 Remarketing Agent................................................ 8 Remarketing Agreement............................................ 8 Remarketing Settlement Date...................................... 9 Responsible Officer.............................................. 9 Restricted Global Security....................................... 9 Restricted Period................................................ 9 Restricted Security.............................................. 9 Restricted Subsidiary............................................ 9 Rule 144A........................................................ 9 Rule 3a-5........................................................ 9 Scheduled Remarketing Date....................................... 9 Scheduled Remarketing Settlement Date............................ 9 Senior Notes Guarantee........................................... 10 Securities....................................................... 10 Securities Act................................................... 10 Special Event.................................................... 10 Special Mandatory Redemption..................................... 10 Sponsor.......................................................... 10 Subsidiary Guarantee............................................. 10 Successor Delaware Trustee....................................... 10
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Page ---- Successor Entity................................................. 10 Successor Property Trustee....................................... 10 Successor Security............................................... 10 Super Majority................................................... 10 Tax Event........................................................ 10 Tax Opinion...................................................... 11 Tax Opinion Redemption........................................... 11 10% in Liquidation Amount........................................ 11 30-year Treasury Rate............................................ 11 Transfer Restricted Securities................................... 11 Transfer Restricted Securities Certificate....................... 11 Transfer Restricted Security Redemption.......................... 11 Trust............................................................ 12 Trust Enforcement Event.......................................... 12 Trust Indenture Act.............................................. 12 Trustee" or "Trustees............................................ 12 Wholly-Owned Restricted Subsidiary............................... 12 ARTICLE 2 TRUST INDENTURE ACT...................... 12 SECTION 2.1 Trust Indenture Act; Application.................... 12 SECTION 2.2 Lists of Holders of Securities...................... 13 SECTION 2.3 Reports by the Property Trustee..................... 13 SECTION 2.4 Periodic Reports to the Property Trustee............ 13 SECTION 2.5 Evidence of Compliance with Conditions Precedent.... 13 SECTION 2.6 Trust Enforcement Events; Waiver.................... 14 SECTION 2.7 Trust Enforcement Event; Notice..................... 15 ARTICLE 3 ORGANIZATION.......................... 16 SECTION 3.1 Name and Organization............................... 16 SECTION 3.2 Office.............................................. 16 SECTION 3.3 Purpose............................................. 16 SECTION 3.4 Authority........................................... 17 SECTION 3.5 Title to Property of the Trust...................... 17 SECTION 3.6 Powers and Duties of the Regular Trustees........... 17 SECTION 3.7 Prohibition of Actions by the Trust and the Trustees 20 SECTION 3.8 Powers and Duties of the Property Trustee........... 21 SECTION 3.9 Certain Duties and Responsibilities of the Property Trustee............................................. 23 SECTION 3.10 Certain Rights of Property Trustee.................. 25 SECTION 3.11 Delaware Trustee.................................... 28 SECTION 3.12 Execution of Documents.............................. 28 SECTION 3.13 Not Responsible for Recitals or Issuance of Securities.......................................... 28 SECTION 3.14 Duration of Trust................................... 28 SECTION 3.15 Mergers............................................. 28 SECTION 3.16 Property Trustee May File Proofs of Claim........... 30
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Page ---- ARTICLE 4 SPONSOR...................................... 31 SECTION 4.1 Responsibilities of the Sponsor..................... 31 SECTION 4.2 Indemnification and Expenses of the Trustees........ 32 ARTICLE 5 TRUST COMMON SECURITIES HOLDER................. 32 SECTION 5.1 Debenture Issuer's Purchase of Common Securities.... 32 SECTION 5.2 Covenants of the Common Securities Holder........... 32 ARTICLE 6 TRUSTEES............................ 33 SECTION 6.1 Number of Trustees.................................. 33 SECTION 6.2 Delaware Trustee; Eligibility....................... 33 SECTION 6.3 Property Trustee; Eligibility....................... 33 SECTION 6.4 Qualifications of Regular Trustees and Delaware Trustee Generally................................... 34 SECTION 6.5 Initial Regular Trustees............................ 34 SECTION 6.6 Appointment, Removal and Resignation of Trustees............................................ 35 SECTION 6.7 Vacancies among Trustees............................ 36 SECTION 6.8 Effect of Vacancies................................. 36 SECTION 6.9 Meetings............................................ 36 SECTION 6.10 Merger, Conversion, Consolidation or Succession to Business.............................. 37 ARTICLE 7 THE SECURITIES......................... 37 SECTION 7.1 General Provisions Regarding Securities............. 37 SECTION 7.2 Distributions....................................... 39 SECTION 7.3 Redemption of Securities............................ 41 SECTION 7.4 Redemption Procedures............................... 42 SECTION 7.5 Remarketing......................................... 43 SECTION 7.6 Voting Rights of Preferred Securities............... 46 SECTION 7.7 Voting Rights of Common Securities.................. 48 SECTION 7.8 Paying Agent........................................ 49 SECTION 7.9 Transfer of Securities.............................. 49 SECTION 7.10 Mutilated, Destroyed, Lost or Stolen Certificates... 50 SECTION 7.11 Deemed Security Holders............................. 51 SECTION 7.12 Global Securities................................... 51 SECTION 7.13 Restrictive Legend.................................. 54 SECTION 7.14 Special Transfer Provisions......................... 56 SECTION 7.15 Change of Control................................... 59 SECTION 7.16 Asset Sales......................................... 60 ARTICLE 8 DISSOLUTION AND TERMINATION OF TRUST.............. 61 SECTION 8.1 issolution and Termination of Trust................. 61 SECTION 8.2 Liquidation Distribution Upon Dissolution of the Trust............................................... 62
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Page ---- ARTICLE 9 LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, DELAWARE TRUSTEES OR OTHERS....... 62 SECTION 9.1 Liability........................................... 62 SECTION 9.2 Exculpation......................................... 63 SECTION 9.3 Fiduciary Duty...................................... 63 SECTION 9.4 Indemnification..................................... 64 SECTION 9.5 Outside Businesses.................................. 67 ARTICLE 10 ACCOUNTING........................... 67 SECTION 10.1 Fiscal Year........................................ 67 SECTION 10.2 Certain Accounting Matters......................... 67 SECTION 10.3 Banking............................................ 68 SECTION 10.4 Withholding........................................ 68 ARTICLE 11 AMENDMENTS AND MEETINGS.................... 69 SECTION 11.1 Amendments......................................... 69 SECTION 11.2 Meetings of the Holders of Securities; Action by Written Consent................................. 71 ARTICLE 12 REPRESENTATIONS OF PROPERTY DELAWARE TRUSTEE AND DELAWARE TRUSTEE...................... 72 SECTION 12.1 Representations and Warranties of the Property Trustee............................................ 72 SECTION 12.2 Representations and Warranties of the Delaware Trustee............................................ 73 ARTICLE 13 MISCELLANEOUS.......................... 74 SECTION 13.1 Notices............................................. 74 SECTION 13.2 Governing Law....................................... 74 SECTION 13.3 Intention of the Parties............................ 74 SECTION 13.4 Headings............................................ 75 SECTION 13.5 Successors and Assigns.............................. 75 SECTION 13.6 Partial Enforceability.............................. 75 SECTION 13.7 Counterparts........................................ 75
EXHIBITS Exhibit A Form of Remarketed Par Security Certificate, Series A Exhibit B Form of Preferred Security Certificate, Series B Exhibit C Form of Common Security Certificate Exhibit D Notice of Remarketing Exhibit E Notice of Election v AMENDED AND RESTATED DECLARATION OF TRUST THIS AMENDED AND RESTATED DECLARATION OF TRUST ("Declaration"), dated as of June 9, 1997, by and among Imperial Credit Industries, Inc., a California corporation, as Sponsor, and Irwin L. Gubman, Kevin E. Villani and Paul B. Lasiter, as the initial Regular Trustees, Chase Trust Company of California, a state banking corporation, as the initial Property Trustee and Chase Manhattan Bank Delaware, a Delaware banking corporation, as the initial Delaware Trustee, not in their individual capacities but solely as Trustees, and the holders, from time to time, of undivided beneficial ownership interests in the Trust to be issued pursuant to this Declaration. WHEREAS, the Trustees and the Sponsor established Imperial Credit Capital Trust I (the "Trust"), a business trust under the Business Trust Act (as defined, together with other capitalized terms, herein) pursuant to a Declaration of Trust, dated as of May 28, 1997, (the "Original Declaration") and a Certificate of Trust (the "Certificate of Trust") filed with the Secretary of State of the State of Delaware on May 28, 1997; and WHEREAS, the sole purpose of the Trust shall be to issue and sell certain securities representing undivided beneficial ownership interests in the assets of the Trust, to invest the proceeds from such sales in the Debentures (as defined herein) issued by the Debenture Issuer and to engage in only those activities necessary or incidental thereto; and WHEREAS, all of the Trustees and the Sponsor, by this Declaration, amend and restate each and every term and provision of the Original Declaration. NOW, THEREFORE, it being the intention of the parties hereto to continue the Trust as a business trust under the Business Trust Act and that this Declaration constitute the governing instrument of such business trust, the Trustees hereby declare that all assets contributed to the Trust be held in trust for the benefit of the Holders, from time to time, of the Securities representing undivided beneficial ownership interests in the assets of the Trust issued hereunder, subject to the provisions of this Declaration. ARTICLE 1 INTERPRETATION AND DEFINITIONS SECTION 1.1 Interpretation and Definitions. ------------------------------ Unless the context otherwise requires: (a) capitalized terms used in this Declaration but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; 2 (b) a term defined anywhere in this Declaration has the same meaning throughout; (c) all references to "the Declaration" or "this Declaration" are to this Declaration as modified, supplemented or amended from time to time; (d) all references in this Declaration to Articles, Sections, Recitals and Exhibits are to Articles and Sections of, or Recitals and Exhibits to, this Declaration unless otherwise specified; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Declaration unless otherwise defined in this Declaration or unless the context otherwise requires; (f) a reference to the singular includes the plural and vice versa and a reference to any masculine form of a term shall include the feminine form of a term, as applicable; and (g) the following terms have the following meanings: "Additional Interest" has the meaning specified in the Indenture. "Adjusted Distribution Rate" has the meaning specified in Section 7.2(a)(ii). "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act or any successor rule thereunder. "Applicable Distribution Rate" has the meaning specified in Section 7.2. "Authorized Officer" of a Person means any Person that is expressly authorized to bind such Person. "Beneficial Owners" means, for Preferred Securities represented by a Global Security, the person who acquires an interest in the Preferred Securities which is reflected on the records of the Depositary through the Depositary Participants. "Business Day" means any day other than a Saturday or Sunday or a day on which banking institutions in The City of New York are authorized or required by law or executive order to remain closed or a day on which the Corporate Trust Office of the Debenture Trustee, or the principal corporate trust office of the Property Trustee, is closed for business. "Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code Section 3801 et seq., as it may be amended from time to time, or any successor legislation. "Cedel" means Cedel, S.A. 3 "Certificate" means a Common Security Certificate or a Preferred Security Certificate. "Certificate of Trust" has the meaning specified in the Recitals hereto. "Change of Control" means the occurrence of one or more of the following events: (i) a person or entity or group (as that term is used in Section 13(d)(3) of the Exchange Act) of persons or entities shall have become the beneficial owner of majority of the securities of the Debenture Issuer ordinarily having the right to vote in the election of directors; (ii) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Debenture Issuer (together with any directors who are members of such Board of Directors of the Debenture Issuer on the date hereof and any new directors whose election by such Board of Directors of the Debenture Issuer or whose nomination for election by the shareholders of the Debenture Issuer was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Debenture Issuer then in office; (iii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Debenture Issuer and its Restricted Subsidiaries, taken as a whole, to any person or entity or group (as so defined) of persons, or entities (other than to any Wholly Owned Restricted Subsidiary of the Debenture Issuer); (iv) the merger or consolidation of the Debenture Issuer with or into another corporation or the merger of another corporation into the Debenture Issuer with the effect that immediately after such transaction any person or entity or group (as so defined) of persons or entities shall have become the beneficial owner of securities of the surviving corporation of such merger or consolidation representing a majority of the combined voting power of the outstanding securities of the surviving corporation ordinarily having the right to vote in the election of directors; or (v) the adoption of a plan relating to the liquidation or dissolution of the Debenture Issuer. "Closing Date" means the date on which the Preferred Securities are issued and sold. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation. A reference to a specific section of the Code refers not only to such specific section but also to any corresponding provision of any federal tax statute enacted after the date of this Declaration, as such specific section or corresponding provision is in effect on the date of application of the provisions of this Declaration containing such reference. "Commission" means the Securities and Exchange Commission. "Common Securities Holder" means Imperial Credit Industries, Inc. in its capacity as purchaser and holder of all of the Common Securities issued by the Trust. "Common Security" has the meaning specified in Section 7.1 4 "Common Security Certificate" means a definitive certificate in fully registered form representing a Common Security, substantially in the form of Exhibit C hereto. "Corporate Trust Office" means the office of the Debenture Trustee at which the corporate trust business of the Debenture Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Declaration is located at 101 California Street, Suite 2125, San Francisco, California 94111. "Covered Person" means (a) any officer, director, shareholder, partner, member, representative, employee or agent of (i) the Trust or (ii) the Trust's Affiliates; and (b) any Holder of Securities. "Debenture Issuer" means Imperial Credit Industries, Inc. in its capacity as issuer of the Debentures under the Indenture. "Debenture Issuer Indemnified Person" means (a) any Regular Trustee; (b) any Affiliate of any Regular Trustee; (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Regular Trustee or any Affiliate thereof; or (d) any officer, employee or agent of the Trust or its Affiliates. "Debenture Trustee" means Chase Trust Company of California, in its capacity as trustee under the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee. "Debentures" means the Resettable Rate Debentures, Series A, to be issued by the Debenture Issuer and to be held by the Property Trustee, or the Resettable Rate Debentures, Series B, issued in exchange therefor. "Delaware Trustee" has the meaning set forth in Section 6.2. "Depositary" means, with respect to Securities issuable in whole or in part in the form of one or more Global Securities, a clearing agency registered under the Exchange Act that is designated to act as Depositary for such Securities. "Depositary Participant" means a member of, or participant in, the Depositary. "Direct Action" has the meaning specified in Section 3.8(e). "Distribution" means a distribution payable to Holders of Securities in accordance with Section 7.2. "Distribution Date" means each date on which Distributions are payable in accordance with Sections 7.2(b) and (c). "DWAC" means Deposit and Withdrawal At Custodian Service. 5 "Election Date", with respect to any Scheduled Remarketing Date, means the second Business Day prior thereto. "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System. "Excess Proceeds" has the meaning specified in the Indenture. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation. "Fiduciary Indemnified Person" has the meaning specified in Section 9.4(b). "Fiscal Year" has the meaning specified in Section 11.1. "Global Security" means a fully registered, global Preferred Security Certificate. "Guarantee" means the guarantee agreement of the Sponsor in respect of the Preferred Securities and the Common Securities. "Guarantors" has the meaning specified in the Indenture. "Holder" means a Person in whose name a Certificate representing a Security is registered, such Person being a beneficial owner within the meaning of the Business Trust Act; provided, however, that in determining whether the Holders of the requisite liquidation amount of Preferred Securities have voted on any matter provided for in this Declaration, then for the purpose of such determination only (and not for any other purpose hereunder), if the Preferred Securities remain in the form of one or more Global Securities and if the Depositary which is the holder of such Global Securities has sent an omnibus proxy to the Trust assigning voting rights to Depositary Participants to whose accounts the Preferred Securities are credited on the record date, the term "Holders" shall mean such Depositary Participants acting at the direction of Beneficial Owners. "Indemnified Person" means a Debenture Issuer Indemnified Person or a Fiduciary Indemnified Person. "Indenture" means the Indenture dated as of June 9, 1997, among the Debenture Issuer and the Debenture Trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued. "Initial Distribution Rate" has the meaning specified in Section 7.2. "Initial Purchaser" means Lehman Brothers Inc. 6 "Investment Company" means an investment company as defined in the Investment Company Act and the regulations promulgated thereunder. "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time, or any successor legislation. "Investment Company Event" means the receipt by the Trust of an opinion of counsel, rendered by a law firm having a recognized national securities practice, to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in 1940 Act Law"), the Trust is or will be considered an "investment company" that is required to be registered under the Investment Company Act, which Change in 1940 Act Law becomes effective on or after the Closing Date. "Legal Action" has the meaning specified in Section 3.6(g). "List of Holders" has the meaning specified in Section 2.2(a). "Majority in Liquidation Amount" means, except as provided in the terms of the Preferred Securities or by the Trust Indenture Act, Holder(s) of outstanding Securities, voting together as a single class, or, as the context may require, Holders of outstanding Preferred Securities or Holders of outstanding Common Securities, voting separately as a class, who are the record owners of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "Maximum Adjusted Distribution Rate" means the rate per annum, determined on the Scheduled Remarketing Date by the Remarketing Agent in its discretion, equal to the greater of (a) the 30-year Treasury Rate plus 600 basis points and (b) a nationally-recognized high-yield index rate for similarly-rated issues, plus 100 basis points. "Moody's" means Moody's Investors Service, Inc. or any successor thereto. "New Preferred Securities" has the meaning specified in Section 7.1. "New Preferred Security Certificate" has the meaning specified in Section 7.1. "New York Stock Exchange" means the New York Stock Exchange, Inc. or any successor thereto. "Notice of Election" has the meaning specified in Section 7.5. "Officers' Certificate" means, with respect to any Person, a certificate signed by two Authorized Officers of such Person on behalf of such Person. Any Officers' Certificate 7 delivered with respect to compliance with a condition or covenant provided for in this Declaration shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer on behalf of such Person in rendering the Officers' Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer and on behalf of such Person, such condition or covenant has been complied with; provided, that the term "Officers' Certificate", when used with reference to Regular Trustees who are natural persons, shall mean a certificate signed by two of the Regular Trustees which otherwise satisfies the foregoing requirements. "Paying Agent" has the meaning specified in Section 3.8(h). "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof or any other entity of whatever nature. "Preferred Security" has the meaning specified in Section 7.1. "Preferred Security Certificate" means a definitive certificate in fully registered form representing a Preferred Security, substantially in the form of Exhibit A, in the case of Transfer Restricted Securities or Exhibit B, in the case of New Preferred Securities. "Private Placement Legend" has the meaning specified in Section 314 of the Indenture. "Property Account" has the meaning specified in Section 3.8(c). "Property Trustee" means the Trustee meeting the eligibility requirements set forth in Section 6.3. "Pro Rata" means pro rata to each Holder of Securities according to the aggregate liquidation amount of the Securities held by the relevant Holder in relation to the aggregate liquidation amount of all Securities outstanding. 8 "Qualified Institutional Buyer" or "QIB" has the meaning specified in Rule 144A under the Securities Act. "Quorum" means a majority of the Regular Trustees or, if there are only two Regular Trustees, both of them. "Redemption/Distribution Notice" has the meaning set forth in Section 7.4(a). "Redemption Price" means the amount for which the Securities will be redeemed, which amount will equal (i) the redemption price paid by the Debenture Issuer to repay or redeem, in whole or in part, the Debentures held by the Trust plus an amount equal to accumulated and unpaid Distributions on such Securities through the date of their redemption or (ii) such lesser amount as will be received by the Trust in respect of the Debentures so repaid or redeemed. "Registration Rights Agreement" means the Registration Rights Agreement, dated the date hereof, among the Debenture Issuer, the Trust, the Guarantors and the Remarketing Agent for the benefit of themselves and the Holders, as the same may be amended from time to time in accordance with the terms thereof. "Regular Trustee" means any Trustee other than the Property Trustee and the Delaware Trustee. "Regulation S" means Regulation S under the Securities Act and any successor regulation thereto. "Regulation S Global Security" means any Global Security or Securities evidencing Preferred Securities that are to be traded pursuant to Regulation S. "Related Party" means, with respect to the Sponsor, any direct or wholly owned subsidiary of the Sponsor or any Person that owns, directly or indirectly, 100% of the outstanding voting securities of the Sponsor. "Remarketing" means the operation of the procedures for remarketing specified in Section 7.5. "Remarketing Agent" means such agent or agents as the Debenture Issuer may appoint from time to time for the purpose of remarketing the Preferred Securities, as set forth in the Remarketing Agreement. "Remarketing Agreement" means the Remarketing Agreement, dated June 9, 1997, among the Trust, the Debenture Issuer and Lehman Brothers Inc., as the same may be amended, supplemented or modified from time to time. 9 "Remarketing Settlement Date" means the Scheduled Remarketing Settlement Date on which purchases and sales of Preferred Securities pursuant to a Remarketing are consummated. "Responsible Officer" means, with respect to the Property Trustee, any officer within the Corporate Trust Office of the Property Trustee, including any vice-president, any assistant vice-president, the secretary, any assistant secretary, the treasurer, any assistant treasurer or other officer of the Corporate Trust Office of the Property Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Restricted Global Security" means any Global Security or Securities evidencing Preferred Securities that are to be traded pursuant to Rule 144A. "Restricted Period" has the meaning specified in Section 7.15. "Restricted Security" has the meaning assigned to such term in Rule 144(a)(3), as amended from time to time or any successor rule, under the Securities Act. "Restricted Subsidiary" has the meaning specified in the Declaration. "Rule 144A" means Rule 144A, as amended from time to time or any successor rule, under the Securities Act. "Rule 3a-5" means Rule 3a-5 under the Investment Company Act or any successor rule thereunder. "Scheduled Remarketing Date" means the third Business Day prior to any Scheduled Remarketing Settlement Date. "Scheduled Remarketing Settlement Date" means June 14, 2002, or such other date determined pursuant to this definition, unless a Trust Enforcement Event has occurred and is continuing on the 25th Business Day prior to such Scheduled Remarketing Settlement Date, in which case the Scheduled Remarketing Settlement Date shall be the 30th Business Day after the date of cure or waiver of such Trust Enforcement Event; provided, that if (x) purchases and sales of Preferred Securities pursuant to a Remarketing are not consummated on any Scheduled Remarketing Settlement Date for any reason (including the Debenture Issuer's failure to make the deposit required pursuant to Section 3.05 of the Indenture in the event of a Special Mandatory Redemption) other than the occurrence and continuance of any other Trust Enforcement Event or if (y) the Debenture Issuer fails to redeem Debentures in connection with a Tax Opinion Redemption after cancelling the Remarketing, the next Scheduled Remarketing Settlement Date shall be the 30th Business Day after such Scheduled Remarketing Settlement Date. 10 "Senior Notes Guarantee" means the Trust's guarantee of the $200 million aggregate principle amount of the Debenture Issuer's 9 7/8% Senior Notes due 2007. "Securities" means the Common Securities and the Preferred Securities. "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor legislation. "Special Event" means a Tax Event or an Investment Company Event. "Special Mandatory Redemption" has the meaning specified in Section 7.3. "Sponsor" means Imperial Credit Industries, Inc., a California corporation, or any successor entity in a merger, consolidation or amalgamation, in its capacity as sponsor of the Trust. "Subsidiary Guarantee" means the guarantee, by the Trust, of the Debenture Issuer's obligations to pay principal, premium, if any, and interest on the Debentures. "Successor Delaware Trustee" has the meaning specified in Section 6.6(b). "Successor Entity" has the meaning specified in Section 3.15(b)(i). "Successor Property Trustee" has the meaning specified in Section 6.6(b). "Successor Security" has the meaning specified in Section 3.15(b)(i)b. "Super Majority" has the meaning set forth in Section 2.6(a)(ii). "Tax Event" means the receipt by the Debenture Issuer of an opinion of independent tax counsel to the Debenture Issuer, experienced in such matters, to the effect that, as a result of any amendment to, change in or announced proposed change in the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is adopted or which proposed change, pronouncement or decision is announced on or after the Closing Date, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date of such opinion, subject to the United States federal income tax with respect to income received or accrued on the Debentures, (ii) interest payable by the Debenture Issuer on such Debentures is not, or within 90 days of the date of such opinion, will not be deductible by the Debenture Issuer, in whole or in part, for United States federal income tax purposes, or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimus amount of other taxes, duties or other governmental charges. 11 "Tax Opinion" means an opinion of an independent tax counsel to the Debenture Issuer experienced in such matters to the effect that, as a result of (a) any amendment to, or change (including any announced proposed change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such proposed change, pronouncement or decision is announced on or after the date of original issuance of the Securities, that it is more likely than not that (i) the Trust will be, following the Remarketing Settlement Date, subject to United States federal income tax with respect to interest accrued or received on the Debentures, (ii) the Trust will be, following the Remarketing Settlement Date, subject to more than a de minimis amount of taxes, duties or other governmental charges, or (iii) interest payable to the Trust on the Debentures, following the Remarketing Settlement Date, will not be deductible, in whole or in part, by the Debenture Issuer for United States federal income tax purposes. "Tax Opinion Redemption" means a redemption of Debentures, on a Scheduled Remarketing Settlement Date, following receipt of a Tax Opinion, as specified in Section 3.10 of the Indenture. "10% in Liquidation Amount" means, except as provided in the terms of the Preferred Securities or by the Trust Indenture Act, Holder(s) of outstanding Securities, voting together as a single class, or, as the context may require, Holders of outstanding Preferred Securities or Holders of outstanding Common Securities, voting separately as a class, who are the record owners of 10% or more of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "30-year Treasury Rate" means the rate per annum equal to the semi- annual equivalent yield to maturity of the U.S. Treasury security used, in accordance with customary financial practice, as the benchmark pricing bond in pricing new issues of corporate debt securities of 30-year maturities on the Scheduled Remarketing Date. "Transfer Restricted Securities" has the meaning specified in Section 7.1. "Transfer Restricted Securities Certificate" has the meaning specified in Section 7.1. "Transfer Restricted Security Redemption" means a redemption, on the Remarketing Settlement Date, of Debentures issued in exchange for Securities that were not exchanged pursuant to an Exchange Offer, if any, as specified in Section 3.11 of the Indenture. "Treasury Regulations" means the income tax regulations, including temporary and proposed regulations, promulgated under the Code by the United States Treasury, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). 12 "Trust" has the meaning specified in the Recitals hereto. "Trust Enforcement Event" in respect of the Securities means an Indenture Event of Default has occurred and is continuing in respect of the Debentures. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. "Trustee" or "Trustees" means each Person who has signed this Declaration as a trustee, so long as such Person shall continue in office in accordance with the terms hereof, and all other Persons who may from time to time be duly appointed, qualified and serving as Trustees in accordance with the provisions hereof, and references herein to a Trustee or the Trustees shall refer to such Person or Persons solely in their capacity as trustees hereunder. "Wholly-Owned Restricted Subsidiary" has the meaning specified in the Declaration. ARTICLE 2 TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application. -------------------------------- (a) This Declaration is subject to the provisions of the Trust Indenture Act that are required to be part of this Declaration and shall, to the extent applicable, be governed by such provisions. (b) The Property Trustee shall be the only Trustee which is a Trustee for the purposes of the Trust Indenture Act. (c) If and to the extent that any provision of this Declaration conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. (d) The application of the Trust Indenture Act to this Declaration shall not affect the Trust's classification as a grantor trust for United States federal income tax purposes and shall not affect the nature of the Securities as equity securities representing undivided beneficial ownership interests in the assets of the Trust. SECTION 2.2 Lists of Holders of Securities. ------------------------------ (a) Each of the Sponsor and the Regular Trustees on behalf of the Trust shall provide the Property Trustee (i), except while the Preferred Securities are represented by one or more Global Securities, at least one Business Day prior to the date for payment of Distributions, 13 a list, in such form as the Property Trustee may reasonably require, of the names and addresses of the Holders of the Securities ("List of Holders") as of the record date relating to the payment of such Distributions, and (ii) at any other time, within 30 days of receipt by the Trust of a written request from the Property Trustee for a List of Holders as of a date no more than 15 days before such List of Holders is given to the Property Trustee; provided that neither the Sponsor nor the Regular Trustees on behalf of the Trust shall be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Property Trustee by the Sponsor and the Regular Trustees on behalf of the Trust. The Property Trustee shall preserve, in as current a form as is reasonably practicable, all information contained in Lists of Holders given to it or which it receives in the capacity as Paying Agent (if acting in such capacity), provided that the Property Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Property Trustee shall comply with its obligations under, and shall be entitled to the benefits of, Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act. SECTION 2.3 Reports by the Property Trustee. ------------------------------- Within 60 days after May 15 of each year (commencing with the year of the first anniversary of the issuance of the Preferred Securities), the Property Trustee shall provide to the Holders of the Preferred Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Property Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4 Periodic Reports to the Property Trustee. ---------------------------------------- Each of the Sponsor and the Regular Trustees on behalf of the Trust shall provide to the Property Trustee such documents, reports and information as required by Section 314 of the Trust Indenture Act (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 2.5 Evidence of Compliance with Conditions Precedent. ------------------------------------------------ Each of the Sponsor and the Regular Trustees on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Declaration that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6 Trust Enforcement Events; Waiver. -------------------------------- (a) The Holders of a Majority in Liquidation Amount of the Preferred Securities may, by vote or written consent, on behalf of the Holders of all of the Preferred Securities, waive 14 any past Trust Enforcement Event in respect of the Preferred Securities and its consequences, provided that, if the underlying Indenture Event of Default: (i) is not waivable under the Indenture, the Trust Enforcement Event under the Declaration shall also not be waivable; or (ii) requires the consent or vote of greater than a majority in principal amount of the holders of the Debentures (a "Super Majority") to be waived under the Indenture, the related Trust Enforcement Event under the Declaration may only be waived by the vote or written consent of the Holders of at least the proportion in liquidation amount of the Preferred Securities that the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. The foregoing provisions of this Section 26 shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Upon such waiver, any such default shall cease to exist, and any Trust Enforcement Event with respect to the Preferred Securities arising therefrom shall be deemed to have been cured, for every purpose of this Declaration and the Preferred Securities, but no such waiver shall extend to any subsequent or other Trust Enforcement Event with respect to the Preferred Securities or impair any right consequent thereon. Any waiver by the Holders of the Preferred Securities of a Trust Enforcement Event with respect to the Preferred Securities shall also be deemed to constitute a waiver by the Holders of the Common Securities of any such Trust Enforcement Event with respect to the Common Securities for all purposes of this Declaration without any further act, vote, or consent of the Holders of the Common Securities. (b) The Holders of a Majority in Liquidation Amount of the Common Securities may, by vote or written consent, on behalf of the Holders of all of the Common Securities, waive any past Trust Enforcement Event with respect of the Common Securities and its consequences, provided that, if the underlying Indenture Event of Default: (i) is not waivable under the Indenture, except where the Holders of the Common Securities are deemed to have waived such Trust Enforcement Event under the Declaration as provided below in this Section 2.6(b), the Trust Enforcement Event under the Declaration shall also not be waivable; or (ii) requires the consent or vote of a Super Majority to be waived under the Indenture, except where the Holders of the Common Securities are deemed to have waived such Trust Enforcement Event under the Declaration as provided below in this Section 2.6(b), the Trust Enforcement Event under the Declaration may only be waived by the vote or written consent of the Holders of at least the proportion in liquidation amount of the Common Securities that the relevant Super Majority 15 represents of the aggregate principal amount of the Debentures outstanding; provided further, each Holder of Common Securities will be deemed to have waived any Trust Enforcement Event and all Trust Enforcement Events with respect to the Common Securities and the consequences thereof until all Trust Enforcement Events with respect to the Preferred Securities have been cured, waived or otherwise eliminated, and until such Trust Enforcement Events with respect to the Preferred Securities have been so cured, waived or otherwise eliminated, the Property Trustee will be deemed to be acting solely on behalf of the Holders of the Preferred Securities and only the Holders of the Preferred Securities will have the right to direct the Property Trustee in accordance with the terms of the Securities. The foregoing provisions of this Section 2.6(b) shall be in lieu of Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act and such Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act are hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Subject to the foregoing provisions of this Section 2.6(b), upon such cure, waiver or other elimination, any such default shall cease to exist and any Trust Enforcement Event with respect to the Common Securities arising therefrom shall be deemed to have been cured for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other Trust Enforcement Event with respect to the Common Securities or impair any right consequent thereon. (c) A waiver of an Indenture Event of Default by the Property Trustee at the direction of the Holders of the Preferred Securities constitutes a waiver of the corresponding Trust Enforcement Event with respect to the Preferred Securities under this Declaration. The foregoing provisions of this Section 2.6(c) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. SECTION 2.7 Trust Enforcement Event; Notice. ------------------------------- (a) The Property Trustee shall, within 90 days after the occurrence of a Trust Enforcement Event, transmit by mail, first class postage prepaid, to the Holders of the Securities, notices of all defaults with respect to the Securities actually known to a Responsible Officer of the Property Trustee, unless such defaults have been cured before the giving of such notice (the term "defaults" for the purposes of this Section 2.7(a) being hereby defined to be an Indenture Event of Default, not including any periods of grace provided for therein and irrespective of the giving of any notice provided therein); provided that, except for a default in the payment of principal of (or premium, if any) or interest on any of the Debentures, the Property Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Property Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Securities. (b) The Property Trustee shall not be deemed to have knowledge of any default except: 16 (i) a default under Sections 6.01(i) or 6.01(iii) of the Indenture; or (ii) any default as to which the Property Trustee shall have received written notice or of which a Responsible Officer of the Property Trustee charged with the administration of this Declaration shall have actual knowledge. ARTICLE 3 ORGANIZATION SECTION 3.1 Name and Organization. --------------------- The Trust hereby created is named "Imperial Credit Capital Trust I" as such name may be modified from time to time by the Regular Trustees following written notice to the Holders of Securities. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Regular Trustees. SECTION 3.2 Office. ------ The address of the principal office of the Trust is c/o the Debenture Issuer, 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance California 90505. On 10 Business Days' written notice to the Holders of Securities, the Regular Trustees may designate another principal office. SECTION 3.3 Purpose. ------- The exclusive purposes and functions of the Trust are (a) to issue and sell Securities and use the gross proceeds from such sale to acquire the Debentures, and (b) except as otherwise limited herein, to engage in only those other activities necessary or incidental thereto. The Trust shall not borrow money, issue debt or reinvest proceeds derived from investments, pledge any of its assets or otherwise undertake (or permit to be undertaken) any activity that would cause the Trust not to be classified as a grantor trust for United States federal income tax purposes. By the acceptance of this Trust, none of the Trustees, the Sponsor, the Holders of the Preferred Securities or Common Securities or the Preferred Securities Beneficial Owners will take any position for United States federal income tax purposes which is contrary to the classification of the Trust as a grantor trust. SECTION 3.4 Authority. --------- Subject to the limitations provided in this Declaration and to the specific duties of the Property Trustee, the Regular Trustees shall have exclusive authority to carry out the purposes of the Trust. An action taken by the Regular Trustees in accordance with their powers 17 shall constitute the act of and serve to bind the Trust and an action taken by the Property Trustee on behalf of the Trust in accordance with its powers shall constitute the act of and serve to bind the Trust. In dealing with the Trustees acting on behalf of the Trust, no person shall be required to inquire into the authority of the Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Trustees as set forth in this Declaration. (a) Except as expressly set forth in this Declaration and except if a meeting of the Regular Trustees is called with respect to any matter over which the Regular Trustees have power to act, any power of the Regular Trustees may be exercised by, or with the consent of, any one such Regular Trustee. (b) Unless otherwise determined by the Regular Trustees, and except as otherwise required by the Business Trust Act or applicable law, any Regular Trustee is authorized to execute on behalf of the Trust any documents which the Regular Trustees have the power and authority to cause the Trust to execute pursuant to Section 3.6(b), provided, that the registration statements referred to in Section 3.6(b)(i), including any amendments thereto, shall be signed by or on behalf of a majority of the Regular Trustees; and (c) a Regular Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purposes of signing any documents which the Regular Trustees have power and authority to cause the Trust to execute pursuant to Section 3.6. SECTION 3.5 Title to Property of the Trust. ------------------------------ Except as provided in Section 3.8 with respect to the Debentures and the Property Account or as otherwise provided in this Declaration, legal title to all assets of the Trust shall be vested in the Trust. The Holders shall not have legal title to any part of the assets of the Trust, but shall have an undivided beneficial ownership interest in the assets of the Trust. SECTION 3.6 Powers and Duties of the Regular Trustees. ----------------------------------------- The Regular Trustees shall have the exclusive power, duty and authority to cause the Trust to engage in the following activities: (a) to issue and sell the Preferred Securities and the Common Securities in accordance with this Declaration; provided, however, that the Trust may issue no more than two series of Preferred Securities (which will consist exclusively of the Transfer Restricted Securities and the New Preferred Securities) and no more than one series of Common Securities, and, provided further, that there shall be no interests in the Trust other than the Securities, and the issuance of Securities shall be limited to a one-time, simultaneous issuance of both Transfer Restricted Securities and Common Securities on the Closing Date and a one-time issuance of New Preferred Securities pursuant to an exchange offer required pursuant to the Registration Rights Agreement; 18 (b) in connection with the issue and sale of the Preferred Securities, at the direction of the Sponsor, to: (i) execute and file with the Commission one or more registration statements on the applicable forms prepared by the Sponsor, including any amendments thereto, pertaining to the Preferred Securities, the Guarantee and the Debentures; (ii) if deemed necessary or desirable by the Sponsor, execute and file an application, prepared by the Sponsor, to the New York Stock Exchange or any other national stock exchange or the NASDAQ Stock Market for listing of any Preferred Securities, the Guarantee and the Debentures; (iii) if deemed necessary or desirable by the Sponsor, execute and file with the Commission a registration statement on Form 8-A, including any amendments thereto, prepared by the Sponsor, relating to the registration of the Preferred Securities, the Guarantee and the Debentures under Section 12(b) of the Exchange Act; (iv) execute and file any documents prepared by the Sponsor, or take any acts as determined by the Sponsor to be necessary, in order to qualify or register all or part of the Preferred Securities in any State in which the Sponsor has determined to qualify or register such Preferred Securities for sale; (v) execute and deliver a purchase agreement and other related agreements providing for the sale of the Preferred Securities to the Initial Purchaser; (vi) execute and deliver the Registration Rights Agreement; (vii) execute and deliver the Remarketing Agreement; (viii) execute and enter into the Indenture; (ix) execute and deliver the Subsidiary Guarantee; and (x) execute and deliver the Senior Notes Guarantee. (c) to acquire the Debentures with the proceeds of the sale of the Preferred Securities and the Common Securities; provided, however, that the Regular Trustees shall cause legal title to the Debentures to be held of record in the name of the Property Trustee for the benefit of the Holders of the Preferred Securities and the Holders of the Common Securities; (d) to give the Sponsor and the Property Trustee prompt written notice of the occurrence of a Special Event; provided that the Regular Trustees shall consult with the Sponsor 19 and the Property Trustee before taking or refraining from taking any action in relation to any such Special Event; (e) to establish a record date with respect to all actions to be taken hereunder that require a record date be established, including and with respect to, for the purposes of Section 316(c) of the Trust Indenture Act, Distributions, voting rights, redemptions and exchanges, and to issue relevant notices to the Holders of Preferred Securities and Holders of Common Securities as to such actions and applicable record dates; (f) to take all actions and perform such duties as may be required of the Regular Trustees pursuant to the terms of this Declaration and the Securities; (g) to bring or defend, pay, collect, compromise, arbitrate, resort to legal action or otherwise adjust claims or demands of or against the Trust ("Legal Action"), including seeking relief under the federal bankruptcy laws unless pursuant to Section 3.8(e), the Property Trustee has the exclusive power to bring such Legal Action; (h) to employ or otherwise engage employees and agents (who may be designated as officers with titles) and managers, contractors, advisors and consultants to conduct only those services that the Regular Trustees have authority to conduct directly, and to and pay reasonable compensation for such services; (i) to cause the Trust to comply with the Trust's obligations under the Trust Indenture Act; (j) to give the certificate required by Section 314(a)(4) of the Trust Indenture Act to the Property Trustee, which certificate may be executed by any Regular Trustee; (k) to incur expenses that are necessary or incidental to carry out any of the purposes of the Trust; (l) to act as, or appoint another Person to act as, registrar and transfer agent for the Securities; (m) to give prompt written notice to the Holders of the Securities of any notice received from the Debenture Issuer of its election to defer payments of interest on the Debentures as authorized by the Indenture; (n) to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Holders of the Preferred Securities and the Holders of the Common Securities or to enable the Trust to effect the purposes for which the Trust was created; 20 (o) to take any action, not inconsistent with applicable law, that the Regular Trustees determine in their discretion to be necessary or desirable in carrying out the purposes and functions of the Trust as set out in Section 3.3 or the activities of the Trust as set out in this Section 3.6, including, but not limited to: (i) causing the Trust not to be deemed to be an Investment Company required to be registered under the Investment Company Act; (ii) causing the Trust to be classified as a grantor trust for United States federal income tax purposes; and (iii) cooperating with the Debenture Issuer to ensure that the Debentures will be treated as indebtedness of the Debenture Issuer for United States federal income tax purposes. (p) to take all action necessary to cause all applicable tax returns and tax information reports that are required to be filed with respect to the Trust to be duly prepared and filed by the Regular Trustees, on behalf of the Trust; and (q) to execute all documents or instruments, perform all duties and powers, and do all things for and on behalf of the Trust in all matters necessary or incidental to the foregoing. The Regular Trustees shall exercise the powers set forth in this Section 3.6 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Regular Trustees shall have no power to, and shall not, take any action that is inconsistent with the purposes and functions of the Trust set forth in Section 3.3. Subject to this Section 3.6, the Regular Trustees shall have none of the powers or the authority of the Property Trustee set forth in Section 3.8. Any expenses incurred by the Regular Trustees pursuant to this Section 3.6 shall be reimbursed by the Debenture Issuer. SECTION 3.7 Prohibition of Actions by the Trust and the Trustees. ---------------------------------------------------- (a) The Trust shall not, and the Trustees (including the Property Trustee) shall cause the Trust not to engage in any activity other than as required or authorized by this Declaration. In particular, the Trust shall not and the Trustees (including the Property Trustee) shall cause the Trust not to: (i) invest any proceeds received by the Trust from holding the Debentures, but shall distribute all such proceeds to Holders of Securities pursuant to the terms of this Declaration and of the Securities; (ii) acquire any assets other than as expressly provided herein; 21 (iii) possess Trust property for other than a Trust purpose; (iv) make any loans or incur any indebtedness; (v) possess any power or otherwise act in such a way as to vary the Trust assets; (vi) possess any power or otherwise act in such a way as to vary the terms of the Securities in any way whatsoever (except to the extent expressly authorized in this Declaration or by the terms of the Securities); (vii) issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than the Securities; or (viii) other than as provided in this Declaration or by the terms of the Securities, (A) direct the time, method and place of exercising any trust or power conferred upon the Debenture Trustee with respect to the Debentures, (B) waive any past default that is waivable under the Indenture, (C) exercise any right to rescind or annul any declaration that the principal of all the Debentures shall be due and payable, or (D) consent to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required unless the Trust shall have received an opinion of counsel to the effect that such modification will not cause more than an insubstantial risk that the Trust will be deemed an Investment Company required to be registered under the Investment Company Act, or the Trust will not be classified as a grantor trust for United States federal income tax purposes; (ix) take any action inconsistent with the status of the Trust as a grantor trust for United States federal income tax purposes; or (x) revoke any action previously authorized or approved by vote of the Holders of the Preferred Securities. SECTION 3.8 Powers and Duties of the Property Trustee. ----------------------------------------- (a) The legal title to the Debentures shall be owned by and held of record in the name of the Property Trustee in trust for the benefit of the Trust and the Holders of the Securities. The right, title and interest of the Property Trustee to the Debentures shall vest automatically in each Person who may hereafter be appointed as Property Trustee in accordance with Section 6.6. Such vesting and cessation of title shall be effective whether or not conveyancing documents with regard to the Debentures have been executed and delivered. 22 (b) The Property Trustee shall not transfer its right, title and interest in the Debentures to the Regular Trustees or to the Delaware Trustee (if the Property Trustee does not also act as Delaware Trustee). (c) The Property Trustee shall: (i) establish and maintain a segregated non-interest bearing trust account (the "Property Account") in the name of and under the exclusive control of the Property Trustee on behalf of the Holders of the Securities and, upon the receipt of payments of funds made in respect of the Debentures held by the Property Trustee, deposit such funds into the Property Account and make payments to the Holders of the Preferred Securities and Holders of the Common Securities from the Property Account in accordance with Section 7.2. Funds in the Property Account shall be held uninvested until disbursed in accordance with this Declaration. The Property Account shall be an account that is maintained with a banking institution the rating on whose long-term unsecured indebtedness is at least equal to the rating assigned to the Preferred Securities by a "nationally recognized statistical rating organization", within the meaning of Rule 436(g)(2) under the Securities Act; (ii) engage in such ministerial activities as shall be necessary or appropriate to effect the redemption of the Preferred Securities and the Common Securities to the extent the Debentures are redeemed or mature; and (iii) upon written notice of distribution issued by the Regular Trustees in accordance with the terms of the Securities, engage in such ministerial activities as so directed and as shall be necessary or appropriate to effect the distribution of the Debentures to Holders of Securities upon the occurrence of a Special Event. (d) The Property Trustee shall take all actions and perform such duties as may be specifically required of the Property Trustee pursuant to the terms of this Declaration and the Securities. (e) The Property Trustee shall take any Legal Action which arises out of or in connection with a Trust Enforcement Event of which a Responsible Officer of the Property Trustee has actual knowledge or the Property Trustee's duties and obligations under this Declaration or the Trust Indenture Act; provided however, that if a Trust Enforcement Event has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay interest or principal on the Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, on the redemption date), then a Holder of Preferred Securities may directly institute a proceeding for enforcement of payment to such Holder of the principal of or interest on Debentures having a principal amount equal to the aggregate 23 liquidation amount of the Preferred Securities of such Holder (a "Direct Action") on or after the respective due date specified in the Debentures. (f) The Property Trustee shall continue to serve as a Trustee until either: (i) the Trust has been completely liquidated and the proceeds of the liquidation distributed to the Holders of Securities pursuant to the terms of the Securities; or (ii) a Successor Property Trustee has been appointed and has accepted that appointment in accordance with Section 6.6. (g) The Property Trustee shall have the legal power to exercise all of the rights, powers and privileges of a holder of Debentures under the Indenture and, if a Trust Enforcement Event actually known to a Responsible Officer of the Property Trustee occurs and is continuing, the Property Trustee shall, for the benefit of Holders of the Securities, enforce its rights as holder of the Debentures subject to the rights of the Holders pursuant to the terms of such Securities. (h) The Property Trustee may authorize one or more Persons (each, a "Paying Agent") to pay Distributions, redemption payments or liquidation payments on behalf of the Trust with respect to all Securities and any such Paying Agent shall comply with Section 317(b) of the Trust Indenture Act. Any Paying Agent may be removed by the Property Trustee at any time and a successor Paying Agent or additional Paying Agents may be appointed at any time by the Property Trustee. (i) Subject to this Section 3.8, the Property Trustee shall have none of the duties, liabilities, powers or the authority of the Regular Trustees set forth in Section 3.6. The Property Trustee shall exercise the powers set forth in this Section 3.8 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Property Trustee shall have no power to, and shall not, take any action that is inconsistent with the purposes and functions of the Trust set out in Section 3.3. SECTION 3.9 Certain Duties and Responsibilities of the Property --------------------------------------------------- Trustee. - ------- (a) The Property Trustee, before the occurrence of any Trust Enforcement Event and after the curing of all Trust Enforcement Events that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Declaration and no implied covenants shall be read into this Declaration against the Property Trustee. In case a Trust Enforcement Event has occurred (that has not been cured or waived pursuant to Section 2.6) of which a Responsible Officer of the Property Trustee has actual knowledge, the Property Trustee shall exercise such of the rights and powers vested in it by this Declaration, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. 24 (b) No provision of this Declaration shall be construed to relieve the Property Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) prior to the occurrence of a Trust Enforcement Event and after the curing or waiving of all such Trust Enforcement Events that may have occurred: a. the duties and obligations of the Property Trustee shall be determined solely by the express provisions of this Declaration and the Property Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Declaration, and no implied covenants or obligations shall be read into this Declaration against the Property Trustee; and b. in the absence of bad faith on the part of the Property Trustee, the Property Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Property Trustee and conforming to the requirements of this Declaration; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Property Trustee, the Property Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Declaration; (ii) the Property Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts; (iii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it without negligence, in good faith in accordance with the direction of the Holders of not less than a Majority in Liquidation Amount of the Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under this Declaration; (iv) no provision of this Declaration shall require the Property Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Declaration or indemnity reasonably satisfactory to the 25 Property Trustee against such risk or liability is not reasonably assured to it; (v) the Property Trustee's sole duty with respect to the custody, safe-keeping and physical preservation of the Debentures and the Property Account shall be to deal with such property in a similar manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Declaration and the Trust Indenture Act; (vi) the Property Trustee shall have no duty or liability for or with respect to the value, genuineness, existence or sufficiency of the Debentures or the payment of any taxes or assessments levied thereon or in connection therewith; (vii) the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree with the Sponsor. Money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Property Account maintained by the Property Trustee pursuant to Section 3.8(c)(i) and except to the extent otherwise required by law; and (viii) the Property Trustee shall not be responsible for monitoring the compliance by the Regular Trustees or the Sponsor with their respective duties under this Declaration, nor shall the Property Trustee be liable for any default or misconduct of the Regular Trustees or the Sponsor. SECTION 3.10 Certain Rights of Property Trustee. ---------------------------------- (a) Subject to the provisions of Section 3.9: (i) the Property Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (ii) any direction or act of the Sponsor or the Regular Trustees contemplated by this Declaration shall be sufficiently evidenced by an Officers' Certificate; (iii) whenever in the administration of this Declaration, the Property Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Property Trustee (unless 26 other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Sponsor or the Regular Trustees; (iv) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or registration thereof; (v) the Property Trustee may consult with counsel of its choice or other experts and the advice or opinion of such counsel and experts with respect to legal matters or advice within the scope of such experts' area of expertise shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion, such counsel may be counsel to the Sponsor or any of its Affiliates, and may include any of its employees. The Property Trustee shall have the right at any time to seek instructions concerning the administration of this Declaration from any court of competent jurisdiction; (vi) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Declaration at the request or direction of any Holder, unless such Holder shall have provided to the Property Trustee security and indemnity, reasonably satisfactory to the Property Trustee, against the costs, expenses (including attorneys, fees and expenses and the expenses of the Property Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Property Trustee; provided that, nothing contained in this Section 3.10(a) shall be taken to relieve the Property Trustee, upon the occurrence of an Indenture Event of Default, of its obligation to exercise the rights and powers vested in it by this Declaration; (vii) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Property Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (viii) the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, custodians, nominees or attorneys and the Property Trustee shall not be 27 responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (ix) any action taken by the Property Trustee or its agents hereunder shall bind the Trust and the Holders of the Securities, and the signature of the Property Trustee or its agents alone shall be sufficient and effective to perform any such action and no third party shall be required to inquire as to the authority of the Property Trustee to so act or as to its compliance with any of the terms and provisions of this Declaration, both of which shall be conclusively evidenced by the Property Trustee's or its agent's taking such action; (x) whenever in the administration of this Declaration the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Property Trustee (i) may request instructions from the Holders of the Securities which instructions may only be given by the Holders of the same proportion in liquidation amount of the Securities as would be entitled to direct the Property Trustee under the terms of the Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in or accordance with such instructions; (xi) except as otherwise expressly provided by this Declaration, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Declaration; and (xii) the Property Trustee shall not be liable for any action taken, suffered or omitted to be taken by it without negligence, in good faith and reasonably believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Declaration. (b) No provision of this Declaration shall be deemed to impose any duty or obligation on the Property Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Property Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Property Trustee shall be construed to be a duty. SECTION 3.11 Delaware Trustee. ---------------- 28 Notwithstanding any other provision of this Declaration other than Section 6.2, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities of the Regular Trustees or the Property Trustee described in this Declaration. Except as set forth in Section 6.2, the Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Business Trust Act. SECTION 3.12 Execution of Documents. ---------------------- Unless otherwise determined by the Regular Trustees, and except as otherwise required by the Business Trust Act, any Regular Trustee is authorized to execute on behalf of the Trust any documents that the Regular Trustees have the power and authority to execute pursuant to Section 3.6. SECTION 3.13 Not Responsible for Recitals or Issuance of Securities. ------------------------------------------------------ The recitals contained in this Declaration and the Securities shall be taken as the statements of the Sponsor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the value or condition of the property of the Trust or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Declaration, the Securities, the Debentures or the Indenture. SECTION 3.14 Duration of Trust. ----------------- The Trust shall exist until terminated pursuant to the provisions of Article 8 hereof. SECTION 3.15 Mergers. ------- (a) The Trust may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any corporation or other body, except as described in Section 3.15(b) and (c). (b) The Trust may, at the request of the Sponsor and with the consent of the Regular Trustees or, if there are more than two, a majority of the Regular Trustees and without the consent of the Holders of the Securities, the Delaware Trustee or the Property Trustee, consolidate, amalgamate, merge with or into, or be replaced by or convey, transfer or lease its properties substantially as an entirety to a trust organized as such under the laws of any State; provided, that: (i) if the Trust is not the successor, such successor entity (the "Successor Entity") either: a. expressly assumes all of the obligations of the Trust with respect to the Securities; or 29 b. substitutes for the Preferred Securities other securities having substantially the same terms as the Preferred Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Preferred Securities rank in priority with respect to Distributions and payments upon liquidation, redemption and otherwise; (ii) the Debenture Issuer expressly appoints a trustee of such Successor Entity that possesses the same powers and duties as the Property Trustee as the holder of the Debentures; (iii) the Preferred Securities or any Successor Securities are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or with any other or organization on which the Preferred Securities are then listed or quoted; (iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Preferred Securities (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization; (v) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Preferred Securities (including any Successor Securities) in any material respect; (vi) such Successor Entity has a purpose identical to that of the Trust; (vii) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease the Sponsor has received an opinion of independent counsel to the Trust experienced in such matters to the effect that: a. such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Preferred Securities (including any Successor Securities) in any material respect; b. following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease neither the Trust nor the Successor Entity will be required to register as an Investment Company; and c. following such merger, consolidation, amalgamation or replacement, the Trust (or the Successor Entity) will continue to be 30 classified as a grantor trust for United States federal income tax purposes; (viii) the Sponsor or any permitted successor or assignee owns all of the Common Securities and guarantees the obligations of such Successor Entity under the Successor Securities at least to the extent provided by the Preferred Securities Guarantee; and (ix) such Successor Entity expressly assumes all of the obligations of the Trust with respect to the Trustees. (c) Notwithstanding Section 3.15(b), the Trust shall not, except with the consent of Holders of 100% in aggregate liquidation amount of the Preferred Securities, consolidate, amalgamate, merge with or into, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to, any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it, if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or Successor Entity to be classified as other than a grantor trust for United States federal income tax purposes and each Holder of the Securities not to be treated as owning an undivided interest in the Debentures. SECTION 3.16 Property Trustee May File Proofs of Claim. ----------------------------------------- In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other similar judicial proceeding relative to the Trust or any other obligor upon the Securities or the property of the Trust or of such other obligor or their creditors, the Property Trustee (irrespective of whether any Distributions on the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Property Trustee shall have made any demand on the Trust for the payment of any past due Distributions) shall be entitled and empowered, to the fullest extent permitted by law, by intervention in such proceeding or otherwise: (a) to file and prove a claim for the whole amount of any Distributions owing and unpaid in respect of the Securities (or, if the Securities are original issue discount Securities, such portion of the liquidation amount as may be specified in the terms of such Securities) and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Property Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Property Trustee, its and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; 31 and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Property Trustee and, in the event the Property Trustee shall consent to the making of such payments directly to the Holders, to pay to the Property Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Property Trustee, its agents and counsel, and any other amounts due the Property Trustee. Nothing herein contained shall be deemed to authorize the Property Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement adjustment or compensation affecting the Securities or the rights of any Holder thereof or to authorize the Property Trustee to vote in respect of the claim of any Holder in any such proceeding. ARTICLE 4 SPONSOR SECTION 4.1 Responsibilities of the Sponsor. ------------------------------- In connection with the issue and sale of the Preferred Securities, the Sponsor shall have the exclusive right and responsibility to engage in the following activities: (a) to prepare for filing by the Trust with the Commission one or more registration statements on the applicable forms, including any amendments thereto, pertaining to the Preferred Securities, the Guarantee and the Debentures; (b) to determine the States in which to take appropriate action to qualify or register for sale all or part of the Preferred Securities and to do any and all such acts, other than actions which must be taken by the Trust, and advise the Trust of actions it must take, and prepare for execution and filing any documents to be executed and filed by the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such States; (c) to prepare any filing by the Trust of an application to the New York Stock Exchange or any other national stock exchange or the NASDAQ Stock Market for listing, if such filing is determined to be necessary or desirable by the Sponsor; (d) to prepare any filing by the Trust with the Commission of a registration statement on Form 8-A, including any amendments thereto, if such filing is determined to be necessary or desirable by the Sponsor; (e) to negotiate the terms of a purchase agreement and other related agreements providing for the sale of the Preferred Securities to the Initial Purchaser; 32 (f) to negotiate the terms of the Registration Rights Agreement; and (g) to negotiate the terms of the Remarketing Agreement. SECTION 4.2 Indemnification and Expenses of the Trustees. -------------------------------------------- The Sponsor, in its capacity as Debenture Issuer, agrees to indemnify the Property Trustee and the Delaware Trustee for, and to hold each of them harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Property Trustee or the Delaware Trustee, as the case may be, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending either of them against any claim or liability in connection with the exercise or performance of any of their respective powers or duties hereunder; the provisions of this Section 4.2 shall survive the resignation or removal of the Delaware Trustee or the Property Trustee or the termination of this Declaration. ARTICLE 5 TRUST COMMON SECURITIES HOLDER SECTION 5.1 Debenture Issuer's Purchase of Common Securities. ------------------------------------------------ On the Closing Date, the Trust will sell and the Debenture Issuer will purchase all of the Common Securities issued by the Trust, for an amount at least equal to 3% of the capital of the Trust, at the same time as the Preferred Securities are sold. The aggregate stated liquidation amount of Common Securities outstanding at any time shall be not less than 3% of the capital of the Trust. SECTION 5.2 Covenants of the Common Securities Holder. ----------------------------------------- For so long as the Preferred Securities remain outstanding, the Common Securities Holder will covenant (i) to maintain, directly or indirectly, 100% ownership of the Common Securities, (ii) to cause the Trust to remain a statutory business trust and not to voluntarily dissolve, wind up, liquidate or be terminated, except as permitted by this Declaration, (iii) to use its commercially reasonable efforts to ensure that the Trust will not be an investment company for purposes of the Investment Company Act, and (iv) to take no action which would be reasonably likely to cause the Trust to be classified as an association or a publicly traded partnership taxable as a corporation for United States federal income tax purposes. 33 ARTICLE 6 TRUSTEES SECTION 6.1 Number of Trustees. ------------------ The number of Trustees initially shall be five, and: (a) at any time before the issuance of any Securities, the Sponsor may, by written instrument, increase or decrease the number of Trustees; and (b) after the issuance of any Securities, the number of Trustees may be increased or decreased by vote of the Holders of a Majority in Liquidation Amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities or by written consent in lieu of such meeting; provided that the number of Trustees shall be at least three; and provided further that (1) the Delaware Trustee, in the case of a natural person, shall be a person who is a resident of the State of Delaware or that, if not a natural person, is an entity which has its principal place of business in the State of Delaware and otherwise meets the requirements of applicable law; (2) at least one Regular Trustee is an employee or officer of, or is affiliated with, the Sponsor; and (3) one Trustee shall be the Property Trustee for so long as this Declaration is required to qualify as an indenture under the Trust Indenture Act, and such Trustee may also serve as Delaware Trustee if it meets the applicable requirements. SECTION 6.2 Delaware Trustee; Eligibility. ----------------------------- If required by the Business Trust Act, one Trustee (the "Delaware Trustee") shall be: (a) a natural person who is a resident of the State of Delaware; or (b) if not a natural person, an entity which has its principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law, provided that, if the Property Trustee has its principal place of business in the State of Delaware and otherwise meets the requirements of applicable law, then the Property Trustee shall also be the Delaware Trustee and Section 3.11 shall have no application. SECTION 6.3 Property Trustee; Eligibility. ----------------------------- (a) There shall at all times be one Trustee which shall act as Property Trustee which shall: (i) not be an Affiliate of the Sponsor; and 34 (ii) be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a corporation or other Person permitted by the Commission to act as an institutional trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust owners, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000), and subject to supervision or examination by federal, State, Territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then for the purposes of this Section 6.3(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Property Trustee shall cease to be eligible to so act under Section 6.3(a), the Property Trustee shall immediately resign in the manner and with the effect set forth in Section 6.6(c). (c) If the Property Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Property Trustee and the Holder of the Common Securities (as if it were the obligor referred to in Section 310(b) of the Trust Indenture Act) shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. (d) The Guarantee shall be deemed to be specifically described in this Declaration for purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. SECTION 6.4 Qualifications of Regular Trustees and Delaware Trustee ------------------------------------------------------- Generally. - --------- Each Regular Trustee and the Delaware Trustee (unless the Property Trustee also acts as Delaware Trustee) shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more Authorized Officers. SECTION 6.5 Initial Regular Trustees. ------------------------ The initial Regular Trustees shall be: Irwin L. Gubman, Kevin E. Villani and Paul B. Lasiter, the business address of all of whom is c/o the Debenture Issuer, 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance California 90505. 35 SECTION 6.6 Appointment, Removal and Resignation of Trustees. ------------------------------------------------ (a) Subject to Section 6.6(b), Trustees may be appointed or removed without cause at any time: (i) until the issuance of any Securities, by written instrument executed by the Sponsor; and (ii) after the issuance of any Securities, by vote of the Holders of a Majority in Liquidation Amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities. (b) The Trustee that acts as Property Trustee shall not be removed in accordance with Section 66 until a successor Trustee possessing the qualifications to act as Property Trustee under Section 3.8(h) (a "Successor Property Trustee") has been appointed and has accepted such appointment by written instrument executed by such Successor Property Trustee and delivered to the Regular Trustees and the Sponsor. The Trustee that acts as Delaware Trustee shall not be removed in accordance with Section 6.6(a) until a successor Trustee possessing the qualifications to act as Delaware Trustee under Sections 6.2 and 6.4 (a "Successor Delaware Trustee") has been appointed and has accepted such appointment by written instrument executed by such Successor Delaware Trustee and delivered to the Regular Trustees and the Sponsor. (c) A Trustee appointed to office shall hold office until his or its successor shall have been appointed, until his death or its dissolution or until his or its removal or resignation. Any Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing signed by the Trustee and delivered to the Sponsor and the Trust, which resignation shall take effect upon such delivery or upon such later date as is specified therein; provided, however, that: (i) No such resignation of the Trustee that acts as the Property Trustee shall be effective: a. until a Successor Property Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Property Trustee and delivered to the Trust, the Sponsor and the resigning Property Trustee; or b. until the assets of the Trust have been completely liquidated and the proceeds thereof distributed to the holders of the Securities; and (ii) no such resignation of the Trustee that acts as the Delaware Trustee shall be effective until a Successor Delaware Trustee has been appointed and has accepted such appointment by instrument executed by such Successor 36 Delaware Trustee and delivered to the Trust, the Sponsor and the resigning Delaware Trustee. (d) The Holders of the Common Securities shall use their best efforts to promptly appoint a Successor Delaware Trustee or Successor Property Trustee, as the case may be, if the Property Trustee or the Delaware Trustee delivers an instrument of resignation in accordance with this Section 6.6. (e) If no Successor Property Trustee or Successor Delaware Trustee, as the case may be, shall have been appointed and accepted appointment as provided in this Section 6.6 within 60 days after delivery to the Sponsor and the Trust of an instrument of resignation or removal, the resigning or removed Property Trustee or Delaware Trustee, as applicable, may petition any court of competent jurisdiction for appointment of a Successor Property Trustee or Successor Delaware Trustee, as applicable. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Property Trustee or Successor Delaware Trustee, as the case may be. (f) No Property Trustee or Delaware Trustee shall be liable for the acts or omissions to act of any Successor Property Trustee or Successor Delaware Trustee, as the case may be. SECTION 6.7 Vacancies among Trustees. ------------------------ If a Trustee ceases to hold office for any reason and the number of Trustees is not reduced pursuant to Section 6.1, or if the number of Trustees is increased pursuant to Section 6.1, a vacancy shall occur. A resolution certifying the existence of such vacancy by the Regular Trustees or, if there are more than two, a majority of the Regular Trustees shall be conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with Section 6.6. SECTION 6.8 Effect of Vacancies. ------------------- The death, resignation, retirement, removal, bankruptcy, dissolution, liquidation, incompetence or incapacity to perform the duties of a Trustee shall not operate to annul the Trust. Whenever a vacancy in the number of Regular Trustees shall occur, until such vacancy is filled by the appointment of a Regular Trustee in accordance with Section 6.6, the Regular Trustees in office, regardless of their number, shall have all the powers granted to the Regular Trustees and shall discharge all the duties imposed upon the Regular Trustees by this Declaration. SECTION 6.9 Meetings. -------- If there is more than one Regular Trustee, meetings of the Regular Trustees shall be held from time to time upon the call of any Regular Trustee. Regular meetings of the Regular Trustees may be held at a time and place fixed by resolution of the Regular Trustees. Notice of 37 any in-person meetings of the Regular Trustees shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 48 hours before such meeting. Notice of any telephonic meetings of the Regular Trustees shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before a meeting. Notices shall contain a brief statement of the time, place and anticipated purposes of the meeting. The presence (whether in person or by telephone) of a Regular Trustee at a meeting shall constitute a waiver of notice of such meeting except where a Regular Trustee attends a meeting for the express purpose of objecting to the transaction of any activity on the ground that the meeting has not been lawfully called or convened. Unless provided otherwise in this Declaration, any action of the Regular Trustees may be taken at a meeting by vote of a majority of the Regular Trustees present (whether in person or by telephone) and eligible to vote with respect to such matter, provided that a Quorum is present, or without a meeting by the unanimous written consent of the Regular Trustees. In the event there is only one Regular Trustee, any and all action of such Regular Trustee shall be evidenced by a written consent of such Regular Trustee. SECTION 6.10 Merger, Conversion, Consolidation or Succession to -------------------------------------------------- Business. - -------- Any corporation into which the Property Trustee, the Delaware Trustee or any Regular Trustee that is not a natural person, may be merged or converted or with such Trustee may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of such Trustee, shall be the successor of such Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. ARTICLE 7 THE SECURITIES SECTION 7.1 General Provisions Regarding Securities. --------------------------------------- (a) The Regular Trustees shall on behalf of the Trust issue a class of preferred capital securities representing undivided beneficial ownership interests in the assets of the Trust (the "Transfer Restricted Securities"), a class of preferred capital securities to be issued only in exchange for the Transfer Restricted Securities (the "New Preferred Securities," and, together with the Transfer Restricted Securities, the "Preferred Securities"), and one class of common securities representing undivided beneficial ownership interests in the assets of the Trust (the "Common Securities"). (i) Preferred Securities. The Preferred Securities of the Trust have an aggregate liquidation amount with respect to the assets of the Trust of $70,000,000 and a liquidation amount with respect to the assets of the Trust of $1,000 per Preferred Security. The Transfer Restricted Preferred 38 Securities are hereby designated for identification purposes only as the Remarketed Par Securities, Series A, of the Trust and the New Preferred Securities are hereby designated for identification purposes only as the Preferred Securities, Series B, of the Trust. The Transfer Restricted Preferred Security Certificates and the New Preferred Security Certificates evidencing the Preferred Securities, respectively, shall be substantially in the form of Exhibits A and B to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice or to conform to the rules of any stock exchange on which the Preferred Securities are listed or quoted. (ii) Common Securities. The Common Securities of the Trust have an aggregate liquidation amount with respect to the assets of the Trust of $2,165,000 and a liquidation amount with respect to the assets of the Trust of $1,000 per Common Security. The Common Securities are hereby designated for purposes of identification only as the Common Securities of the Trust. The Common Security Certificates evidencing the Common Securities shall be substantially in the form of Exhibit C to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice. (b) Payment of Distributions on, and the Redemption Price of, the Preferred Securities and the Common Securities, as applicable, shall be made Pro Rata based on the liquidation amount of such Preferred Securities and Common Securities; provided, however, that if on any date on which such Distributions or the Redemption Price is payable, an Indenture Event of Default shall have occurred and be continuing, no payment of any Distribution on, or Redemption Price payable in respect of, any of the Common Securities, and no other payment on account of the redemption, liquidation or other acquisition of such Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions on all of the outstanding Preferred Securities for all distribution periods terminating on or prior thereto, or in the case of amounts payable on redemption the full amount of the Redemption Price of all of the outstanding Preferred Securities then called for redemption, shall have been made or provided for, and all funds available to the Property Trustee shall first be applied to the payment in full in cash of all Distributions on, or the Redemption Price of, the Preferred Securities then due and payable. The Trust shall issue no securities or other interests in the assets of the Trust other than the Preferred Securities and the Common Securities. (c) The Certificates shall be signed on behalf of the Trust by a Regular Trustee. Such signature shall be the manual or facsimile signature of any present or any future Regular Trustee. In case a Regular Trustee of the Trust who shall have signed any of the Certificates shall cease to be such Regular Trustee before the Certificates so signed shall be delivered by the Trust, such Certificates nevertheless may be delivered as though the person who signed such Certificates had not ceased to be such Regular Trustee; and any Certificate may be signed on behalf of the Trust by such persons who, at the actual date of execution of such Certificate, shall be the Regular Trustees of the Trust, although at the date of the execution and delivery of the 39 Declaration any such person was not such a Regular Trustee. Certificates shall be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Regular Trustees, as evidenced by their execution thereof, and may have such letters, numbers or other marks of identification or designation and such legends or endorsements as the Regular Trustees may deem appropriate, or as may be required to comply with any law or with any rule or regulation of any stock exchange on which Securities may be listed, or to conform to usage. A Certificate representing Preferred Securities shall not be valid until authenticated by the manual signature of an authorized officer of the Property Trustee. Such signature shall be conclusive evidence that such Certificate has been authenticated under this Declaration. Upon a written order of the Trust signed by one Regular Trustee, the Property Trustee shall authenticate the Certificates representing Preferred Securities for original issue. The aggregate number of Preferred Securities outstanding at any time shall not exceed the liquidation amount set forth in Section 7.1(a)(i). The Property Trustee may appoint an authenticating agent acceptable to the Trust to authenticate Certificates. An authenticating agent may authenticate Certificates whenever the Property Trustee may do so. Each reference in this Declaration to authentication by the Property Trustee includes authentication by such agent. An authenticating agent has the same rights as the Property Trustee to deal with the Sponsor or an Affiliate of the Sponsor. (d) The consideration received by the Trust for the issuance of the Securities shall constitute a contribution to the capital of the Trust and shall not constitute a loan to the Trust. (e) Upon issuance of the Securities as provided in this Declaration, the Securities so issued shall be deemed to be validly issued, and subject to the terms hereof, fully paid and non-assessable beneficial ownership interests in the assets of the Trust. (f) Every Person, by virtue of having become a Holder or a Preferred Security Beneficial Owner in accordance with the terms of this Declaration, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Declaration and the terms of the Securities, the Guarantee, the Indenture and the Debentures. (g) The holders of the Securities shall have no preemptive or similar rights. SECTION 7.2 Distributions. ------------- (a) Holders of Securities shall be entitled to receive cumulative cash Distributions at the following rates (each, an "Applicable Distribution Rate") of the stated liquidation amount of $1,000 per Security: 40 (i) from the Closing Date to but excluding the Remarketing Settlement Date, at the rate per annum equal to 10-1/4% (the "Initial Distribution Rate"); and (ii) from the Remarketing Settlement Date, if any, to but excluding the date of redemption, if any, thereof, at the rate per annum (the "Adjusted Distribution Rate") that results from the Remarketing consummated on the Remarketing Settlement Date. The Adjusted Distribution Rate shall not exceed the Maximum Adjusted Distribution Rate. At all times, the interest rate payable on the Debentures pursuant to Section 4.01(c) of the Indenture shall equal the Applicable Distribution Rate. (b) (i) Distributions on the Securities shall be cumulative, shall accumulate from the date of initial issuance and shall be payable semi-annually, in arrears, on each June 15 (June 14 in 2002) and December 15, commencing December 15, 1997, and on the Scheduled Remarketing Settlement Date (each, a "Distribution Date"), when, as and if available for payment, by each Property Trustee, except as otherwise described below. Distributions are payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Trust has funds available for the payment of such Distributions in the Property Account. The amount of Distributions payable for any period shall be computed (i) for any full 180-day semi-annual Distribution period on the basis of a 360-day year of twelve 30-day months, (ii) for any period shorter than a full 180-day semi-annual distribution period for which Distributions are computed, on the basis of a 30-day month and (iii) for periods of less than a month, the actual number of days elapsed per 30-day month. Subject to Section 7.1(b), Distributions shall be made on the Preferred Securities and the Common Securities on a Pro Rata basis. (ii) Distributions not paid on the scheduled Distribution Date will accumulate and compound semi-annually at the Applicable Distribution Rate in effect at the beginning of the related interest period ("Compounded Distributions"). "Distributions" shall mean ordinary cumulative Distributions together with any Compounded Distributions. (iii) If and to the extent that the Debenture Issuer makes a payment of interest (including Additional Interest, premium and/or principal on the Debentures held by the Property Trustee (the amount of any such payment being a "Payment Amount"), the Property Trustee shall and is directed, to the extent funds are available for that purpose, to make a Pro Rata distribution of the Payment Amount to Holders, subject to Section 7.1(b). (c) Distributions on the Securities shall be payable to the Holders thereof as they appear on the register of the Trust as of the close of business on the June 1 and December 1 next preceding the relevant Distribution Date. The relevant record dates for the Common Securities shall be the same as for the Preferred Securities. At all times, the Distribution Dates shall correspond to the interest payment dates on the Debentures. Distributions payable on any Securities that are not punctually paid on any Distribution Date, as a result of the Debenture Issuer having failed to make a payment under the Debentures, shall cease to be payable to the Person in whose name such Securities are registered on the relevant record date, and such 41 defaulted Distribution will instead be payable to the Person in whose name such Securities are registered on the special record date or other specified date determined in accordance with this Declaration. If any date on which Distributions are payable on the Securities is not a Business Day, then payment of the Distribution payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such payment date. (d) In the event that there is any money or other property held by or for the Trust that is not accounted for hereunder, such property shall be distributed Pro Rata among the Holders of the Securities. SECTION 7.3 Redemption of Securities. ------------------------ (a) Upon the repayment or redemption, in whole or in part, of the Debentures held by the Trust, whether at the stated maturity of the Debentures or upon earlier redemption as provided in the Indenture, the proceeds from such repayment or redemption shall be simultaneously applied Pro Rata (subject to Section 7.1(b) of this Declaration) to redeem Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Debentures so repaid or redeemed at the Redemption Price. Except with respect to a Special Mandatory Redemption, Holders shall be given not less than 30 nor more than 60 days notice of such redemption in accordance with Section 7.4 below. (b) If, at any time, a Special Event shall occur and be continuing, the Regular Trustees may, within 90 days following the occurrence of such Special Event, elect to dissolve the Trust upon not less than 30 nor more than 60 days' notice and, after satisfaction of liabilities to creditors, if any, cause the Debentures to be distributed to the holders of the Securities in liquidation of the Trust. (c) On the date fixed for any distribution of Debentures, upon dissolution of the Trust, (i) the Securities will no longer be deemed to be outstanding and (ii) certificates representing Securities will be deemed to represent the Debentures having an aggregate principal amount equal to the stated liquidation amount of, and bearing accrued and unpaid interest equal to accumulated and unpaid Distributions on, such Securities until such certificates are presented to the Sponsor or its agent for transfer or reissuance. (d) If, by 4:00 p.m., New York City time, on any Scheduled Remarketing Date, the Remarketing Agent is unable to remarket, at a price of $1,000 per Preferred Security, all of the Preferred Securities tendered or deemed tendered for purchase in the Remarketing on such Scheduled Remarketing Date, (i) such unsold Preferred Securities shall be exchanged on the related Scheduled Remarketing Settlement Date with the Trust for Debentures having an aggregate principal amount equal to the aggregate liquidation amount of such unsold Preferred Securities and such Debentures shall be immediately redeemed by the Debenture Issuer, unless (ii) as a result of such redemption, less than $25.0 million principal amount of Debentures would 42 remain outstanding, in which latter event, the Debenture Issuer shall redeem on such Scheduled Remarketing Settlement Date all of the outstanding Debentures. In the case of either such redemption (a "Special Mandatory Redemption"), the redemption price of the Debentures shall be 100% of the principal amount of the Debentures so redeemed. SECTION 7.4 Redemption Procedures. --------------------- (a) Except with respect to a Special Mandatory Redemption (which shall not be governed by this Section 7.4(a)), notice of any redemption of, or notice of distribution of Debentures in exchange for, the Securities (a "Redemption/Distribution Notice"), will be given by the Trust by mail to each Holder of Securities to be redeemed or exchanged not fewer than 30 nor more than 60 days before the date fixed for redemption or exchange thereof which, in the case of a redemption, will be the date fixed for redemption of the Debentures. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this Section 7.4(a), a Redemption/Distribution Notice shall be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders of Securities. Each Redemption/ Distribution Notice shall be addressed to the Holders of Securities at the address of each such Holder appearing in the register of the Trust. No defect in the Redemption/Distribution Notice or in the mailing of either thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder. (b) If fewer than all the outstanding Securities are to be so redeemed, the Securities will be redeemed Pro Rata and the Preferred Securities to be redeemed will be redeemed as described in Section 7.4(c) below. The Trust may not redeem the Securities in part unless all accumulated and unpaid Distributions to the date of redemption have been paid in full on all Securities then outstanding. For all purposes of this Declaration, unless the context otherwise requires, all provisions relating to the redemption of Preferred Securities shall relate, in the case of any Preferred Security redeemed or to be redeemed only in part, to the portion of the aggregate liquidation amount of Preferred Securities which has been or is to be redeemed. (c) Subject to the Trust's fulfillment of the notice requirements set forth in Section 7.4(a) above, if Securities are to be redeemed (including a redemption of Securities following a Special Mandatory Redemption of all of the Debentures), then (i) with respect to Preferred Securities represented by one or more Global Securities, by 12:00 noon, New York City time, on the redemption date, to the extent funds are available, the Property Trustee will deposit irrevocably with the Depositary or its nominee (or successor Clearing Agency or its nominee) funds sufficient to pay the applicable Redemption Price with respect to such Preferred Securities and will give the Depositary irrevocable instructions and authority to pay the Redemption Price to the Holders of such Preferred Securities and (ii) with respect to Securities not represented by one or more Global Securities, the Trust, to the extent funds are available, will irrevocably deposit with the Paying Agent such funds sufficient to pay the relevant Redemption Price to the Holders of such Securities and will give the Paying Agent irrevocable instructions and authority to pay the applicable Redemption Price by check mailed to the address of the relevant Holder appearing on the register of the Trust on the redemption date. If any date fixed 43 for redemption of Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If payment of the Redemption Price in respect of any Securities is improperly withheld or refused and not paid either by the Property Trustee or by the Sponsor as guarantor pursuant to the Guarantee, Distributions on such Securities will continue to accumulate at the then Applicable Distribution Rate in effect from the original redemption date to the actual date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the Redemption Price. For these purposes, the applicable Redemption Price shall not include Distributions which are being paid to Holders who were Holders on a relevant record date. If notice of redemption has been given and funds deposited as required, then immediately prior to the close of business on the date of such deposit or payment, Distributions will cease to accrue on the Securities called for redemption and all rights of Holders of such Securities so called for redemption will cease, except the right of the Holders to receive the Redemption Price, but without interest on such Redemption Price, and from and after the date fixed for redemption, such Securities will cease to be outstanding. Neither the Regular Trustees nor the Trust shall be required to register or cause to be registered the transfer of any Securities that have been called for redemption, except in the case of any Securities being redeemed in part, any portion thereof not to be redeemed. (d) Subject to the foregoing and applicable law (including, without limitation, United States federal securities laws), the Debenture Issuer or its subsidiaries may at any time and from time to time purchase outstanding Preferred Securities by tender, in the open market or by private agreement. SECTION 7.5 Remarketing. ----------- (a) (i) If the Debenture Issuer receives a Tax Opinion at least 35 Business Days prior to an Election Date, the Debenture Issuer may cancel the Remarketing by giving, to the Property Trustee, the Depositary and the Remarketing Agent, written notice of such cancellation. (ii) If the Debenture Issuer does not receive such a Tax Opinion or if the Debenture Issuer does not elect to cancel the Remarketing after receiving such Tax Opinion, the Trust shall give a Notice of Remarketing of the Preferred Securities, substantially in the form attached as, or containing substantially the information contained in, Exhibit D to this Declaration to the Depositary, with copies to the Property Trustee and the Remarketing Agent, not less than 20 nor more than 35 Business Days prior to the Election Date. If the Debenture Issuer is required to redeem Debentures (and thus Preferred Securities) in connection with a Transfer Restricted Security Redemption, Holders of such Preferred Securities shall receive notice of such redemption at or prior to the time when the Notice of Remarketing of the Preferred Securities shall be given to the Depositary, and such Holders shall not tender their Preferred Securities for purchase in the Remarketing. 44 (b) Not later than 4:00 P.M., New York City time, on the Election Date, each holder of Preferred Securities may give a Notice of Election, substantially in the form attached as, or containing substantially the information contained in, Exhibit E to this Declaration ("Notice of Election"), to the Property Trustee of its election (i) to retain and not to have all or any portion of the Preferred Securities owned by it remarketed in the Remarketing to be conducted on the Scheduled Remarketing Date or (ii) to tender all or any portion of such Preferred Securities for purchase in such Remarketing (such portion, in either case, shall be in the liquidation amount of $1,000 or any integral multiple thereof). Any Notice of Election given to the Property Trustee shall be irrevocable and may not be conditioned upon the level at which the Adjusted Distribution Rate is established in the Remarketing. Promptly after 4:30 P.M., New York City time, on the Election Date, the Property Trustee, based on the Notices of Election received by it through the Depositary prior to such time, shall notify the Trust, the Debenture Issuer and the Remarketing Agent of the number of Preferred Securities to be retained by Holders and the number of Preferred Securities tendered for purchase in the Remarketing. Under Section 4 of the Remarketing Agreement, the Company, in its capacity as Debenture Issuer, shall be liable for, and shall pay, any and all costs and expenses incurred in connection with the Remarketing and the Trust shall not be liable for such costs and expenses. (c) If any Holder gives a Notice of Election to tender Preferred Securities as described in clause (ii) of Section 7.5(b), the Preferred Securities so subject to such Notice of Election shall be deemed tendered for purchase in the Remarketing, notwithstanding any failure by such Holder to deliver or properly deliver such Preferred Securities to the Remarketing Agent for purchase. If any Holder of Preferred Securities fails timely to deliver a Notice of Election, as described in Section 7.5(b), such Preferred Securities shall be deemed tendered for purchase in the Remarketing, notwithstanding such failure or the failure by such Holder to deliver or properly deliver Preferred Securities to the Remarketing Agent for purchase. (d) The right of each Holder to have Preferred Securities tendered for purchase shall be limited to the extent that (i) the Remarketing Agent conducts a remarketing pursuant to the terms of the Remarketing Agreement, (ii) Preferred Securities tendered have not been called for redemption, (iii) the Remarketing Agent is able to find a purchaser or purchasers for tendered Preferred Securities at an Adjusted Distribution Rate that does not exceed the Maximum Adjusted Distribution Rate and (iv) such purchaser or purchasers deliver the purchase price therefor to the Remarketing Agent. (e) Prior to 4:00 P.M., New York City time, on the Scheduled Remarketing Date, the Remarketing Agent shall determine the Adjusted Distribution Rate, which shall be the rate per annum (rounded to the nearest one-thousandth (0.001) of one percent per annum) which the Remarketing Agent determines, in its sole judgment, to be the lowest rate per annum, if any, not exceeding the Maximum Adjusted Distribution Rate that will enable it to remarket all Preferred Securities tendered or deemed tendered for purchase at a price of $1,000 per Preferred Security. Notwithstanding the foregoing, if the Remarketing Agent is able to remarket some, but is unable to remarket all, of the Preferred Securities tendered or deemed tendered for purchase in the Remarketing, the Adjusted Distribution Rate shall be the highest rate, not exceeding the Maximum Adjusted Distribution Rate, required to remarket the Preferred Securities sold in the 45 Remarketing. If holders submit Notices of Election to retain all of the Securities then outstanding, the Adjusted Distribution Rate shall be the rate determined by the Remarketing Agent, in its sole discretion, as the rate that would have been established had a Remarketing been held on the Scheduled Remarketing Date with respect to such Notice of Election. (f) If the Remarketing Agent is unable to remarket by 4:00 P.M., New York City time, on the Scheduled Remarketing Date, all Preferred Securities tendered or deemed tendered for purchase at a price of $1,000 per Security, each holder that tendered Preferred Securities for sale shall sell a number of Preferred Securities on a pro rata basis, to the extent practicable, or by lot, as determined by the Remarketing Agent in its sole discretion, based on the number of orders to purchase Preferred Securities in the Remarketing. If the allocation procedures described in the preceding sentence would result in the sale of a fraction of a Preferred Security, the Remarketing Agent shall, in its sole discretion, round up or down the number of Preferred Securities sold by each holder in the Remarketing so that each Preferred Security sold in the Remarketing will be a whole Preferred Security and the total number of Preferred Securities sold equals the total number of Preferred Securities purchased in the Remarketing. (g) By approximately 4:30 P.M., New York City time, on the Scheduled Remarketing Date, the Remarketing Agent shall advise, by telephone (i) the Depositary, the Property Trustee, the Debenture Trustee, the Trust and the Sponsor of the Adjusted Distribution Rate determined in the Remarketing and the number of Preferred Securities sold in the Remarketing, (ii) each purchaser (or the Depositary Participant thereof) of the Adjusted Distribution Rate determined in the Remarketing and the number of Preferred Securities such purchaser is to purchase and (iii) each purchaser to give instructions to its Depositary Participant to pay the purchase price on the Scheduled Remarketing Settlement Date in same day funds against delivery of the Preferred Securities purchased through the facilities of the Depositary. (h) In accordance with the Depositary's normal procedures, on the Remarketing Settlement Date, the transactions described above with respect to each Preferred Security tendered for purchase and sold in the Remarketing shall be executed through the Depositary, if the Depositary or its nominee is the Holder of such Preferred Securities, as authorized in accordance with Section 7.5(h), and the accounts of the respective Depositary Participants shall be debited and credited and such Preferred Securities delivered by book entry as necessary to effect purchases and sales of such Preferred Securities. The Depositary shall make payment in accordance with its normal procedures. (i) If any holder selling Preferred Securities in the Remarketing fails to deliver such Preferred Securities, the Depositary Participant of such selling holder and of any other person that was to have purchased Preferred Securities in the Remarketing may deliver to any such other person a number of Preferred Securities that is less than the number of Preferred Securities that otherwise was to be purchased by such person. In such event, the number of Preferred Securities to be so delivered shall be determined by such Depositary Participant, and delivery of such lesser number of Preferred Securities shall constitute good delivery. 46 (j) The Remarketing Agent is not obligated to purchase any Preferred Securities that would otherwise remain unsold in a Remarketing. Neither the Trust, any Trustee, the Sponsor nor the Remarketing Agent shall be obligated in any case to provide funds to make payment upon tender of Preferred Securities for Remarketing. SECTION 7.6 Voting Rights of Preferred Securities. ------------------------------------- (a) Except as provided under this Article VII and as otherwise required by the Business Trust Act, the Trust Indenture Act and other applicable law, the Holders of the Preferred Securities shall have no voting rights. (b) Subject to the requirement of the Property Trustee obtaining a tax opinion in certain circumstances set forth in Section 7.6(d) below, the Holders of a Majority in Liquidation Amount of the Preferred Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or to direct the exercise of any trust or power conferred upon the Property Trustee under the Declaration, including the right to direct the Property Trustee, as Holder of the Debentures, to (i) exercise the remedies available to it under the Indenture as a Holder of the Debentures, (ii) consent to any amendment or modification of the Indenture or the Debentures where such consent shall be required or (iii) waive any past default and its consequences that is waivable under the Indenture; provided, however, that if an Indenture Event of Default has occurred and is continuing, then the Holders of 25% of the aggregate liquidation amount of the Preferred Securities may direct the Property Trustee to declare the principal of and interest on the Debentures due and payable; provided, further, that where a consent or action under the Indenture would require the consent or act of the Holders of more than a majority of the aggregate principal amount of Debentures affected thereby, only the Holders of the percentage of the aggregate stated liquidation amount of the Preferred Securities which is at least equal to the percentage required under the Indenture may direct the Property Trustee to give such consent to take such action. (c) If the Property Trustee fails to enforce its rights under the Debentures after a Holder of Preferred Securities has made a written request, such Holder of Preferred Securities may institute a legal proceeding directly against the Debenture Issuer to enforce the Property Trustee's rights under the Indenture without first instituting any legal proceeding against the Property Trustee or any other person or entity. In addition, if a Trust Enforcement Event has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to make any interest, principal or other required payments when due under the Indenture, then a Holder of Preferred Securities may directly institute a Direct Action on or after the respective due date specified in the Debentures. (d) The Property Trustee shall notify all Holders of the Preferred Securities of any notice of any Indenture Event of Default received from the Debenture Issuer with respect to the Debentures. Such notice shall state that such Indenture Event of Default also constitutes a Trust Enforcement Event. Except with respect to directing the time, method, and place of conducting a proceeding for a remedy, the Property Trustee shall be under no obligation to take any of the actions described in clause 7.6(b)(i) and (ii) above unless the Property Trustee has 47 obtained an opinion of independent tax counsel to the effect that the Trust will not fail to be classified as a grantor trust for United States federal income tax purposes, as a result of such action, and each Holder will be treated as owning an undivided beneficial ownership interest in the Debentures. (e) In the event the consent of the Property Trustee, as the Holder of the Debentures, is required under the Indenture with respect to any amendment or modification of the Indenture, the Property Trustee shall request the direction of the Holders of the Securities with respect to such amendment or modification and shall vote with respect to such amendment or modification as directed by a Majority in Liquidation Amount of the Securities voting together as a single class; provided, however, that where a consent under the Indenture would require the consent of the Holders of more than a majority of the aggregate principal amount of the Debentures, the Property Trustee may only give such consent at the direction of the Holders of at least the same proportion in aggregate stated liquidation amount of the Securities. The Property Trustee shall not take any such action in accordance with the directions of the Holders of the Securities unless the Property Trustee has obtained an opinion of independent tax counsel to the effect that the Trust will not be classified as other than a grantor trust for United States federal income tax purposes, as a result of such action, and each Holder will be treated as owning an undivided beneficial ownership interest in the Debentures. (f) A waiver of an Indenture Event of Default with respect to the Debentures will constitute a waiver of the corresponding Trust Enforcement Event. (g) Any required approval or direction of Holders of Preferred Securities may be given at a separate meeting of Holders of Preferred Securities convened for such purpose, at a meeting of all of the Holders of Securities or pursuant to written consent. The Regular Trustees shall cause a notice of any meeting at which Holders of Preferred Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of Preferred Securities. Each such notice shall include a statement setting forth the following information: (i) the date of such meeting or the date by which such action is to be taken; (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought; and (iii) instructions for the delivery of proxies or consents. (h) No vote or consent of the Holders of Preferred Securities shall be required for the Trust to redeem and cancel Preferred Securities or distribute Debentures in accordance with the Declaration. (i) Notwithstanding that Holders of Preferred Securities are entitled to vote or consent under any of the circumstances described above, any of the Securities that are owned at such time by the Debenture Issuer, the Trustees or any entity directly or indirectly controlled by, or under direct or indirect common control with, the Debenture Issuer or any Trustee, shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if such Securities were not outstanding. 48 (j) Holders of the Preferred Securities shall have no rights to appoint or remove the Trustees, who may be appointed, removed or replaced solely by the Debenture Issuer, as the Holder of all of the Common Securities. If an Indenture Event of Default has occurred and is continuing, the Property Trustee and the Delaware Trustee may be removed at such time by a Majority in Liquidation Amount of the Preferred Securities. SECTION 7.7 Voting Rights of Common Securities. ---------------------------------- (a) Except as provided under Section 6.1(b) or this Section 7.7 or as otherwise required by the Business Trust Act, the Trust Indenture Act or other applicable law or provided by the Declaration, the Holders of the Common Securities shall have no voting rights. (b) The Holders of the Common Securities shall be entitled, in accordance with Article V of the Declaration, to vote to appoint, remove or replace any Trustee or to increase or decrease the number of Trustees. (c) Subject to Section 2.6 of the Declaration and only after all Trust Enforcement Events with respect to the Preferred Securities have been cured, waived, or otherwise eliminated and subject to the requirement of the Property Trustee obtaining a tax opinion in certain circumstances set forth in this paragraph (c), the Holders of a Majority in Liquidation Amount of the Common Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or direct the exercise of any trust or power conferred upon the Property Trustee under the Declaration, including the right to direct the Property Trustee, as Holder of the Debentures, to (i) exercise the remedies available to it under the Indenture as a Holder of the Debentures, (ii) consent to any amendment or modification of the Indenture or the Debentures where such consent shall be required or (iii) waive any past default and its consequences that is waivable under the Indenture; provided, however, that where a consent or action under the Indenture would require the consent or act of the Holders of more than a majority of the aggregate principal amount of Debentures affected thereby, only the Holders of the percentage of the aggregate stated liquidation amount of the Common Securities which is at least equal to the percentage required under the Indenture may direct the Property Trustee to have such consent or take such action. Except with respect to directing the time, method, and place of conducting a proceeding for a remedy, the Property Trustee shall be under no obligation to take any of the actions described in clause 7.7(c)(i) and (ii) above unless the Property Trustee has obtained an opinion of independent tax counsel to the effect that, as a result of such action, for United States federal income tax purposes the Trust will not fail to be classified as a grantor trust and each Holder will be treated as owning an undivided beneficial ownership interest in the Debentures. (d) If the Property Trustee fails to enforce its rights under the Debentures after a Holder of Common Securities has made a written request, such Holder of Common Securities may directly institute a legal proceeding directly against the Debenture Issuer to enforce the Property Trustee's rights under the Debentures without first instituting any legal proceeding against the Property Trustee or any other person or entity. 49 (e) A waiver of an Indenture Event of Default with respect to the Debentures will constitute a waiver of the corresponding Trust Enforcement Event. (f) Any required approval or direction of Holders of Common Securities may be given at a separate meeting of Holders of Common Securities convened for such purpose, at a meeting of all of the Holders of Securities or pursuant to written consent. The Regular Trustees will cause a notice of any meeting at which Holders of Trust Common Securities are entitled to vote, or of any matter on which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of Common Securities. Each such notice will include a statement setting forth the following information: (i) the date of such meeting or the date by which such action is to be taken; (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought; and (iii) instructions for the delivery of proxies or consents. (g) No vote or consent of the Holders of the Common Securities will be required for the Trust to redeem and cancel Common Securities or to distribute Debentures in accordance with the Declaration and the terms of the Securities. SECTION 7.8 Paying Agent. ------------ In the event that any Preferred Securities are not in book-entry only form, the Trust shall maintain in the Borough of Manhattan, City of New York, State of New York, an office or agency where the Trust Preferred Securities may be presented for payment ("Paying Agent"). The Trust may appoint the paying agent and may appoint one or more additional paying agents in such other locations as it shall determine. The term "Paying Agent" includes any additional paying agent. The Trust may change any Paying Agent without prior notice to the Holders. The Trust shall notify the Property Trustee of the name and address of any Paying Agent not a party to this Declaration. If the Trust fails to appoint or maintain another entity as Paying Agent, the Property Trustee shall act as such. The Trust or any of its Affiliates may act as Paying Agent. Chase Trust Company of California shall initially act as Paying Agent for the Preferred Securities and the Common Securities. In the event the Property Trustee shall no longer be the Paying Agent, the Regular Trustees shall appoint a successor (which shall be a bank or trust company acceptable to the Regular Trustees and the Debenture Issuer) to act as Paying Agent. The Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Property Trustee and the Debenture Issuer. SECTION 7.9 Transfer of Securities. ---------------------- (a) The Trust shall cause to be kept at the Corporate Trust Office of the Property Trustee a register (the register maintained in such office being herein sometimes referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Trust shall provide for the registration of Preferred Securities and of transfers of Preferred Securities. The Property Trustee is hereby appointed "Security Registrar" for the purpose of registering Preferred Securities and transfers of Preferred Securities as herein provided. 50 (b) Upon surrender for registration of transfer of any Security at an office or agency of the Trust designated for such purpose, the Trust shall execute, and the Property Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations and of a like aggregate principal amount. (c) At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Trust shall execute, and the Property Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. (d) Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Trust or the Property Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Trust and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. (e) No service charge shall be made for any registration of transfer or exchange of Securities, but the Trust may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities. (f) If the Securities are to be redeemed in part (other than pursuant to a Special Mandatory Redemption), the Trust shall not be required (A) to issue, register the transfer of or exchange any Securities during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of any such Securities selected for redemption under Section 7.4 and ending at the close of business on the day of such mailing, or (B) to register the transfer or exchange of any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. SECTION 7.10 Mutilated, Destroyed, Lost or Stolen Certificates. ------------------------------------------------- If: (a) any mutilated Certificates should be surrendered to the Regular Trustees, or if the Regular Trustees shall receive evidence to their satisfaction of the destruction, loss or theft of any Certificate; and (b) there shall be delivered to the Regular Trustees such security or indemnity as may be required by them to keep each of them, the Sponsor and the Trust harmless, then, in the absence of notice that such Certificate shall have been acquired by a bona fide purchaser, any Regular Trustee on behalf of the Trust shall execute and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like denomination. In connection with the issuance of any new Certificate under this Section 7.10, the Regular Trustees may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Certificate issued pursuant to this 51 Section shall constitute conclusive evidence of an ownership interest in the relevant Securities, as if originally issued, whether or not the lost, stolen or destroyed Certificate shall be found at any time. SECTION 7.11 Deemed Security Holders. ----------------------- The Trustees may treat the Person in whose name any Certificate shall be registered on register of the Trust as the sole holder of such Certificate and of the Securities represented by such Certificate for purposes of receiving Distributions and for all other purposes whatsoever and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Certificate or in the Securities represented by such Certificate on the part of any Person, whether or not the Trust shall have actual or other notice thereof. SECTION 7.12 Global Securities. ----------------- The Transfer Restricted Securities shall be, and the New Preferred Securities may be, issued as Global Securities, Preferred Securities are to be issued in the form of one or more Global Securities, then the Trust shall execute and the Property Trustee shall authenticate and deliver one or more Global Securities that (i) shall represent and shall be denominated in an amount equal to the aggregate liquidation amount of all of the Preferred Securities to be issued in the form of Global Securities and not yet cancelled, (ii) shall be registered in the name of the Depositary for such Global Security or Preferred Securities or the nominee of such Depositary, and (iii) shall be delivered by the Property Trustee to such Depositary or pursuant to such Depositary's instructions. Global Securities shall bear a legend substantially to the following effect: "This Remarketed Preferred Security is a Global Security within the meaning of the Declaration hereinafter referred to and is registered in the name of The Depository Trust Company, a New York corporation (the "Depositary"), or a nominee of the Depositary. This Remarketed Preferred Security is exchangeable for Remarketed Preferred Securities registered in the name of a person other than the Depositary or its nominee only in the limited circumstances described in the Declaration and no transfer of this Remarketed Preferred Security (other than a transfer of this Remarketed Preferred Security as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary) may be registered except in limited circumstances. Unless this Remarketed Preferred Security Certificate is presented by an authorized representative of the Depositary to Imperial Credit Capital Trust I or its agent for registration of transfer, exchange or payment, and any Remarketed Preferred Security Certificate issued is registered in the name of Cede & Co. or such other name as registered by an authorized representative of the Depositary (and any payment hereon is made to Cede & Co. or to such other entity as is requested by an authorized representative of the Depositary), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein." 52 Preferred Securities not represented by a Global Security issued in exchange for all or a part of a Global Security pursuant to this Section 7.12 shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Property Trustee. Upon execution and authentication, the Property Trustee shall deliver such Preferred Securities not represented by a Global Security to the persons in whose names such definitive Preferred Securities are so registered. At such time as all interests in Global Securities have been redeemed, repurchased or cancelled, such Global Securities shall be, upon receipt thereof, cancelled by the Property Trustee in accordance with standing procedures of the Depositary. At any time prior to such cancellation, if any interest in Global Securities is exchanged for Preferred Securities not represented by a Global Security, redeemed, cancelled or transferred to a transferee who receives Preferred Securities not represented by a Global Security therefor or any Preferred Security not represented by a Global Security is exchanged or transferred for part of Global Securities, the principal amount of such Global Securities shall, in accordance with the standing procedures of the Depositary, be reduced or increased, as the case may be, and an endorsement shall be made on such Global Securities by the Property Trustee to reflect such reduction or increase. The Trust and the Property Trustee may for all purposes, including the making of payments due on the Preferred Securities, deal with the Depositary as the authorized representative of the Holders for the purposes of exercising the rights of Holders hereunder. The rights of the owner of any beneficial interest in a Global Security shall be limited to those established by law and agreements between such owners and depository participants or Euroclear and Cedel; provided, that no such agreement shall give any rights to any person against the Trust or the Property Trustee without the written consent of the parties so affected. Multiple requests and directions from and votes of the Depositary as holder of Preferred Securities in global form with respect to any particular matter shall not be deemed inconsistent to the extent they do not represent an amount of Preferred Securities in excess of those held in the name of the Depositary or its nominee. If at any time the Depositary for any Preferred Securities represented by one or more Global Securities notifies the Trust that it is unwilling or unable to continue as Depositary for such Preferred Securities or if at any time the Depositary for such Preferred Securities shall no longer be eligible under this Section 7.12, the Trust shall appoint a successor Depositary with respect to such Preferred Securities. If a successor Depositary for such Preferred Securities is not appointed by the Trust within 90 days after the Trust receives such notice or becomes aware of such ineligibility, the Trust's election that such Preferred Securities be represented by one or more Global Securities shall no longer be effective and the Trust shall execute, and the Property Trustee will authenticate and deliver, Preferred Securities in definitive registered form, in any authorized denominations, in an aggregate liquidation amount equal to the principal amount of the Global Security or Preferred Securities representing such Preferred Securities in exchange for such Global Security or Preferred Securities. 53 After a Remarketing, the Trust may at any time and in its sole discretion determine that the Preferred Securities issued in the form of one or more Global Securities shall no longer be represented by a Global Security or Preferred Securities. In such event the Trust shall execute, and the Property Trustee, shall authenticate and deliver, Preferred Securities in definitive registered form, in any authorized denominations, in an aggregate liquidation amount equal to the principal amount of the Global Security or Preferred Securities representing such Preferred Securities, in exchange for such Global Security or Preferred Securities. Notwithstanding any other provisions of this Declaration (other than the provisions set forth in Section 7.9), Global Securities may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Interests of beneficial owners in a Global Security may be transferred or exchanged for Preferred Securities not represented by a Global Security and Preferred Securities not represented by a Global Security may be transferred or exchange for Global Securities in accordance with rules of the Depositary and the provisions of Section 7.14. Any Preferred Security in global form may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Declaration as may be required by the Depositary or by the National Association of Securities Dealers, Inc. in order for the Preferred Securities to be tradeable on the PORTAL Market or as may be required for the Preferred Securities to be tradeable on any other market developed for trading of securities pursuant to Rule 144A or required to comply with any applicable law or any regulation thereunder or with Regulation S or with the rules and regulations of any securities exchange upon which the Preferred Securities may be listed or traded or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Preferred Securities are subject. Any Preferred Security in global form may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Declaration as may be required by the Depositary or by the National Association of Securities Dealers, Inc. in order for the Preferred Securities to be tradeable on the PORTAL Market or as may be required for the Preferred Securities to be tradeable on any other market developed for trading of securities pursuant to Rule 144A or required to comply with any applicable law or any regulation thereunder or with Regulation S or with the rules and regulations of any securities exchange upon which the Preferred Securities may be listed or traded or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Preferred Securities are subject. SECTION 7.13 Restrictive Legend. ------------------ (a) Each Global Security and Preferred Security not represented by a Global Security that constitutes a Restricted Security shall bear the following legend (the "Private 54 Placement Legend") on the face thereof until two years after the later of the date of original issue and the last date on which the Sponsor or any affiliate of the Sponsor was the owner of such Preferred Securities (or any predecessor thereto) (the "Resale Restriction Termination Date"), unless otherwise agreed by the Trust and the Holder thereof: "THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, REPRESENTS, ACKNOWLEDGES AND AGREES FOR THE BENEFIT OF THE TRUST THAT: (I) IT HAS ACQUIRED A "RESTRICTED" SECURITY WHICH HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT; (II) IT WILL NOT OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY PRIOR TO THE LATER OF THE DATE WHICH IS TWO YEARS AFTER THE DATE OF ORIGINAL ISSUANCE HEREOF AND THE LAST DATE ON WHICH THE TRUST OR ANY AFFILIATE OF THE TRUST WAS THE OWNER OF SUCH RESTRICTED SECURITIES (OR ANY PREDECESSOR) EXCEPT (A) TO THE TRUST, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (D) OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY APPLICABLE JURISDICTION; AND (III) IT WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THIS SECURITY OF THE RESALE RESTRICTIONS SET FORTH IN (II) ABOVE. ANY OFFER, SALE OR OTHER DISPOSITION PURSUANT TO THE FOREGOING CLAUSES (II)(D) AND (E) IS SUBJECT TO THE RIGHT OF THE ISSUER OF THIS SECURITY AND THE PROPERTY TRUSTEE FOR SUCH REMARKETED PREFERRED SECURITIES TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS OR OTHER INFORMATION ACCEPTABLE TO THEM IN FORM AND SUBSTANCE." 55 Any Preferred Security (or security issued in exchange or substitution therefor) as to which such restrictions on transfer shall have expired in accordance with their terms may, upon satisfaction of the requirements of Section 7.14(b) and surrender of such Preferred Security for exchange to the Preferred Security Registrar in accordance with the provisions of this Section 7.13(a), be exchanged for a new Preferred Security or Preferred Securities, of like tenor and aggregate liquidation amount, which shall not bear the restrictive legend required by this Section 7.13(a). Upon any sale or transfer of any Restricted Security (including any interest in a Global Security) (i) that is effected pursuant to an effective registration statement under the Securities Act or (ii) in connection with which the Property Trustee receives certificates and other information (including an opinion of counsel, if requested) reasonably acceptable to the Company and the Property Trustee to the effect that such security will no longer be subject to the resale restrictions under federal and state securities laws, then (A) in the case of a Restricted Security in definitive form, the Preferred Security registrar or co-registrar shall permit the holder thereof to exchange such Restricted Security for a security that does not bear the legend set forth in Section 7.13(a), and shall rescind any such restrictions on transfer and (B) in the case of Restricted Securities represented by a Global Security, such Preferred Security shall no longer be subject to the restrictions contained in the legend set forth in Section 7.13(a) (but still subject to the other provisions hereof). In addition, any Preferred Security (or security issued in exchange or substitution therefor) as to which the restrictions on transfer described in the legend set forth in Section 7.13(a) have expired by their terms, may, upon surrender thereof (in accordance with terms of this Indenture) together with such certifications and other information (including an opinion of counsel having substantial experience in practice under the Securities Act and otherwise reasonably acceptable to the Company, addressed to the Company and the Property Trustee and in form acceptable to the Company, to the effect that the transfer of such Restricted Security has been made in compliance with Rule 144 or such successor provision) acceptable to the Company and the Property Trustee as either of them may reasonably require, be exchanged for a new Preferred Security or Preferred Securities of like tenor and aggregate liquidation amount, which shall not bear the restrictive legends set forth in Section 7.13(a). SECTION 7.14 Special Transfer Provisions. --------------------------- (a) At any time after the Remarketing Settlement Date at the request of the Beneficial Owner of a Preferred Security in global form, such Beneficial Owner shall be entitled to obtain a definitive Preferred Security upon written request to the Property Trustee in accordance with the standing instructions and procedures existing between the Depositary and the Property Trustee for the issuance thereof. Any transfer after the Remarketing Settlement Date of a beneficial interest in a Preferred Security in global form which cannot be effected through book-entry settlement must be effected by the delivery to the transferee (or its nominee) of a definitive Preferred Security or Preferred Securities registered in the name of the transferee (or its nominee) on the books maintained by the Security Registrar. With respect to any such transfer, the Property Trustee shall cause, in accordance with the standing instructions and procedures existing between the Depositary and the Property Trustee, the aggregate liquidation amount of the Global Security to be reduced and, following such reduction, the Property Trustee 56 shall cause definitive Preferred Securities in the appropriate aggregate liquidation amount in the name of such transferee (or its nominee) and bearing such restrictive legends as may be required by this Declaration to be delivered. In connection with any such transfer, the Property Trustee may request such representations and agreements relating to the restrictions on transfer of such Preferred Securities from such transferee (or such transferee's nominee) as the Property Trustee may reasonably require. (b) So long as the Preferred Securities are eligible to be held as Global Preferred Securities, or unless otherwise required by law, upon any transfer of a definitive Preferred Security to a QIB in accordance with Rule 144A, unless otherwise requested by the transferor, and upon receipt of the definitive Preferred Security being so transferred, together with a certification from the transferor that the transferor reasonably believes the transferee is a QIB (or other evidence satisfactory to the Property Trustee), the Property Trustee shall make an endorsement on the Restricted Global Security to reflect an increase in the aggregate liquidation amount of the Restricted Global Security, and the Property Trustee shall cancel such definitive Preferred Security and cause, in accordance with the standing instructions and procedures existing between the Depositary and the Property Trustees, the aggregate liquidation amount of Preferred Securities represented by the Restricted Global Security to be increased accordingly. (c) So long as the Preferred Securities are eligible for book-entry settlement, or unless otherwise required by law, upon any transfer of a definitive Preferred Security in accordance with Regulation S, if requested by the transferor, and upon receipt of the definitive Preferred Security or Preferred Securities being so transferred, together with a certification from the transferor that the transfer was made in accordance with Rule 903 or 904 of Regulation S or Rule 144 under the Preferred Securities Act (or other evidence satisfactory to the Property Trustee), the Property Trustee shall make an endorsement on the Regulation S Global Security to reflect an increase in the aggregate liquidation amount of the Preferred Securities represented by the Regulation S Global Security, the Property Trustee shall cancel such definitive Preferred Security or Preferred Securities and cause, in accordance with the standing instructions and procedures existing between the Depositary and the Property Trustee, the aggregate liquidation amount of Preferred Securities represented by the Regulation S Global Security to be increased accordingly. (d) If a holder of a beneficial interest in the Restricted Global Security wishes at any time to exchange its interest in the Restricted Global Security for an interest in the Regulation S Global Security, or to transfer its interest in the Restricted Global Security to a person who wishes to take delivery thereof in the form of an interest in the Regulation S Global Security, such holder may, subject to the rules and procedures of the Depositary and to the requirements set forth in the following sentence, exchange or cause the exchange or transfer or cause the transfer of such interest for an equivalent beneficial interest in the Regulation S Global Security. Upon receipt by the Property Trustee, as transfer agent of (1) instructions given in accordance with the Depositary's procedures from or on behalf of a holder of a beneficial interest in the Restricted Global Security, directing the Property Trustee (via DWAC), as transfer agent, to credit or cause to be credited a beneficial interest in the Regulation S Global Security in an amount equal to the beneficial interest in the Restricted Global Security to be exchanged or 57 transferred, (2) a written order given in accordance with the Depositary's procedures containing information regarding the Euroclear or Cedel account to be credited with such increase and the name of such account, and (3) a certificate given by the holder of such beneficial interest stating that the exchange or transfer of such interest has been made pursuant to and in accordance with Rule 903 or Rule 904 of Regulation S or Rule 144 under the Preferred Securities Act (or other evidence satisfactory to the Property Trustee), the Property Trustee, as transfer agent, shall promptly deliver appropriate instructions to the Depositary (via DWAC), its nominee, or the custodian for the Depositary, as the case may be, to reduce or reflect on its records a reduction of the Restricted Global Security by the aggregate liquidation amount of the beneficial interest in such Restricted Global Security to be so exchanged or transferred from the relevant participant, and the Property Trustee, as transfer agent, shall promptly deliver appropriate instructions (via DWAC) to the Depositary, its nominee, or the custodian for the Depositary, as the case may be, concurrently with such reduction, to increase or reflect on its records an increase of the liquidation amount of such Regulation S Global Security by the aggregate liquidation amount of the beneficial interest in such Restricted Global Security to be so exchanged or transferred, and to credit or cause to be credited to the account of the person specified in such instructions (who may be Morgan Guaranty Trust Company of New York, Brussels office, as operator of Euroclear or Cedel or another agent member of Euroclear or Cedel, or both, as the case may be, acting for and on behalf of them) a beneficial interest in such Regulation S Global Security equal to the reduction in the liquidation amount of such Restricted Global Security. (e) If a holder of a beneficial interest in the Regulation S Global Security wishes at any time to exchange its interest in the Regulation S Global Security for an interest in the Restricted Global Security, or to transfer its interest in the Regulation S Global Security to a person who wishes to take delivery thereof in the form of an interest in the Restricted Global Security, such holder may, subject to the rules and procedures of Euroclear or Cedel and the Depositary, as the case may be, and to the requirements set forth in the following sentence, exchange or cause the exchange or transfer or cause the transfer of such interest for an equivalent beneficial interest in such Restricted Global Security. Upon receipt by the Property Trustee, as transfer agent of (l) instructions given in accordance with the procedures of Euroclear or Cedel and the Depositary, as the case may be, from or on behalf of a beneficial owner of an interest in the Regulation S Global Security directing the Property Trustee, as transfer agent, to credit or cause to be credited a beneficial interest in the Restricted Global Security in an amount equal to the beneficial interest in the Regulation S Global Security to be exchanged or transferred, (2) a written order given in accordance with the procedures of Euroclear or Cedel and the Depositary, as the case may be, containing information regarding the account with the Depositary to be credited with such increase and the name of such account, and (3) prior to the expiration of the Restricted Period, a certificate given by the holder of such beneficial interest and stating that the person transferring such interest in such Regulation S Global Security reasonably believes that the person acquiring such interest in the Restricted Global Security is a QIB and is obtaining such beneficial interest in a transaction meeting the requirements of Rule 144A and any applicable securities laws of any state of the United States or any other jurisdiction (or other evidence satisfactory to the Property Trustee), the Property Trustee, as transfer agent, shall promptly deliver (via DWAC) appropriate instructions to the Depositary, its nominee, or the custodian for the Depositary, as the case may be, to reduce or reflect on its records a reduction of 58 the Regulation S Global Security by the aggregate liquidation amount of the beneficial interest in such Regulation S Global Security to be exchanged or transferred, and the Property Trustee, as transfer agent, shall promptly deliver (via DWAC) appropriate instructions to the Depositary, its nominee, or the custodian for the Depositary, as the case may be, concurrently with such reduction, to increase or reflect on its records an increase of the liquidation amount of the Restricted Global Security by the aggregate liquidation amount of the beneficial interest in the Regulation S Global Security to be so exchanged or transferred, and to credit or cause to be credited to the account of the person specified in such instructions a beneficial interest in the Restricted Global Security equal to the reduction in the liquidation amount of the Regulation S Global Security. After the expiration of the Restricted Period, the certification requirement set forth in clause (3) of the second sentence of this Section 7.14(e) will no longer apply to such exchanges and transfers. (f) Any beneficial interest in one of the Global Securities that is transferred to a person who takes delivery in the form of an interest in the other Global Security will, upon transfer, cease to be an interest in such Global Security and become an interest in the other Global Security and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interests in such other Global Security for as long as it remains such an interest. (g) Prior to or on the 40th day after the later of the commencement of the offering of the Preferred Securities and the Closing Date (the "Restricted Period"), beneficial interests in a Regulation S Global Security may only be held through Morgan Guaranty Trust Company of New York, Brussels office, as operator of Euroclear or Cedel or another agent member of Euroclear and Cedel acting for and on behalf of them, unless delivery is made through the Restricted Global Security in accordance with the certification requirements hereof. During the Restricted Period, interests in the Regulation S Global Security, may be exchanged for interests in the Restricted Global Security or for definitive Preferred Securities only in accordance with the certification requirements described above. SECTION 7.15 Change of Control. ----------------- Upon the occurrence of a Change of Control on or prior to the Remarketing Settlement Date, each holder of Preferred Securities will have the right to require the Trust to cause all or any part (equal to $1,000 liquidation amount or any integral multiple thereof) of the Preferred Securities to be exchanged for an equivalent principal amount of Debentures. Promptly thereafter, such Debentures shall be repurchased by the Debenture Issuer, as described below (the "Change of Control Offer"), at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon to the date of purchase (the "Change of Control Payment"). Within 10 days following any Change of Control, the Debenture Issuer shall notify the Trust of such Change of Control and the Trust shall mail a notice to each holder describing the transaction or transactions that constitute the Change of Control and offering to exchange the Preferred Securities for the Debentures pursuant to the procedures required by the 59 Declaration and described in such notice. The Trust and the Debenture Issuer shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the exchange of the Preferred Securities and the repurchase of the Debentures as a result of a Change of Control. The Change of Control Offer shall remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Change of Control Offer Period"). No later than five Business Days after the termination of the Change of Control Offer Period (the "Change of Control Purchase Date"), the Trust shall accept all Preferred Securities tendered in response to the Change of Control Offer and the Debenture Issuer shall repurchase all Debentures exchanged for such Preferred Securities. Payment for the Debentures exchanged for any Preferred Securities so accepted shall be made in the same manner as interest payments are made under the Indenture. On the Change of Control Purchase Date, the Trust shall, to the extent lawful, (a) accept for exchange all Preferred Securities or portions thereof properly tendered pursuant to the Change of Control Offer, (b) deliver or cause to be delivered to the Property Trustee the Securities so accepted together with a certificate of the Regular Trustees stating the aggregate liquidation amount of Securities or portions thereof being exchanged by the Trust and (c) the Trust shall then exchange, for such Preferred Securities, Debentures having an equivalent aggregate principal amount. The Debenture Issuer will promptly deposit with the Indenture Trustee an amount equal to the Change of Control Payment in respect of all Preferred Securities or portions thereof so exchanged. The Indenture Trustee shall promptly mail to each holder of Preferred Securities so exchanged the Change of Control Payment for such Preferred Securities, and the Trust shall promptly authenticate and mail (or cause to be transferred by book entry) to each holder a new Preferred Security equal in liquidation amount to any unexchanged portion of the Preferred Securities surrendered, if any; provided that each such new Preferred Securities will be in a liquidation amount of $1,000 or an integral multiple thereof. The Trust and the Debenture Issuer shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. SECTION 7.16 Asset Sales ----------- If the aggregate amount of Excess Proceeds under Section 4.07 of the Indenture exceeds $5.0 million, the Trust shall be required to make an offer to all holders of Preferred Securities (an "Asset Sale Offer") to exchange, for such Preferred Securities the maximum principal amount of Debentures that may be exchanged under Section 4.07 of the Indenture out of the Excess Proceeds, which Debentures shall then be repurchased by the Debenture Issuer at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of purchase. 60 An Asset Sale Offer will remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Asset Sale Offer Period"). No later than five Business Days after the termination of the Asset Sale Offer Period (the "Asset Sale Purchase Date"), the Trust will accept for exchange up to the liquidation amount of Preferred Securities required to be exchanged pursuant to this Section (the "Asset Sale Offer Amount") or, if less than the Asset Sale Offer Amount has been tendered, all Preferred Securities tendered in response to the Asset Sale Offer. If the Asset Sale Purchase Date is on or after a Distribution record date and on or before the related Distribution payment date, any accumulated and unpaid Distributions and Additional Distributions, if any, shall be paid to the Person in whose name a Preferred Security is registered at the close of business on such record date, and no additional Distributions or Additional Distributions, if any, shall be payable to holders who tender Preferred Securities pursuant to the Asset Sale Offer. On or before the Asset Sale Purchase Date, the Trust shall, to the extent lawful, accept for exchange, on a pro rata basis to the extent necessary, the Asset Sale Offer Amount of Preferred Securities or portions thereof tendered pursuant to the Asset Sale Offer, or if less than the Asset Sale Offer Amount has been tendered, all Preferred Securities tendered, and the Regular Trustees shall deliver to the Property Trustee a certificate stating that such Preferred Securities or portions thereof were accepted for exchange by the Trustee in accordance with the terms of this covenant. Promptly following such exchange, the Debenture Issuer shall (but in any case not later than five days after the Asset Sale Purchase Date) mail or deliver to each tendering holder an amount equal to the purchase price of the Debentures exchanged with such holder by the Trust, and the Trust shall promptly issue a new Preferred Security, and the Trust shall authenticate and mail or deliver such new Preferred Security to such holder, in a liquidation amount equal to any unexchanged portion of the Preferred Security surrendered. Any Preferred Security not so accepted shall be promptly mailed or delivered by the Trust to the holder thereof. The Trust and the Debenture Issuer shall publicly announce the results of the Asset Sale Offer on the Asset Sale Purchase Date. ARTICLE 8 DISSOLUTION AND TERMINATION OF TRUST SECTION 8.1 Dissolution and Termination of Trust. ------------------------------------ (a) The Trust shall dissolve upon the earliest of: (i) the bankruptcy of the Holder of the Common Securities or the Sponsor; 61 (ii) the filing of a certificate of dissolution or its equivalent with respect to the Sponsor; and the filing of a certificate of cancellation with respect to the Trust after obtaining the consent of the Holders of at least a Majority in Liquidation Amount of the Securities to the filing of a certificate of cancellation with respect to the Trust or the revocation of the Sponsor's charter and the expiration of 90 days after the date of revocation without a reinstatement thereof; (iii) the entry of a decree of judicial dissolution of the Sponsor or the Trust; (iv) the time when all of the Securities shall have been called for redemption and the amounts then due shall have been paid to the Holders in accordance with the terms of the Securities; (v) upon the election of the Regular Trustees, following the occurrence and continuation of a Special Event pursuant to which the Trust shall have been dissolved in accordance with the terms of the Securities, and all of the Debentures shall have been distributed to the Holders of Securities in exchange for all of the Securities; or (vi) the time when all of the Regular Trustees and the Sponsor shall have consented to termination of the Trust provided such action is taken before the issuance of any Securities. (b) As soon as is practicable after the occurrence of an event referred to in Section 81 and upon completion of the winding up and liquidation of the Trust, the Trustees shall terminate the Trust by filing a certificate of cancellation with the Secretary of State of the State of Delaware. (c) The provisions of Section 39 and Article 10 shall survive the termination of the Trust. SECTION 8.2 Liquidation Distribution Upon Dissolution of the Trust. ------------------------------------------------------ (a) In the event of any voluntary or involuntary dissolution, winding-up and liquidation of the Trust (each a "Liquidation"), the Holders of the Preferred Securities on the date of the Liquidation will be entitled to receive, out of the assets of the Trust available for distribution to Holders of Securities after satisfaction of the Trusts' liabilities to creditors, if any, distributions in cash or other immediately available funds in an amount equal to the aggregate of the stated liquidation amount of $1,000 per Security plus accrued and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"), unless, in connection with such Liquidation, Debentures in an aggregate stated liquidation amount equal to the aggregate stated liquidation amount of, with a distribution rate identical to the distribution rate of, and accrued and unpaid distributions equal to accrued and unpaid distributions on, such 62 Securities shall be distributed on a Pro Rata basis to the Holders of the Securities in exchange for such Securities. (b) If, upon any such Liquidation, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Securities shall be paid on a Pro Rata basis. The Holders of the Common Securities will be entitled to receive distributions upon any such Liquidation Pro Rata with the Holders of the Preferred Securities except that if an Indenture Event of Default has occurred and is continuing, the Preferred Securities shall have a preference over the Common Securities with regard to such distributions. ARTICLE 9 LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, DELAWARE TRUSTEES OR OTHERS SECTION 9.1 Liability. --------- (a) Except as expressly set forth in this Declaration, the Preferred Securities Guarantee and the terms of the Securities, the Sponsor: (i) shall not be personally liable for the return of any portion of the capital contributions (or any return thereon) of the Holders of the Securities which shall be made solely from assets of the Trust; and (ii) shall not be required to pay to the Trust or to any Holder of Securities any deficit upon dissolution of the Trust or otherwise. (b) Pursuant to Section 3803(a) of the Business Trust Act, the Holders of the Common Securities shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware; provided, however, the Holder of the Common Securities shall be liable for all of the debts and obligations of the Trust (other than with respect to the Securities) to the extent not satisfied out of the Trust's assets. (c) Pursuant to Section 3803(a) of the Business Trust Act, the Holders of the Preferred Securities shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. SECTION 9.2 Exculpation. ----------- (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason 63 of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's gross negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to the Trust by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Securities might properly be paid. SECTION 9.3 Fiduciary Duty. -------------- (a) To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to any other Covered Person, an Indemnified Person acting under this Declaration shall not be liable to the Trust or to an other Covered Person for its good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity (other than the duties imposed on the Property Trustee under the Trust Indenture Act), are agreed by the parties hereto to replace such other duties and liabilities of such Indemnified Person. (b) Unless otherwise expressly provided herein: (i) whenever a conflict of interest exists or arises between any Covered Persons; or (ii) whenever this Declaration or any other agreement contemplated herein or therein provides that an Indemnified Person shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust or any Holder of Securities, the Indemnified Person shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Indemnified Person, the resolution, action or term so made, taken or provided by the Indemnified Person shall not constitute a breach of this Declaration or any other agreement contemplated herein or of any duty or obligation of the Indemnified Person at law or in equity or otherwise. 64 (c) Whenever in this Declaration an Indemnified Person is permitted or required to make a decision: (i) in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or (ii) in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be subject to any other or different standard imposed by this Declaration or by applicable law. SECTION 9.4 Indemnification. --------------- (a)(i) The Debenture Issuer shall indemnify, to the full extent permitted by law, any Debenture Issuer Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was a Debenture Issuer Indemnified Person against expenses (including attorney fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Debenture Issuer Indemnified Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (ii) The Debenture Issuer shall indemnify, to the full extent permitted by law, any Debenture Issuer Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment in its favor by reason of the fact that he is or was a Debenture Issuer Indemnified Person against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Debenture Issuer Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and 65 reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (iii) Any indemnification under paragraphs (i) and (ii) of this Section 9.4(a) (unless ordered by a court) shall be made by the Debenture Issuer only as authorized in the specific case upon a determination that indemnification of the Debenture Issuer Indemnified Person is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (i) and (ii). Such determination shall be made (1) by the Regular Trustees by a majority vote of a quorum consisting of such Regular Trustees who were not parties to such action, suit or proceeding, (2) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Regular Trustees so directs, by independent legal counsel in a written opinion, or (3) by the Common Security Holder of the Trust. (iv) Expenses (including attorneys' fees) incurred by a Debenture Issuer Indemnified Person in defending a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 9.4(a) shall be paid by the Debenture Issuer in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Debenture Issuer Indemnified Person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Debenture Issuer as authorized in this Section 9.4(a). Notwithstanding the foregoing, no advance shall be made by the Debenture Issuer if a determination is reasonably and promptly made (i) by the Regular Trustees by a majority vote of a quorum of disinterested Regular Trustees, (ii) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Regular Trustees so directs, by independent legal counsel in a written opinion or (iii) the Common Security Holder of the Trust, that, based upon the facts known to the Regular Trustees, counsel or the Common Security Holder at the time such determination is made, such Debenture Issuer Indemnified Person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the Trust, or, with respect to any criminal proceeding, that such Debenture Issuer Indemnified Person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the Regular Trustees, independent legal counsel or Common Security Holder reasonably determine that such person deliberately breached his duty to the Trust or its Common or Preferred Security Holders. (v) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 9.4(a) shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors of the Debenture Issuer or Preferred Security Holders of the Trust or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. All rights to indemnification under this Section 9.4(a) (a) shall be deemed to be provided by a contract between the Debenture Issuer and each Debenture Issuer Indemnified Person who serves in such capacity at any time while this Section 9.4(a) is in effect. Any repeal or modification of this Section 9.4(a) shall not affect any rights or obligations then existing. 66 (vi) The Debenture Issuer or the Trust may purchase and maintain insurance on behalf of any person who is or was a Debenture Issuer Indemnified Person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Debenture Issuer would have the power to indemnify him against such liability under the provisions of this Section 9.4(a). (vii) For purposes of this Section 9.4(a), references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section 9.4(a) with respect to the resulting or surviving entity as he would have with respect to such constituent entity if its separate existence had continued. (viii) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 9.4(a) shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a Debenture Issuer Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a person. The obligation to indemnify as set forth in this Section 9.4(a) shall survive the satisfaction and discharge of this Declaration. (b) The Debenture Issuer agrees to indemnify the (i) Property Trustee, (ii) the Delaware Trustee, (iii) an Affiliate of the Property Trustee and the Delaware Trustee, and (iv) any officers, directors, shareholders, members, partners, employees, representatives, custodians, nominees or agents of the Property Trustee and the Delaware Trustee (each of the Persons in (i) through (iv) being referred to as a "Fiduciary Indemnified Person") for, and to hold each Fiduciary Indemnified Person harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against or investigating any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 9.4(a) shall survive the satisfaction and discharge of this Declaration. SECTION 9.5 Outside Businesses. ------------------ Any Covered Person, the Sponsor, the Delaware Trustee and the Property Trustee may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the activities of the Trust, and the Trust and the Holders of Securities shall have no rights by virtue of this Declaration in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the activities of the Trust, shall not be deemed wrongful or improper. No Covered Person, the Sponsor, the Delaware Trustee or the Property Trustee shall be obligated to present any particular investment or other opportunity to the Trust even if such 67 opportunity is of a character that, if presented to the Trust, could be taken by the Trust, and any Covered Person, the Sponsor, the Delaware Trustee and the Property Trustee shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment or other opportunity. Any Covered Person, the Delaware Trustee and the Property Trustee may engage or be interested in any financial or other transaction with the Sponsor or any Affiliate of the Sponsor, or may act as depositary for, trustee or agent for, or act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates. ARTICLE 10 ACCOUNTING SECTION 10.1 Fiscal Year. ----------- The fiscal year ("Fiscal Year") of the Trust shall be the calendar year, or such other year as is required by the Code. SECTION 10.2 Certain Accounting Matters. -------------------------- (a) At all times during the existence of the Trust, the Regular Trustees shall keep, or cause to be kept, full books of account, records and supporting documents, which shall reflect in reasonable detail, each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied. The Trust shall use the accrual method of accounting for United States federal income tax purposes. The books of account and the records of the Trust shall be examined by and reported upon as of the end of each Fiscal Year of the Trust by a firm of independent certified public accountants selected by the Regular Trustees. (b) The Regular Trustees shall cause to be prepared and delivered to each of the Holders of Securities, within 90 days after the end of each Fiscal Year of the Trust, annual financial statements of the Trust, including a balance sheet of the Trust as of the end of such Fiscal Year, and the related statements of income or loss. (c) The Regular Trustees shall cause to be duly prepared and delivered to each of the Holders of Securities, an annual United States federal income tax information statement, required by the Code, containing such information with regard to the Securities held by each Holder as is required by the Code and the Treasury Regulations. Notwithstanding any right under the Code to deliver any such statement at a later date, the Regular Trustees shall endeavor to deliver all such statements within 30 days after the end of each Fiscal Year of the Trust. (d) The Regular Trustees shall cause to be duly prepared and filed with the appropriate taxing authority, an annual United States federal income tax return, on a Form 1041 or such other form required by United States federal income tax law, and any other annual 68 income tax returns required to be filed by the Regular Trustees on behalf of the Trust with any state or local taxing authority. SECTION 10.3 Banking. ------- The Trust shall maintain one or more bank accounts in the name and for the sole benefit of the Trust; provided, however, that all payments of funds in respect of the Debentures held by the Property Trustee shall be made directly to the Property Account and no other funds of the Trust shall be deposited in the Property Account. The sole signatories for such accounts shall be designated by the Regular Trustees; provided, however, that the Property Trustee shall designate the signatories for the Property Account. SECTION 10.4 Withholding. ----------- The Trust and the Regular Trustees shall comply with all withholding requirements under United States federal, state and local law. The Trust shall request, and the Holders shall provide to the Trust, such forms or certificates as are necessary to establish an exemption from withholding with respect to each Holder, and any representations and forms as shall reasonably be requested by the Trust to assist it in determining the extent of, and in fulfilling, its withholding obligations. The Regular Trustees shall file required forms with applicable jurisdictions and, unless an exemption from withholding is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Trust is required to withhold and pay over any amounts to any authority with respect to distributions or allocations to any Holder, the amount withheld shall be deemed to be a distribution in the amount of the withholding to the Holder. In the event of any claimed over withholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount required to be withheld was not withheld from actual Distributions made, the Trust may reduce subsequent Distributions by the amount of such withholding. ARTICLE 11 AMENDMENTS AND MEETINGS SECTION 11.1 Amendments. ---------- (a) Except as otherwise provided in this Declaration or by any applicable terms of the Securities, this Declaration may only be amended by a written instrument approved and executed by the Sponsor, the Regular Trustees (or, if there are more than two Regular Trustees, a majority of the Regular Trustees), the Property Trustee and the Delaware Trustee. (b) No amendment shall be made, and any such purported amendment shall be void and ineffective: 69 (i) unless, in the case of any proposed amendment, the Property Trustee shall have first received an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); (ii) unless, in the case of any proposed amendment which affects the rights, powers, duties, obligations or immunities of the Property Trustee, the Property Trustee shall have first received: a. an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); and b. an opinion of counsel (who may be counsel to the Sponsor or the Trust) that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); and (iii) to the extent the result of such amendment would be to: a. cause the Trust to be classified other than as a grantor trust for United States federal income tax purposes; b. reduce or otherwise adversely affect the powers of the Property Trustee in contravention of the Trust Indenture Act; or c. cause the Trust to be deemed to be an Investment Company required to be registered under the Investment Company Act. (c) At such time after the Trust has issued any Securities that remain outstanding, any amendment that would (i) adversely affect the powers, preferences or special rights of the Securities, whether by way of amendment to the Declaration or otherwise or (ii) result in the dissolution, winding-up or termination of the Trust other than pursuant to the terms of this Declaration or (iii) change the amount or timing of any distribution of the Securities or otherwise adversely affect the amount of any distribution required to be made in respect of the Securities as of a specified date or (iv) restrict the right of a Holder of Securities to institute suit for the enforcement of any such payment on or after such date, then the holders of the Securities voting together as a single class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of each of the Holders of the Securities affected thereby; provided that, if any amendment or proposal referred to in clause (i) above would adversely affect only the Preferred Securities or the Common Securities, then only the affected class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of each of the Holders of such class of Securities. 70 (d) Section 7.9 and this Section 111 shall not be amended without the consent of all of the Holders of the Securities. (e) Article 4 shall not be amended without the consent of the Holders of a Majority in Liquidation Amount of the Common Securities. (f) The rights of the Holders of the Common Securities under Article 5 to increase or decrease the number of, and appoint and remove Trustees shall not be amended without the consent of the Holders of a Majority in Liquidation Amount of the Common Securities. (g) Notwithstanding Section 111, this Declaration without the consent of the Holders of the Securities to: (i) cure any ambiguity; (ii) correct or supplement any provision in this Declaration that may be inconsistent with any other provision of this Declaration; (iii) add to the covenants, restrictions or obligations of the Sponsor; (iv) to conform to any change in Rule 3a-5 or written change in interpretation or application of Rule 3a-5 by any legislative body, court, government agency or regulatory authority which amendment does not have a material adverse effect on the rights, preferences or privileges of the Holders; or (v) to modify, eliminate and add to any provision of this Declaration to ensure that the Trust will be classified as a grantor trust for U.S. federal income tax purposes at all times that any Securities are outstanding or to ensure that the Trust will not be required to register as an Investment Company under the Investment Company Act; provided, however, that such modification, elimination or addition would not adversely affect in any material respect the rights, privileges or preferences of any Holder of the Securities. SECTION 11.2 Meetings of the Holders of Securities; Action by Written -------------------------------------------------------- Consent. - ------- (a) Meetings of the Holders of any class of Securities may be called at any time by the Regular Trustees (or as provided in the terms of the Securities) to consider and act on any matter on which Holders of such class of Securities are entitled to act under the terms of this Declaration, the terms of the Securities or the rules of any stock exchange on which the Preferred Securities are listed or admitted for trading. The Regular Trustees shall call a meeting of the Holders of such class if directed to do so by the Holders of at least 10% in Liquidation Amount of such class of Securities. Such direction shall be given by delivering to the Regular Trustees 71 one or more calls in a writing stating that the signing Holders of Securities wish to call a meeting and indicating the general or specific purpose for which the meeting is to be called. Any Holders of Securities calling a meeting shall specify in writing the Certificates held by the Holders of Securities exercising the right to call a meeting and only those Securities specified shall be counted for purposes of determining whether the required percentage set forth in the second sentence of this paragraph has been met. (b) Except to the extent otherwise provided in the terms of the Securities, the following provisions shall apply to meetings of Holders of Securities: (i) notice of any such meeting shall be given to all the Holders of Securities having a right to vote thereat at least 7 days and not more than 60 days before the date of such meeting. Whenever a vote, consent or approval of the Holders of Securities is permitted or required under this Declaration or the rules of any stock exchange on which the Preferred Securities are listed or admitted for trading, such vote, consent or approval may be given at a meeting of the Holders of Securities. Any action that may be taken at a meeting of the Holders of Securities may be taken without a meeting if a consent in writing setting forth the action so taken is signed by the Holders of Securities owning not less than the minimum amount of Securities in liquidation amount that would be necessary to authorize or take such action at a meeting at which all Holders of Securities having a right to vote thereon were present and voting. Prompt notice of the taking of action without a meeting shall be given to the Holders of Securities entitled to vote who have not consented in writing. The Regular Trustees may specify that any written ballot submitted to the Security Holders for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Regular Trustees; (ii) each Holder of a Security may authorize any Person to act for it by proxy on all matters in which a Holder of Securities is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Holder of Securities executing such proxy. Except as otherwise provided herein, all matters relating to the giving, voting or validity of proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder, as if the Trust were a Delaware corporation and the Holders of the Securities were stockholders of a Delaware corporation; (iii) each meeting of the Holders of the Securities shall be conducted by the Regular Trustees or by such other Person that the Regular Trustees may designate; and 72 (iv) unless the Business Trust Act, this Declaration, the terms of the Securities, the Trust Indenture Act or the listing rules of any stock exchange on which the Preferred Securities are then listed for trading, otherwise provides, the Regular Trustees, in their sole discretion, shall establish all other provisions relating to meetings of Holders of Securities, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Holders of Securities, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy or any other matter with respect to the exercise of any such right to vote. ARTICLE 12 REPRESENTATIONS OF PROPERTY DELAWARE TRUSTEE AND DELAWARE TRUSTEE SECTION 12.1 Representations and Warranties of the Property Trustee. ------------------------------------------------------ The Trustee that acts as initial Property Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Property Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Property Trustee's acceptance of its appointment as Property Trustee that: (a) the Property Trustee is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (b) the Property Trustee satisfies the requirements set forth in Section 6.3(a); (c) the execution, delivery and performance by the Property Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Property Trustee. This Declaration has been duly executed and delivered by the Property Trustee, and it constitutes a legal, valid and binding obligation of the Property Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (d) the execution, delivery and performance of this Declaration by the Property Trustee does not conflict with or constitute a breach of the articles of association or incorporation, as the case may be, or the by-laws (or other similar organizational documents) of the Property Trustee; and 73 (e) no consent, approval or authorization of, or registration with or notice to, any State or federal banking authority is required for the execution, delivery or performance by the Property Trustee of this Declaration. SECTION 12.2 Representations and Warranties of the Delaware Trustee. ------------------------------------------------------ The Trustee that acts as initial Delaware Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Delaware Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance of its appointment as Delaware Trustee that: (a) the Delaware Trustee satisfies the requirements set forth in Section 6.2 and has the power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration and, if it is not a natural person, is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization; (b) the Delaware Trustee has been authorized to perform its obligations under the Certificate of Trust and this Declaration. This Declaration under Delaware law constitutes a legal, valid and binding obligation of the Delaware Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); and (c) no consent, approval or authorization of, or registration with or notice to, any State or federal banking authority is require for the execution, delivery or performance by the Delaware Trustee of this Declaration. 74 ARTICLE 13 MISCELLANEOUS SECTION 13.1 Notices. ------- All notices provided for in this Declaration shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by registered or certified mail, as follows: (a) if given to the Trust, in care of the Regular Trustees at the Trust's mailing address set forth below (or such other address as the Trust may give notice of to the Property Trustee, the Delaware Trustee and the Holders of the Securities): (b) if given to the Delaware Trustee, at the mailing address set forth below (or such other address as the Delaware Trustee may give notice of to the Regular Trustees, the Property Trustee and the Holders of the Securities): (c) if given to the Property Trustee, at its Corporate Trust Office (or such other address as the Property Trustee may give notice of to the Regular Trustees, the Delaware Trustee and the Holders of the Securities). (d) if given to the Holder of the Common Securities, at the mailing address of the Sponsor set forth below (or such other address as the Holder of the Common Securities may give notice of to the Property Trustee, the Delaware Trustee and the Trust): (e) if given to any other Holder, at the address set forth on the register of the Trust. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 13.2 Governing Law. ------------- This Declaration and the rights of the parties hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware. SECTION 13.3 Intention of the Parties. ------------------------ It is the intention of the parties hereto that the Trust be classified for United States federal income tax purposes as a grantor trust. The provisions of this Declaration shall be interpreted in a manner consistent with such classification. 75 SECTION 13.4 Headings. -------- Headings contained in this Declaration are inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof. SECTION 13.5 Successors and Assigns. ---------------------- Whenever in this Declaration any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether so expressed. SECTION 13.6 Partial Enforceability. ---------------------- If any provision of this Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to persons or circumstances other than those to which it is held invalid, shall not be affected thereby. SECTION 13.7 Counterparts. ------------ This Declaration may contain more than one counterpart of the signature page and this Declaration may be executed by the affixing of the signature of each of the Trustees to one of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. 76 IN WITNESS WHEREOF, the undersigned have caused these presents to be executed as of the day and year first above written. IMPERIAL CREDIT INDUSTRIES, INC., as Sponsor and Common Securities Holder BY: /s/ H. Wayne Snavely ______________________________________ Name: H. Wayne Snavely Title: Chairman CHASE TRUST COMPANY OF CALIFORNIA as Property Trustee BY: /s/ Hans H. Helley ______________________________________ Name: Hans H. Helley Title: Assistant Vice President CHASE MANHATTAN BANK DELAWARE as Delaware Trustee BY: /s/ John J. Cashin ______________________________________ Name: John J. Cashin Title: Vice President IRWIN L. GUBMAN as Regular Trustee BY: /s/ Irwin L. Gubman ______________________________________ KEVIN E. VILLANI as Regular Trustee BY: /s/ Kevin E. Villani ______________________________________ PAUL B. LASITER as Regular Trustee BY: /s/ Paul B. Lasiter ______________________________________ EXHIBIT A This Remarketed Par Security is a Global Security within the meaning of the Declaration hereinafter referred to and is registered in the name of The Depository Trust Company, a New York corporation (the "Depositary"), or a nominee of the Depositary. This Remarketed Par Security is exchangeable for Preferred Securities registered in the name of a person other than the Depositary or its nominee only in the limited circumstances described in the Declaration and no transfer of this Remarketed Par Security (other than a transfer of this Remarketed Par Security as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depository to the Depositary or another nominee of the Depositary) may be registered except in limited circumstances. Unless this Remarketed Par Security Certificate is presented by an authorized representative of the Depositary to Imperial Credit Capital Trust I or its agent for registration of transfer, exchange or payment, and any Remarketed Par Security Certificate issued is registered in the name of Cede & Co. or such other name as registered by an authorized representative of the Depositary (and any payment hereon is made to Cede & Co. or to such other entity as is requested by an authorized representative of the Depositary), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein. CERTIFICATE NO. 1 NUMBER OF REMARKETED PAR SECURITIES: CUSIP NO. _______ CERTIFICATE EVIDENCING REMARKETED PAR SECURITIES OF IMPERIAL CREDIT CAPITAL TRUST I REMARKETED PAR SECURITIES, SERIES A (ROPES) (LIQUIDATION AMOUNT $1,000 PER SECURITY) Imperial Credit Capital Trust I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that Cede & Co. (the "Holder") is the registered owner of ___ remarketed par securities of the Trust representing undivided beneficial ownership interests in the assets of the Trust designated the Remarketed Par Securities, Series A (liquidation amount $1,000 per Security) (the "Preferred Securities"). The Preferred Securities are transferable on the register of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer as provided in the Declaration (as defined below). The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Declaration of Trust of the Trust, dated as of June 9, 1997 (as the same may be amended from time to time (the "Declaration"), among Imperial Credit Industries, Inc., as Sponsor (the "Sponsor"), Irwin L. Gubman, Kevin E. Villani and Paul B. Lasiter, as Regular Trustees, Chase Trust Company of California, as Property Trustee, and Chase Manhattan Bank Delaware, as Delaware Trustee. Capitalized terms used herein but not defined shall have the meaning given to them in the Declaration. The Holder is entitled to the benefits of the Guarantee to the extent described therein. The Sponsor will provide a copy of the Declaration, the Guarantee and the Indenture to a Holder without charge upon written request to the Sponsor at its principal place of business. 2 Upon receipt of this certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Preferred Securities as evidence of undivided indirect beneficial ownership interests in the Debentures. IN WITNESS WHEREOF, the Trust has executed this certificate this day of June, 1997. IMPERIAL CREDIT CAPITAL TRUST I By:______________________________________ Name: Title: Regular Trustee This is one of the Securities referred to in the within-mentioned Declaration. CHASE TRUST COMPANY OF CALIFORNIA By:______________________________________ Name: Title: 4 In connection with any transfer of this Security occurring prior to the date which is the earlier of (i) the date of the declaration by the Commission of the effectiveness of a registration statement under the Securities Act covering resales of this Security (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) two years after the later of the date of original issue and the last date on which the Sponsor or any affiliate of the Sponsor was the owner of such Preferred Securities (or any predecessor thereto) (the "Resale Restriction Termination Date"), the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer: [CHECK ONE] --------- (1) __ to the Sponsor or a subsidiary thereof; or (2) __ pursuant to and in compliance with Rule 144A under the Securities Act of 1933, as amended; or (3) __ outside the United States to a "foreign person" in compliance with Rule 904 of Regulation S under the Securities Act of 1933, as amended; or (4) __ pursuant to the exemption from registration provided by Rule 144 under the Securities Act of 1933, as amended; or (5) __ pursuant to an effective registration statement under the Securities Act of 1933, as amended; or (6) __ pursuant to another available exemption from the registration requirements of the Securities Act of 1933, as amended. Unless one of the boxes is checked, the Trustees will refuse to register any of the Securities evidenced by this certificate in the name of any person other than the registered Holder thereof; provided, however, that if box (3), (4) or (6) is checked, the Sponsor or the Trustees may require, prior to registering any such transfer of the Securities, in its sole discretion, such written legal opinions, certifications (including an investment letter in the case of box (3)) and other information as the Trustees or the Sponsor has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, as amended. If none of the foregoing boxes is checked, the Trustees or Registrar shall not be obligated to register this Security in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 7.12 of the Declaration shall have been satisfied. Dated: __________________ Signed:_______________________________________ (Sign exactly as name appears on the other side of this Security) Signature Guarantee:______________ 5 TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Sponsor as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ________ __________________________________________________ NOTICE: To be executed by an executive officer EXHIBIT B This Preferred Security is a Global Security within the meaning of the Declaration hereinafter referred to and is registered in the name of The Depository Trust Company, a New York corporation (the "Depositary"), or a nominee of the Depositary. This Preferred Security is exchangeable for Preferred Securities registered in the name of a person other than the Depositary or its nominee only in the limited circumstances described in the Declaration and no transfer of this Preferred Security (other than a transfer of this Preferred Security as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary) may be registered except in limited circumstances. Unless this Preferred Security Certificate is presented by an authorized representative of the Depositary to Imperial Credit Capital Trust I or its agent for registration of transfer, exchange or payment, and any Preferred Security Certificate issued is registered in the name of Cede & Co. or such other name as registered by an authorized representative of the Depositary (and any payment hereon is made to Cede & Co. or to such other entity as is requested by an authorized representative of the Depositary), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein. CERTIFICATE NO. 1 NUMBER OF PREFERRED SECURITIES: CUSIP NO. _______ CERTIFICATE EVIDENCING PREFERRED SECURITIES OF IMPERIAL CREDIT CAPITAL TRUST I PREFERRED SECURITIES, SERIES B (LIQUIDATION AMOUNT $1,000 PER SECURITY) Imperial Credit Capital Trust I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that Cede & Co. (the "Holder") is the registered owner of ___ preferred securities of the Trust representing undivided beneficial ownership interests in the assets of the Trust designated the Preferred Securities, Series B (liquidation amount $1,000 per Security) (the "Preferred Securities"). The Preferred Securities are transferable on the register of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer as provided in the Declaration (as defined below). The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Declaration of Trust of the Trust, dated as of June 9, 1997 (as the same may be amended from time to time (the "Declaration"), among Imperial Credit Industries, Inc., as Sponsor (the "Sponsor"), Irwin L. Gubman, Kevin E. Villani and Paul B. Lasiter, as Regular Trustees, Chase Trust Company of California, as Property Trustee, and Chase Manhattan Bank Delaware, as Delaware Trustee. Capitalized terms used herein but not defined shall have the meaning given to them in the Declaration. The Holder is entitled to the benefits of the Guarantee to the extent described therein. The Sponsor will provide a copy of the Declaration, the Guarantee and the Indenture to a Holder without charge upon written request to the Sponsor at its principal place of business. 2 Upon receipt of this certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance, the Holder agrees to treat, for all United States income tax purposes, the Debentures as indebtedness and the Preferred Securities as evidence of undivided indirect beneficial ownership interests in the Debentures. 3 IN WITNESS WHEREOF, the Trust has executed this certificate this _____ day of ___________, 20__. IMPERIAL CREDIT CAPITAL TRUST I By:______________________________________ Name: Title: Regular Trustee This is one of the Securities referred to in the within-mentioned Declaration. By:______________________________________ Name: Title: Exhibit C THIS CERTIFICATE IS NOT TRANSFERABLE CERTIFICATE NO. 1 NUMBER OF COMMON SECURITIES: ____ CERTIFICATE EVIDENCING COMMON SECURITIES OF IMPERIAL CREDIT CAPITAL TRUST I COMMON SECURITIES (LIQUIDATION AMOUNT $1,000 PER COMMON SECURITY) Imperial Credit Capital Trust I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that IMPERIAL CREDIT INDUSTRIES, INC. (the "Holder") is the registered owner of common securities of the Trust representing an undivided beneficial ownership interest in the assets of the Trust designated the Common Securities (liquidation amount $1,000 per Common Security) (the "Common Securities"). The Common Securities are not transferable and any attempted transfer thereof shall be void. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Declaration of Trust of the Trust, dated as of June 9, 1997 (as the same may be amended from time to time, the "Declaration"), among Imperial Credit Industries, Inc., as Sponsor, Irwin L. Gubman, Kevin E. Villani and Paul B. Lasiter, as Regular Trustees, Chase Trust Company, as Property Trustee and Chase Manhattan Bank, as Delaware Trustee. The Holder is entitled to the benefits of the Guarantee to the extent described therein. Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Sponsor will provide a copy of the Declaration, the Guarantee and the Indenture to a Holder without charge upon written request to the Sponsor at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance, the Holder agrees to treat, for all United States income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of an undivided indirect beneficial ownership interest in the Debentures. IN WITNESS WHEREOF, the Trust has executed this certificate this day of June, 1997. IMPERIAL CREDIT CAPITAL TRUST I By:____________________________________ Name: Title: Regular Trustee 3 EXHIBIT D NOTICE OF REMARKETING OF REMARKETED PAR SECURITIES, SERIES A, OF IMPERIAL CREDIT CAPITAL TRUST I HOLDERS MUST RETURN, NO LATER THAN 4:00 P.M., NEW YORK CITY TIME, ON ___________ ___, ____, A NOTICE OF ELECTION REGARDING THEIR DECISION TO TENDER OR NOT TO TENDER THEIR REMARKETED PAR SECURITIES FOR PURCHASE IN THE REMARKETING. IF A HOLDER DOES NOT RETURN A NOTICE OF ELECTION BY SUCH TIME, THE REMARKETED PAR SECURITIES OWNED BY SUCH HOLDER SHALL BE DEEMED TO BE TENDERED FOR PURCHASE IN THE REMARKETING. ________ ___, 2002 Holders of Remarketed Par Securities, Series A (the "Securities"), of Imperial Credit Capital Trust I, a Delaware statutory business trust (the "Trust"), are hereby given notice of remarketing of the Preferred Securities (the "Remarketing") on June 9, 2002 (the "Scheduled Remarketing Date"). For your information, we are also enclosing: (i) an [Offering Memorandum], dated _____ __, 2002, relating to the Preferred Securities and the Remarketing; and (ii) a Notice of Election (together with the Offering Memorandum, the "Remarketing Materials"). HOLDERS ARE URGED TO READ THESE MATERIALS IN THEIR ENTIRETY. THE FOLLOWING SUMMARY OF THE REMARKETING MATERIALS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE REMARKETING MATERIALS. On the Scheduled Remarketing Date, Lehman Brothers Inc. (the "Remarketing Agent") will use commercially reasonable efforts to remarket, at a price equal to 100% of the liquidation amount thereof, Preferred Securities tendered or deemed tendered for purchase in the Remarketing. Prior to 4:00 P.M., New York City time, on the Scheduled Remarketing Date, the Remarketing Agent will determine the distribution rate to apply to the Preferred Securities following the Remarketing (the "Adjusted Distribution Rate"), which will be the rate per annum (rounded to the nearest one-thousandth (0.001) of one percent per annum) which the Remarketing Agent determines, in its sole judgment, to be the lowest rate per annum, not exceeding ____ % per annum (the "Maximum Adjusted Distribution Rate"), that will enable it to remarket all Preferred Securities tendered or deemed tendered for remarketing at a price of $1,000 per Preferred Security. Notwithstanding the foregoing, (i) if the Remarketing Agent is 4 able to remarket some, but is unable to remarket all, of the Preferred Securities tendered or deemed tendered for purchase in the Remarketing, the Adjusted Distribution Rate will be the highest rate, not exceeding the Maximum Adjusted Distribution Rate, required to remarket the Preferred Securities sold in the Remarketing and (ii) if the Remarketing Agent is not able to remarket any Preferred Securities tendered or deemed tendered in the Remarketing, the Adjusted Distribution Rate will be the Maximum Adjusted Distribution Rate. If the purchases and sales of Preferred Securities pursuant to the Remarketing are not consummated on June 9, 2002, the distribution rate on the Preferred Securities will be increased as described in the Offering Memorandum. Each holder is being given the opportunity to complete the enclosed Notice of Election and indicate irrevocably, no later than 4:00 P.M., New York City time, on June 9, 2002, whether it wishes (i) to retain and not to have all or any portion of the Preferred Securities owned by it remarketed in the Remarketing to be conducted on the Scheduled Remarketing Date or (ii) to tender all or any portion of such Preferred Securities for purchase in the Remarketing (such portion, in either case, is required to be in the liquidation amount of $1,000 or any integral multiple thereof). Any Notice of Election given to the Property Trustee will be irrevocable and may not be conditioned upon the level at which the Adjusted Distribution Rate is established in the Remarketing. IF ANY HOLDER OF PREFERRED SECURITIES FAILS TIMELY TO DELIVER SUCH NOTICE OF ELECTION, THE PREFERRED SECURITIES OWNED BY IT WILL BE DEEMED TO BE TENDERED FOR PURCHASE IN THE REMARKETING. Any holder of Preferred Securities that desires to continue to hold a number of Preferred Securities, but only if the Adjusted Distribution Rate is not less than a specified rate per annum, should submit a Notice of Election to tender such Preferred Securities and separately notify the Remarketing Agent of its interest at the telephone number set forth below. If such holder so notifies the Remarketing Agent, the Remarketing Agent will give priority to such holder's purchase of such number of Preferred Securities in the Remarketing, provided that the Adjusted Distribution Rate is not less than such specified rate. [Include description of procedures for completing and returning the Notice of Election]. If the Remarketing Agent is unable to remarket all Preferred Securities tendered or deemed tendered for purchase in the Remarketing at a price of $1,000 per Preferred Security, on the third Business Day following the Remarketing (i) such unsold Preferred Securities shall be exchanged with the Trust for Resettable Rate Debentures, Series A, of Imperial Credit Industries, Inc. (the "Debentures") having an aggregate principal amount equal to the aggregate liquidation amount of such unsold Preferred Securities and such Debentures shall be immediately redeemed by ______ unless (ii) as a result of such redemption, less than $______ principal amount of Debentures would remain outstanding, in which event, ______ is required to redeem all of the Debentures. In either case (a "Special Mandatory Redemption"), the redemption price of the Debentures will be 100% of the aggregate principal amount of the Debentures so redeemed. AS A RESULT OF SUCH SPECIAL MANDATORY REDEMPTION, ALL PREFERRED SECURITIES TENDERED OR DEEMED TENDERED FOR PURCHASE IN THE REMARKETING WILL BE PURCHASED IN THE REMARKETING OR REDEEMED ON THE REMARKETING SETTLEMENT DATE. [Include description of where questions or requests for assistance should be directed.] 5 Very truly yours, IMPERIAL CREDIT CAPITAL TRUST I The Remarketing Agent for the Remarketing is: LEHMAN BROTHERS INC. [Address and phone number] EXHIBIT E NOTICE OF ELECTION TO TENDER OR RETAIN REMARKETED PREFERRED SECURITIES, SERIES A, OF IMPERIAL CREDIT CAPITAL TRUST I THIS NOTICE OF ELECTION MUST BE SUBMITTED TO ________________ AT ________________ NO LATER THAN 4:00 P.M., NEW YORK CITY TIME, ON _______ __, ____. IF A HOLDER DOES NOT RETURN A NOTICE OF ELECTION BY SUCH TIME, THE REMARKETED PREFERRED SECURITIES OWNED BY SUCH HOLDER SHALL BE DEEMED TO BE TENDERED FOR PURCHASE IN THE REMARKETING. 1. The undersigned holder of Remarketed Preferred Securities, Series A (the "Preferred Securities"), issued by Imperial Credit Capital Trust I, a Delaware statutory business trust (the "Trust"), hereby elects [CHECK APPROPRIATE BOX OR BOXES]: [_] To tender $__________ aggregate liquidation amount of its Preferred Securities for purchase in the Remarketing of the Preferred Securities on _______ __, ____. [insert the total liquidation amount of all Preferred Securities held by holder or, if holder elects to tender only a portion of such Preferred Securities, the liquidation amount of such portion, which must be $1,000 or any integral multiple thereof]. [_] To retain, and to direct the Trust and the Remarketing Agent not to remarket in the Remarketing, $__________ aggregate liquidation amount of its Preferred Securities [insert the total liquidation amount of all Preferred Securities held by holder or, if holder elects to retain only a portion of such Preferred Securities, the liquidation amount of such portion, which must be $1,000 or any integral multiple thereof]. 2. After its execution and delivery by the undersigned to ___________, this Notice of Election shall be irrevocable. 3. If the undersigned elects to tender all or any portion of its Preferred Securities, the undersigned understands that its right to have its Preferred Securities tendered for purchase shall be limited to the extent that (i) the Remarketing Agent conducts a Remarketing as described in the Remarketing Agreement, (ii) Preferred Securities tendered have not been called for redemption, (iii) the Remarketing Agent is able to find a purchaser or purchasers for tendered Preferred Securities at an Adjusted Distribution Rate that does not exceed ___% per annum and (iv) such purchaser or purchasers deliver the purchase price therefor to the Remarketing Agent. 4. Capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Offering Memorandum, dated __________ __, ____ (the "Offering Memorandum"). The undersigned hereby acknowledges receipt of the Notice of Remarketing, dated __________ __, ____, and the Offering Memorandum. Dated: _______ __, ____ _________________________________________ 2 Name of holder of Preferred Securities as it is appears on the register of Imperial Credit Capital Trust I, in every particular, without alteration, enlargement or any change whatsoever ____________________________ Witness EX-4.3 4 INDENTURE, WITH FORMS OF RESETTABLE RATE DEBENTURE EXHIBIT 4.3 IMPERIAL CREDIT INDUSTRIES, INC. AND THE SUBSIDIARY GUARANTORS NAMED HEREIN $72,165,000 RESETTABLE RATE DEBENTURES, SERIES A _____________ INDENTURE DATED AS OF JUNE 9, 1997 _____________ CHASE TRUST COMPANY OF CALIFORNIA TRUSTEE TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01 Definitions 1 Section 1.02 Other Definitions................................ 24 Section 1.03 Incorporation by Reference of Trust Indenture Act 25 Section 1.04 Rules of Construction............................ 26 ARTICLE 2 THE DEBENTURES Section 2.01 Form and Dating.................................. 26 Section 2.02 Execution and Authentication..................... 28 Section 2.03 Registrar and Paying Agent....................... 29 Section 2.04 Paying Agent to Hold Money in Trust.............. 30 Section 2.05 Holder Lists..................................... 30 Section 2.06 Transfer and Exchange............................ 30 Section 2.07 Replacement Debentures........................... 40 Section 2.08 Outstanding Debentures........................... 41 Section 2.09 Treasury Debentures.............................. 41 Section 2.10 Temporary Debentures............................. 42 Section 2.11 Cancellation..................................... 42 Section 2.12 Defaulted Interest............................... 42 ARTICLE 3 REDEMPTION AND REMARKETING Section 3.01 Notices to Trustee.............................. 43 Section 3.02 Selection of Debentures to Be Redeemed.......... 43 Section 3.03 Notice of Redemption............................ 43 Section 3.04 Effect of Notice of Redemption.................. 44 Section 3.05 Deposit of Redemption Price..................... 44 Section 3.06 Debentures Redeemed in Part..................... 45 Section 3.07 Optional Redemption............................. 46 Section 3.08 Special Mandatory Redemption.................... 47 Section 3.09 Special Event Redemption; Shortening of Maturity 47 Section 3.10 Tax Opinion Redemption.......................... 48 Section 3.11 Transfer Restricted Security Redemption......... 48 Section 3.12 Remarketing..................................... 49
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PAGE ---- ARTICLE 4 COVENANTS Section 4.01 Payment of Debentures............................... 51 Section 4.02 Maintenance of Office or Agency..................... 53 Section 4.03 Compliance Certificate.............................. 54 Section 4.04 Taxes 55 Section 4.05 Stay, Extension and Usury Laws...................... 55 Section 4.06 Change of Control................................... 55 Section 4.07 Asset Sales 57 Section 4.08 Restricted Payments................................. 59 Section 4.09 Incurrence of Indebtedness and Issuance of Preferred Stock............................................... 61 Section 4.10 Liens............................................... 63 Section 4.11 Dividend and Other Payment Restrictions Affecting Subsidiaries........................................ 63 Section 4.12 Transactions with Affiliates........................ 64 Section 4.13 Business Activities................................. 66 Section 4.14 Reports............................................. 66 Section 4.15 Additional Subsidiary Guarantees.................... 66 Section 4.16 Fees and Expenses................................... 66 ARTICLE 5 SUCCESSORS Section 5.01 Limitations on Merger, Consolidation or Sale of Substantially All Assets............................ 67 Section 5.02 Successor Corporation Substituted................... 68 ARTICLE 6 DEFAULTS AND REMEDIES Section 6.01 Events of Default................................... 68 Section 6.02 Acceleration........................................ 69 Section 6.03 Other Remedies...................................... 70 Section 6.04 Waiver of Past Defaults............................. 71 Section 6.05 Control by Majority................................. 71 Section 6.06 Limitation on Suits................................. 71 Section 6.07 Rights of Holders to Receive Payment................ 72 Section 6.08 Collection Suit by Trustee.......................... 72 Section 6.09 Trustee May File Proofs of Claim.................... 72
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PAGE ---- Section 6.10 Priorities......................................... 73 Section 6.11 Undertaking for Costs.............................. 74 ARTICLE 7 TRUSTEE Section 7.01 Duties of Trustee.................................... 74 Section 7.02 Rights of Trustee.................................... 75 Section 7.03 Individual Rights of Trustee......................... 76 Section 7.04 Trustee's Disclaimer................................. 76 Section 7.05 Notice of Defaults................................... 77 Section 7.06 Reports by Trustee to Holders........................ 77 Section 7.07 Compensation and Indemnity........................... 77 Section 7.08 Replacement of Trustee............................... 78 Section 7.09 Successor Trustee by Merger, etc..................... 79 Section 7.10 Eligibility; Disqualification........................ 79 Section 7.11 Preferential Collection of Claims Against the Company 80 ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE Section 8.01 Option to Effect Legal Defeasance or Covenant Defeasance........................................... 80 Section 8.02. Legal Defeasance and Discharge....................... 80 Section 8.03 Covenant Defeasance.................................. 81 Section 8.04 Conditions to Legal or Covenant Defeasance........... 81 Section 8.05 Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions........ 83 Section 8.06 Repayment to the Company............................. 84 Section 8.07 Reinstatement........................................ 84 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER Section 9.01 Without Consent of Holders........................... 85 Section 9.02 With Consent of Holders.............................. 86 Section 9.03 Compliance with Trust Indenture Act.................. 87 Section 9.04 Revocation and Effect of Consents.................... 88 Section 9.05 Notation on or Exchange of Debentures................ 88 Section 9.06 Trustee to Sign Amendments, etc...................... 88
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PAGE ---- ARTICLE 10 SUBSIDIARY GUARANTEES Section 10.01 Subsidiary Guarantees............................... 89 Section 10.02 Execution and Delivery of Subsidiary Guarantees..... 90 Section 10.03 Subsidiary Guarantors May Consolidate, etc., on Certain Terms....................................... 91 Section 10.04 Releases Following Sale of Assets................... 92 Section 10.05 Limitation of Subsidiary Guarantor's Liability...... 93 Section 10.06 Application of Certain Terms and Provisions to the Subsidiary Guarantors............................... 93 ARTICLE 11 SUBORDINATION Section 11.01 Agreement to Subordinate........................... 94 Section 11.02 Liquidation; Dissolution; Bankruptcy............... 94 Section 11.03 Default on Designated Senior Debt.................. 95 Section 11.04 Acceleration of Debentures......................... 96 Section 11.05 When Distribution Must Be Paid Over................ 96 Section 11.06 Notice by Company.................................. 96 Section 11.09 Subrogation........................................ 97 Section 11.08 Relative Rights.................................... 97 Section 11.09 Subordination May Not Be Impaired by Company....... 97 Section 11.10 Distribution or Notice to Representative........... 98 Section 11.11 Rights of Trustee and Paying Agent................. 98 Section 11.12 Authorization to Effect Subordination.............. 98 Section 11.14 Amendments......................................... 99 ARTICLE 12 MISCELLANEOUS Section 12.01 Trust Indenture Act Controls...................... 99 Section 12.02 Notices........................................... 99 Section 12.03 Communication by Holders with Other Holders....... 100 Section 12.04 Certificate and Opinion as to Conditions Precedent 100 Section 12.05 Statements Required in Certificate or Opinion..... 101 Section 12.06 Rules by Trustee and Agents....................... 101 Section 12.07 Legal Holidays.................................... 101 Section 12.08 No Recourse Against Others........................ 102 Section 12.09 Duplicate Originals............................... 102 Section 12.10 Governing Law..................................... 102
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PAGE ---- Section 12.11 No Adverse Interpretation of Other Agreements..... 102 Section 12.12 Successors........................................ 102 Section 12.13 Severability...................................... 102 Section 12.14 Counterpart Originals............................. 103 Section 12.15 Table of Contents, Headings, etc.................. 103 SIGNATURES........................................................... 104
EXHIBITS Exhibit A-1 Form of Debenture Exhibit A-2 Form of Regulation S Temporary Debenture Exhibit B-1 Form of Certificate for Exchange or Registration of Transfer of Rule 144A Global Debenture to Regulation S Global Debenture Exhibit B-2 Form of Certificate for Exchange or Registration of Transfer From Regulation S Global Debenture to Rule 144A Global Debenture Exhibit B-3 Form of Certificate for Exchange or Registration of Transfer of Certificated Debentures Exhibit B-4 Form of Certificate for Exchange or Registration of Transfer From Rule 144A Global Debenture or Regulation S Permanent Global Debenture to Certificated Debenture Exhibit B-5 Form of Certificate for Exchange or Registration of Transfer From Certificated Debenture to Rule 144A Global Debenture or Regulation S Permanent Global Debenture v INDENTURE, dated as of June 9, 1997, between Imperial Credit Industries, Inc., a California corporation (the "Company"), the Initial Subsidiary Guarantors (as defined) and Chase Trust Company of California, a California corporation, as trustee ("Trustee"). Each party agrees as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Resettable Rate Debentures, Series A (the "Series A Debentures") and the Resettable Rate Debentures, Series B (the "Series B Debentures" and, together with the Series A Debentures, the "Debentures"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01 Definitions "9 7/8% Senior Notes" means the 9 7/8% Senior Notes due 2007 of the Company issued under an Indenture dated as of January 23, 1997. "30-Year Treasury Rate" means the rate per annum equal to the semi-annual equivalent yield to maturity of the U.S. Treasury security used, in accordance with customary financial practice, as the benchmark pricing bond in pricing new issues of corporate debt securities of 30-year maturities on the Scheduled Remarketing Date. "Acquired Debt" means, with respect to any specified Person (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Additional Interest" means all of the additional interest owing pursuant to Section 5 of the Registration Rights Agreement. "Adjusted Distribution Rate" has the meaning specified in the Declaration. "Adjusted Interest Rate" has the meaning specified in Section 3.12. "Adjusted Treasury Rate" means the Treasury Rate plus 0.50%. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, control (including, with correlative meanings, the terms controlling, controlled by and under common control with), as used 2 with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. Notwithstanding the foregoing, no Person (other than the Company or any Restricted Subsidiary of the Company) in whom a Special Purpose Subsidiary makes an Investment in connection with a Qualified Securitization Transaction shall be deemed to be an Affiliate of the Company or any of its Restricted Subsidiaries solely by reason of such Investment. "Agent" means any Registrar, Paying Agent or co-registrar. "Agent Members" means any member of, or participant in, the Depositary. "Applicable Procedures" means, with respect to any transfer or exchange of beneficial interests in a Global Debenture, the rules and procedures of the Depositary that are applicable to such transfer or exchange "Asset Sale" means (a) any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (other than as permitted under Sections 5.01 or 10.03) (each referred to for the purposes of this definition as a "disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary, as the case may be), (ii) all or substantially all the assets of any division or line of business of the Company or any Restricted Subsidiary, (iii) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary, as the case may be, including any sale of the stock of a Restricted Subsidiary, or (iv) any Securitization Related Asset, or (b) any issuance of Capital Stock (other than non-convertible preferred stock that is not Disqualified Stock) by any of the Company's Restricted Subsidiaries, except any such issuance to the Company or any Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor. Notwithstanding the foregoing, an "Asset Sale" does not include (a) a disposition by a Subsidiary to the Company or a Wholly Owned Restricted Subsidiary or by the Company to a Wholly Owned Restricted Subsidiary, (b) a disposition that constitutes a Restricted Payment permitted by Section 4.08), (c) sales of Receivables in Qualified Securitization Transactions for the fair market value thereof, including cash in an amount at least equal to 75% of the book value thereof as determined in accordance with GAAP, (d) transfers of Receivables by a Special Purpose Subsidiary to third parties in a Qualified Securitization Transaction and (e) any trade or exchange by the Company or any Restricted Subsidiary of any assets for similar assets of a Related Business owned 3 or held by another Person; provided that (1) the fair market value of the assets traded or exchanged by the Company or such Restricted Subsidiary (including any cash or Cash Equivalents to be delivered by the Company or such Restricted Subsidiary) is reasonably equivalent to the fair market value of the asset or assets (together with any cash or Cash Equivalents) to be received by the Company or such Restricted Subsidiary and (2) such exchange is approved by a majority of the directors of the Company who are not employees of the Company or its Restricted Subsidiaries. "Authentication Order" means an Officers' Certificate ordering the Trustee to authenticate Debentures. "Board of Directors" means the Board of Directors of the Company or any authorized committee of the Board of Directors. "Board Resolution" means a resolution duly adopted by the Board of Directors of the Company. "Business Day" means any day other than a Legal Holiday. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capitalized Excess Servicing Fees Receivables" mean, with respect to the sale of Receivables in a Qualified Securitization Transaction, the present value of the excess of the weighted average coupon on the Receivables sold over the sum of (i) the coupon in the pass-through certificates, (ii) a base servicing fee paid to the loan or lease servicer and (iii) expected losses to be incurred on the portfolio of Receivables sold, considering prepayment assumptions. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means: (i) United States dollars; (ii) Government Securities (except that for purpose of this definition, Government Securities must have a remaining Weighted Average Life to Maturity of not more than one year from the date of investment therein); (iii) commercial paper or other short-term corporate obligation that has received a rating of at least A-1 or AA from Standard & Poor's Corporation 4 ("S&P"), P-1 or Aa2 from Moody's Investor Services, Inc. ("Moody's"), F-1 or AA from Fitch Investor Service, Inc. ("Fitch"), or D-1 or AA from Duff & Phelps Credit Rating Co., ("Duff"); (iv) time deposits, certificates of deposit, bank acceptances or bank notes issued by any bank having capital surplus and undivided profits aggregating at least $500,000,000 (or the foreign currency equivalent thereof) and at least a high A rating (or the equivalent) from any two of the following: S&P, Moody's, Thomson Bankwatch, Inc. or IBCA, Inc.; (v) money market preferred stocks which, at the date of acquisition and at all times thereafter, are accorded ratings of at least mid AA by any two of the following: S&P, Moody's, Fitch or Duff; (vi) tax-exempt obligations that are accorded ratings at the time of investment therein of at least mid AA (or equivalent short-term ratings) by any two of the following; S&P, Moody's, Fitch or Duff; (vii) master repurchase agreements with foreign or domestic banks having capital and surplus of not less than $500,000,000 (or the foreign equivalent thereof) or primary dealers so long as (a) such bank or dealer has a rating of at least mid AA from any two of the following: S&P, Moody's, Fitch or Duff; (b) such agreements are collateralized with obligations of the United States government or its agencies at a ratio of 102%, or with other collateral rated at least mid AA from any two of the following: S&P, Moody's, Fitch or Duff, at a rate of 103% and, in either case marked to market weekly and (c) such securities shall be held by a third-party agent; (viii) guaranteed investment contracts and/or agreements of a bank, insurance company or other institution whose unsecured, uninsured and unguaranteed obligations (or claims-paying ability) are, at the time of investment therein, rated AAA by any two of the following: S&P, Moody's, Fitch or Duff; (ix) money market funds, the portfolio of which is limited to investments described in clauses (i) through (viii); (x) with respect to Non- Domestic Persons, instruments that are comparable to those described in clauses (i), (ii), (iv) and (vii) in the country in which such Non-Domestic Person is organized or has its principal business operations; and (xii) up to $1,000,000 in the aggregate of other financial assets held by Restricted Subsidiaries. In no event shall any of the Cash Equivalents described in clauses (iii) through (viii), (x) and (xi) above have a final maturity more than one year from the date of investment therein. "Certificated Debentures" means Debentures that are in the form of the Debentures attached hereto as Exhibit A-1, that do not include the information called for by footnotes 1 and 2 thereof. "Change of Control" means the occurrence of one or more of the following events: (i) a person or entity or group (as that term is used in Section 13(d)(3) of the Exchange Act) of persons or entities shall have become the beneficial owner of a majority of the securities of the Company ordinarily having the right to vote in the election of directors; (ii) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any directors who are members of such Board of Directors of the Company on the date hereof and any new directors whose election by such Board of Directors of the Company 5 or whose nomination for election by the shareholders of the Company was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; (iii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company and its Restricted Subsidiaries, taken as a whole, to any person or entity or group (as so defined) of persons, or entities (other than to any Wholly Owned Restricted Subsidiary of the Company); (iv) the merger or consolidation of the Company with or into another corporation or the merger of another corporation into the Company with the effect that immediately after such transaction any person or entity or group (as so defined) of persons or entities shall have become the beneficial owner of securities of the surviving corporation of such merger or consolidation representing a majority of the combined voting power of the outstanding securities of the surviving corporation ordinarily having the right to vote in the election of directors; or (v) the adoption of a plan relating to the liquidation or dissolution of the Company. "Common Trust Securities" means the common securities issued by the Trust. "Company Guarantee" means the Guarantee Agreement, dated as of June 9, 1997, made by the Company in respect of the Securities and the Common Trust Securities. "Comparable Treasury Issue" means with respect to any prepayment date the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life. If no United States Treasury security has a maturity which is within a period from three months before to three months after the last day of the Remaining Life, the two most closely corresponding United States Treasury securities shall be used as the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or extrapolated on a straight-line basis, rounding to the nearest month using such securities. "Comparable Treasury Price" means (A) the average of five Reference Treasury Dealer Quotations for such prepayment date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Indenture Trustee obtains fewer than three such Reference Treasury Dealer Quotations, the average of all such Quotations. "Consolidated Leverage Ratio" as of any date of determination means the ratio of (i) the aggregate amount of all consolidated Indebtedness of the Company and its Restricted Subsidiaries, excluding Warehouse Indebtedness and Guarantees thereof 6 permitted to be incurred pursuant to clause (iii) of Section 4.09 to (ii) the Consolidated Net Worth of the Company. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof that is a Subsidiary Guarantor, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in accounting principles shall be excluded, and (v) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Subsidiaries. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Restricted Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock (other than Disqualified Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less (x) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the Issue Date in the book value of any asset owned by such Person or a consolidated Restricted Subsidiary of such Person, (y) all investments as of such date in unconsolidated Restricted Subsidiaries and in Persons that are not Restricted Subsidiaries (except, in each case, Permitted Investments), and (z) all unamortized debt discount and expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 12.02 or such other address as the Trustee may give notice to the Company. 7 "Debenture Custodian" means the Trustee, as custodian with respect to the Global Debentures, or any successor entity thereto. "Declaration" means the Amended and Restated Declaration of Trust, dated as of June 9, 1997, by and among the Company, as Sponsor, and Kevin E. Villani, Irwin L. Gubman and Paul B. Lasiter, as the Regular Trustees, Chase Trust Company of California, as the Property Trustee and Chase Manhattan Bank Delaware, a Delaware corporation, as the Delaware Trustee. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Designated Senior Debt" means any Senior Debt permitted under this Indenture the principal amount of which is $25,000,000 or more and that has been designated by the Company as "Designated Senior Debt." "Depositary" means, with respect to the Debentures issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Debentures, until a successor shall have been appointed and become such Depositary pursuant to the applicable provision of this Indenture, and, thereafter, "Depositary" shall mean or include such successor. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the Stated Maturity of the Debentures. "Dissolution Event" means an event pursuant to which the Trust is dissolved in accordance with the Declaration, and the Debentures held by the Property Trustee are distributed to the holders of the Securities and Common Trust Securities issued by the Trust pro rata in accordance with the Declaration. "Dollars" and "$" means lawful money of the United States of America. "Election Date," with respect to any Scheduled Remarketing Date, means the second Business Day prior thereto. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). 8 "Equity Offering" means an underwritten primary public offering of Equity Interests (other then Disqualified Stock) of the Company pursuant to an effective registration statement under the Securities Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Offer" means the offer that may be made by the Company pursuant to the Registration Rights Agreement to exchange Series B Securities for Series A Securities and Series B Debentures for Series A Debentures. "Existing Indebtedness" means the Indebtedness of the Company and its Subsidiaries (other then Indebtedness under the Warehouse Facilities) in existence on the Issue Date, until such amounts are repaid. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Issue Date. "Global Debentures" means, individually and collectively, the Regulation S Temporary Global Debenture, the Regulation S Permanent Global Debenture and the Rule 144A Global Debenture. "Government Securities" means direct obligations of the United States of America, or any agency or instrumentality thereof for the payment of which the full faith and credit of the United States of America is pledged. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates, in either case in the ordinary course of business and not for speculative or investment purposes. "Holder" means a Person in whose name a Debenture is registered. 9 "Indebtedness" means, with respect to any Person on any date of determination (without duplication), (i) the principal of and premium (if any) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable, (ii) all Capital Lease Obligations of such Person, (iii) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable and expense accruals arising in the ordinary course of business), (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the tenth Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit), (v) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock other than Permitted SPTL Preferred Stock (but excluding any accrued dividends), (vi) all Warehouse Indebtedness, (vii) all obligations of the type referred to in clauses (i) through (vi) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guaranty, (viii) all obligations of the type referred to in clauses (i) through (vii) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured and (ix) to the extent not otherwise included in this definition, Hedging Obligations of such Person. Except in the case of Warehouse Indebtedness (the amount of which shall be determined in accordance with the definition thereof) the amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. Notwithstanding the foregoing, the term "Indebtedness" does not include deposit liabilities of any Restricted Subsidiary, the deposits of which are insured by the Federal Deposit Insurance Corporation or any successor agency or Indebtedness of any Restricted Subsidiary to the Federal Home Loan Bank of San Francisco or any successor thereto incurred in the ordinary course of business and secured by qualifying mortgage loans or mortgage-backed securities. "Indenture" means this Indenture as amended or supplemented from time to time. 10 "Indenture Default" means any event that is or with the passage of time or the giving of notice or both would be an Indenture Event of Default. "Initial Subsidiary Guarantors" means the initial Subsidiary Guarantors as of the date of this Indenture. "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time, or any successor legislation. "Investment Company Event" means the receipt by the Trust of an opinion of counsel, rendered by a law firm having a recognized national securities practice, to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, the Trust is or will be considered an "investment company" that is required to be registered under the Investment Company Act, which change becomes effective on or after the Issue Date. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP; provided that an acquisition of assets, Equity Interests or other securities by the Company for consideration consisting of common equity securities of the Company shall not be deemed to be an Investment. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value (as determined as set forth in the last paragraph under Section 4.08) of the Equity Interests of such Restricted Subsidiary not sold or disposed of; provided, however, that this requirement shall not apply if (i) the class of Equity Interests of the Restricted Subsidiary owned by the Company is registered under Section 12 of the Exchange Act and is listed on a national securities exchange or quoted on a national quotations system and (ii) if the Company has entered into an agreement with the Restricted Subsidiary that provides the Company with the right to demand (subject to customary restrictions) registration of all of its Equity Interests under the Securities Act. "Issue Date" means the date on which the Series A Debentures are originally issued. 11 "Lien" means, with respect to any Person, any mortgage, pledge, security interest, encumbrance, lien or charge of any kind on the assets of such Person, including (i) any conditional sale or other title retention agreement or lease in the nature thereof, and (ii) any claim (whether direct or indirect through subordination or other structural encumbrance against any Securitization Related Asset sold or otherwise transferred by such Person to a buyer, unless such Person is not liable for any losses thereon). "Maximum Adjusted Distribution Rate" means the rate per annum, determined on the Scheduled Remarketing Date by the Remarketing Agent in its discretion, equal to the greater of (a) the 30-Year Treasury Rate plus 600 basis points and (b) a nationally-recognized high-yield index rate for similarly-rated issues, plus 100 basis points. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and after any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness secured by a Lien on the asset or assets that were the subject of such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Recourse Debt" means Indebtedness: (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), or (b) is directly or indirectly liable (as a guarantor or otherwise); (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than the Debentures being offered hereby) of the 12 Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officers" means the Chief Executive Officer, the President, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of the Company. "Officers' Certificate" means a certificate signed by two Officers, one of whom must be the principal executive officer, principal financial officer or principal accounting officer of the Company. "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee. Except with respect to any opinion delivered pursuant to Article 8, the counsel may be an employee of the Company or the Trustee. The counsel may be counsel to the Company or the Trustee. "Permitted Junior Securities" means Equity Interests in the Company or debt securities that are subordinated to all Senior Debt (and any debt securities issued in exchange for Senior Debt) to substantially the same extent as, or to a greater extent than, the Debentures are subordinated to Senior Debt pursuant to the Indenture. "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary: (i) in a Subsidiary Guarantor or in SPTL or a Person that will, upon the making of such Investment, become a Subsidiary Guarantor; provided, however, that the primary business of such Subsidiary Guarantor is a Related Business; and provided further, that any Investment by the Company in SPTL must be in the form of Permitted SPTL Preferred Stock or in a security senior to such stock; (ii) in another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Subsidiary Guarantor; provided, however, that such Person's primary business is a Related Business; (iii) comprised of Cash Equivalents; (iv) comprised of Receivables owing to the Company or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (v) comprised of payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made 13 in the ordinary course of business; (vi) comprised of stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments; (vii) in any Person to the extent such Investment represents the non-cash portion of the consideration received for an Asset Sale as permitted pursuant to Section 4.07; (viii) comprised of Receivables of the Company or any of its Wholly Owned Restricted Subsidiaries; or (ix) comprised of Securitization Related Assets arising in a Qualified Securitization Transaction. "Permitted Liens" means, with respect to any Person: (a) pledges or deposits by such Person under worker's compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits of cash or United States government bonds to secure surety or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent, in each case Incurred in the ordinary course of business; (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, in each case for sums not yet due or being contested in good faith by appropriate proceedings or other Liens arising out of judgments or awards against such Person with respect to which such Person shall then be proceeding with an appeal or other proceedings for review; (c) Liens for property taxes not yet subject to penalties for non- payment or which are being contested in good faith and by appropriate proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit issued pursuant to the request of and for the account of such Person in the ordinary course of its business; provided, however, that such letters of credit do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances, easements or reservations of, or rights of others for, licenses, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real property or Liens incidental to the conduct of the business of such Person or to the ownership of its properties which were not Incurred in connection with Indebtedness and which do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of such Person; (f) Liens securing Indebtedness Incurred to finance the construction, purchase or lease of, or repairs, improvements or additions to, property of such Person (but excluding Capital Stock of another Person); provided, however, that the Lien may not extend to any other property owned by such Person or any of its Subsidiaries at the time the Lien is Incurred, and the Indebtedness secured by the Lien may not be Incurred more than 180 days after the latest of the acquisition, completion of construction, repair, improvement, addition or commencement of full operation of the property subject to the Lien; (g) Liens on Receivables owned by the Company or a Restricted Subsidiary, as the case may be, to secure Indebtedness permitted under clause (ii) of Section 4.09 and Liens to secure Indebtedness under mortgage loan repurchase agreements or repurchase facilities 14 permitted under clause (iii) of Section 4.09; (h) Liens on Securitization Related Assets (or on the Capital Stock of any Subsidiary of such Person substantially all the assets of which are Securitization Related Assets); provided, however, that, (x) any such Liens may only encumber Securitization Related Assets in an amount not to exceed 75% of the excess, if any, of (i) the total amount of Securitization Related Assets, determined on a consolidated basis in accordance with GAAP, as of the creation of such Lien over (ii) an amount equal to 150% of all unsecured Senior Indebtedness of the Company and its Restricted Subsidiaries as of the time of creation of such Lien, and (y) the balance of Securitization Related Assets, not permitted to be encumbered by the foregoing proviso (x) shall remain unencumbered by any Lien; (i) Liens on Receivables and other assets of a Special Purpose Subsidiary incurred in connection with a Qualified Securitization Transaction; (j) Liens existing on the Issue Date; (k) Liens on property or shares of Capital Stock of another Person at the time such other Person becomes a Subsidiary of such Person; provided, however, that such Liens are not created, incurred or assumed in connection with, or in contemplation of, such other Person becoming such a Subsidiary; provided further, however, that such Lien may not extend to any other property owned by such Person or any of its Subsidiaries; (l) Liens on property at the time such Person or any of its Subsidiaries acquires the property, including, any acquisition by means of a merger or consolidation with or into such Person or a Subsidiary of such Person; provided, however, that such Liens are not created, incurred or assumed in connection with, or in contemplation of such acquisition; provided further, however, that the Liens may not extend to any other property owned by such Person or any of its Subsidiaries; (m) Liens securing Indebtedness or other obligations of a Subsidiary of such Person owing to such Person or a Restricted Subsidiary of such Person; (n) Liens (other than on any Securitization Related Assets) securing Hedging Obligations; (o) Liens on cash or other assets (other than Securitization Related Assets) securing Warehouse Indebtedness of the Company or its Restricted Subsidiaries; (p) Liens to secure any Permitted Refinancing Indebtedness as a whole, or in part, with any Indebtedness permitted under this Indenture to be Incurred and secured by any Lien referred to in the foregoing clauses (f), (j), (k) and (l); provided, however, that (x) such new Lien shall be limited to all or part of the same property that secured the original Lien (plus improvements to or on such property) and (y) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of (A) the outstanding, principal amount or, if greater, committed amount of the Indebtedness described under clauses (f), (j), (k) or (l), as the case may be, at the time the original Lien became a Permitted Lien and (B) an amount necessary to pay any fees and expenses, including premiums, related to such refinancing, refunding, extension, renewal or replacement; (q) Liens securing deposit liabilities of any Restricted Subsidiary, the deposits of which are insured by the Federal Deposit Insurance Corporation or any successor agency or Indebtedness of any Restricted Subsidiary to the Federal Home Loan Bank of San Francisco or any successor thereto incurred in the ordinary course of business and secured by qualifying mortgage loans or mortgage-backed securities; and (r) Liens on assets of Unrestricted Subsidiaries that secure Non- 15 Recourse Debt of Unrestricted Subsidiaries. Notwithstanding the foregoing, "Permitted Liens" will not include any Lien described in clauses (f), (j) or (k) above to the extent such Lien applies to any Additional Assets acquired directly or indirectly from Net Proceeds pursuant to Section 4.07. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Debentures, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Debentures on terms at least as favorable to the Holders of Debentures as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (v) such Indebtedness may not include a Guaranty of Indebtedness of a Person that is not a Subsidiary of the Company. "Permitted SPTL Preferred Stock" means nonvoting (except as provided in the second proviso below), noncumulative, perpetual preferred stock of SPTL which would qualify as Tier 1 capital or the equivalent thereof on an unrestricted basis for purposes of the capital requirements contained in 12 C.F.R. Part 325, Subpart A, or any successor provision; provided that the total liquidation preference of such preferred stock outstanding at any time shall not exceed 20% of the Consolidated Net Worth of SPTL (after giving effect to the issuance of such preferred stock); and provided further, that the holders of such stock may be granted the right to elect directors constituting less than a majority of the board of directors of SPTL if dividends on such have not been paid for six dividend periods, whether consecutive or not, and until such time as SPTL has paid or declared and set apart for payment dividends for four consecutive dividend periods. "Permitted Warehouse Indebtedness" means Warehouse Indebtedness in connection with a Warehouse Facility; provided, however, that (i) the assets as to which such Warehouse Indebtedness relates are or, prior to any funding under the related 16 Warehouse Facility with respect to such assets, were eligible to be recorded as held for sale on the consolidated balance sheet of the Company in accordance with GAAP, (ii) such Warehouse Indebtedness will be deemed to be Permitted Warehouse Indebtedness (a) in the case of a Purchase Facility, only to the extent the holder of such Warehouse Indebtedness has no contractual recourse to the Company and its Restricted Subsidiaries to satisfy claims in respect of such Permitted Warehouse Indebtedness in excess of the realizable value of the Receivables financed thereby, and (b) in the case of any other Warehouse Facility, only to the extent of the lesser of (A) the amount advanced by the lender with respect to the Receivables financed under such Warehouse Facility, and (B) the principal amount of such Receivables and (iii) any such Indebtedness has not been outstanding in excess of 364 days. "Person" means any individual, corporation, limited liability company, partnership, association, joint stock company, trust or trustee thereof, estate or executor thereof, unincorporated organization or joint venture. "Property Trustee" has the meaning specified in the Declaration. "Purchase Facility" means any Warehouse Facility in the form of a purchase and sale facility pursuant to which the Company or a Restricted Subsidiary of the Company sells Receivables to a financial institution and retains a right of first refusal upon the subsequent resale of such Receivables by such financial institution. "Qualified Securitization Transaction" means any transaction or series of transactions pursuant to which (i) the Company or any of its Restricted Subsidiaries (other than a Special Purpose Subsidiary) sells, conveys or otherwise transfers to a Special Purpose Subsidiary or (ii) the Company, any of its Restricted Subsidiaries or a Special Purpose Subsidiary sells, conveys or otherwise transfers to a special purpose owner trust or other Person Receivables (together with any assets related to such Receivables, including, without limitation, all collateral securing such Receivables, all contracts and all guarantees or other obligations in respect of such Receivables, proceeds of such Receivables and other assets which are customarily transferred in connection with asset securitization transactions involving Receivables) of the Company or any of its Restricted Subsidiaries in transactions constituting "true sales" under the Bankruptcy Laws and as "sales" under GAAP, as evidenced by an Opinion of Counsel to such effect. "Quotation Agent" means Lehman Brothers Inc. and their respective successors; provided, however, that if the foregoing shall cease to be a primary United States Government securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer. 17 "Receivables" means consumer, mortgage and commercial loans, equipment or other lease receivables and receivables purchased or originated by the Company or any Restricted Subsidiary in the ordinary course of business; provided, however, that for purposes of determining the amount of a Receivable at any time, such amount shall be determined in accordance with GAAP, consistently applied, as of the most recent practicable date. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any prepayment date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. New York City time, on the third business day preceding such prepayment date. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of the date of this Indenture, by and among the Company and the other parties named on the signature pages thereof, as such agreement may be amended, modified or supplemented from time to time. "Regular Trustees" has the meaning set forth in the Declaration. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Global Debenture" means a Regulation S Temporary Global Debenture or Regulation S Permanent Global Debenture, as appropriate. "Regulation S Permanent Global Debenture" means a permanent global note that contains the paragraph referred to in footnote 1 and the additional schedule referred to in footnote 2 to the form of the Debenture attached hereto as Exhibit A-1, and that is deposited with and registered in the name of the Depositary, representing the Debentures sold in reliance on Regulation S. "Regulation S Temporary Global Debenture" means a single temporary global note in the form of the Debenture attached hereto as Exhibit A-2 that is deposited with and registered in the name of the Depositary, representing Debentures sold in reliance on Regulation S. "Remarketing" means the operation of the procedures for remarketing specified in Section 7.5 of the Declaration (or, if a Dissolution Event occurs prior to a Scheduled Remarketing Date, specified in Section 3.12 hereof). 18 "Remarketing Agent" means such agent or agents as the Company may appoint from time to time for the purpose of remarketing the Securities (or the Debentures, pursuant to Article IV hereof), as set forth in the Remarketing Agreement. "Remarketing Agreement" means the Remarketing Agreement, dated as of June 9, 1997, among the Trust, the Company and Lehman Brothers Inc., as the same may be amended, supplemented or modified from time to time. "Remarketing Settlement Date" means the Scheduled Remarketing Settlement Date on which purchases and sales of Securities pursuant to a Remarketing are consummated. "Related Business" means any consumer or commercial finance business or any financial advisory or financial service business. "Representative" means the indenture trustee or other trustee, agent or representative for any Senior Debt. "Residual Certificates" means, with respect to the sale of Receivables in a Qualified Securitization Transaction, any certificates representing Receivables not sold or transferred in such transaction or otherwise retained by or returned to the Person transferring such Receivables. "Responsible Officer" when used with respect to the Trustee, means any officer within the Corporate Trust Office (or any successor group of the Trustee) assigned by the Trustee to administer its corporate trust matters. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Retained Interest" means, with respect to the sale of Receivables in a Qualified Securitization Transaction, the interest and rights retained by the Person in the Receivables transferred or sold in a Qualified Securitization Transaction, including any rights to receive cash flow attributable to such Receivables. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Rule 144A Global Debenture" means a permanent global note that contains the paragraph referred to in footnote 1 and the additional schedule referred to in footnote 2 to the form of the Debenture attached hereto as Exhibit A-1, and that is deposited with 19 and registered in the name of the Depositary, representing Debentures sold in reliance on Rule 144A. "Scheduled Remarketing Date" means the third Business Day prior to any Scheduled Remarketing Settlement Date. "Scheduled Remarketing Settlement Date" means June 14, 2002, or such other date determined pursuant to this definition, unless a Trust Enforcement Event has occurred and is continuing on the 25th Business Day prior to such Scheduled Remarketing Settlement Date, in which case the Scheduled Remarketing Settlement Date will be the 30th Business Day after the date of cure or waiver of such Trust Enforcement Event; provided that if (x) purchases and sales of Securities pursuant to a Remarketing are not consummated on any Scheduled Remarketing Settlement Date for any reason (including the Company's failure to make the deposit required in the event of a Special Mandatory Redemption) other than the occurrence and continuance of any other Trust Enforcement Event or if (y) the Company fails to redeem Debentures in connection with a Tax Opinion Redemption after cancelling the Remarketing, the next Scheduled Remarketing Settlement Date will be the 30th Business Day after such Scheduled Remarketing Settlement Date. "SEC" means the Securities and Exchange Commission. "Securities" means the $70,000,000 aggregate liquidation amount of Remarketed Par Securities, Series A of the Trust, representing undivided beneficial ownership interests in the assets of the Trust or any Remarketed Par Securities, Series B, of the Trust, issued in exchange therefor pursuant to the Exchange Offer. "Securities Act" means the Securities Act of 1933, as amended. "Securitization Related Assets" means, with respect to a Qualified Securitization Transaction: (i) the Capitalized Excess Servicing Fees Receivable retained by the Person who transfers or sells Receivables in such a transaction; (ii) the Retained Interest held by such Person in the Receivables sold or transferred in such transaction; and (iii) Residual Certificates retained by such Person in such transaction. "Senior Debt" means all Indebtedness permitted to be incurred by the Company under the terms of this Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Debentures and all Obligations with respect to the foregoing. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (i) any liability for federal, state, local or other taxes owed or owing by the Company, 20 (ii) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (iii) any trade payables or (iv) any Indebtedness that is incurred in violation of this Indenture. "Senior Indebtedness" means all Indebtedness of the Company or the Subsidiary Guarantors that is not, by its terms, subordinated in right of payment to the Debentures or the Subsidiary Guarantees, respectively. "Significant Subsidiary" means any Restricted Subsidiary that would be a "significant subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. "Special Event" means either an Investment Company Event or a Tax Event. "Special Purpose Subsidiary" means a Wholly Owned Restricted Subsidiary of the Company (a) that is designated (as set forth below) as a "Special Purpose Subsidiary" by the Board of Directors of the Company, (b) that does not engage in, and whose charter prohibits it from engaging in, any activities other than Qualified Securitization Transactions, (c) no portion of the Indebtedness or any other Obligations (contingent or otherwise) of which (i) is guaranteed by the Company or any other Restricted Subsidiary of the Company, (ii) is recourse to or obligates the Company or any other Restricted Subsidiary of the Company in any way other than pursuant to representations, warranties, covenants and indemnities entered into in the ordinary course of business in connection with a Qualified Securitization Transaction or (iii) subjects any property or asset of the Company or any other Restricted Subsidiary of the Company, directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to representations, warranties, covenants and indemnities entered into in the ordinary course of business in connection with a Qualified Securitization Transaction, (d) with which neither the Company nor any other Restricted Subsidiary of the Company has any material contract, agreement, arrangement or understanding other than on terms no less favorable to the Company or such Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company and (e) with which neither the Company nor any other Restricted Subsidiary of the Company has any obligation to maintain or preserve such Restricted Subsidiary's financial condition or cause such Restricted Subsidiary to achieve certain levels of operating results. Any such designation by the Board of Directors of the Company shall be evidenced to the Trustee by filing with the Trustee a certified copy of the resolution of the Board of Directors of the Company giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions. "SPFC" means Southern Pacific Funding Corporation, a California corporation and a partially owned Subsidiary of the Company. 21 "SPTL" means Southern Pacific Thrift & Loan Association, a California corporation and a Subsidiary of the Company. "Stated Maturity" means, with respect to any installment of principal or interest on any series of Indebtedness, the date on which such payment of principal or interest was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such principal or interest prior to the date originally scheduled for the payment thereof. "Strategic Investor Repurchase Transaction" means the repurchase, redemption or other retirement for value of any Equity Interests of any Restricted Subsidiary (a) from a strategic partner or investor owning such Equity Interests that, except for such Investment, would not be an Affiliate of the Company or its Restricted Subsidiaries and (b) in a transaction whose terms comply with the provisions of Section 4.12 hereof. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof); provided that SPFC and ICIFC shall not be considered Subsidiaries of the Company unless the Company owns more than 50% of the total voting power of shares of Capital Stock on or after March 31, 1997. "Subsidiary Guarantors" means each of (i) the Restricted Subsidiaries of the Company other than SPTL and the Special Purpose Subsidiaries and (ii) any other Subsidiary that executes a Subsidiary Guarantee in accordance with the provisions of this Indenture, and their respective successors and assigns. "Tax Event" means the receipt by the Trust of an opinion of independent tax counsel to the Company, experienced in such matters, to the effect that, as a result of any amendment to, change in or announced proposed change in the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is adopted or which propsed change, pronouncement or decision is announced on or after the Issue Date, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures, (ii) interest payable by the Company 22 on the Debentures is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes, or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. "Tax Opinion" means an opinion of an independent tax counsel to the Company experienced in such matters to the effect that, as a result of (a) any amendment to, or change (including any announced proposed change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws of regulations, or which amendment or change is effective or such propsed change, pronouncement or decision is announced on or after the Issue Date, that it is more likely than not that (i) the Trust will be, following the Remarketing Settlement Date, subject to United States federal income tax with respect to interest accrued or received on the Debentures, (ii) the Trust will be, following the Remarketing Settlement Date, subject to more than a de minimis amount of taxes, duties or other governmental charges, or (iii) interest payable to the Trust on the Debentures, following the Remarketing Settlement Date, will not be deductible, in whole or in part, by the Company for United States federal income tax purposes. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA. "Transfer Restricted Securities" means securities that bear or are required to bear the legend set forth in Section 2.06 hereof. "Treasury Rate" means (i) the yield, under the heading which represents the average for the immediately prior week, appearing in the most recently published statistical release designated "H.15(519)" or any successor publication which is published weekly by the Federal Reserve and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities", for the maturity corresponding to the Remaining Life (if no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Remaining Life shall be determined and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the 23 Comparable Treasury Price for such prepayment date. The Treasury Rate shall be calculated on the third business day preceding the prepayment date. "Trust" means Imperial Credit Capital Trust I, a Delaware statutory business trust. "Trust Enforcement Event" has the meaning specified in the Declaration. "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent that such Subsidiary: (a) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (b) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (c) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (d) has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by Section 4.08. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under Section 4.09, the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under Section 4.09, (ii) such Subsidiary becomes a 24 Subsidiary Guarantor and (iii) no Default or Event of Default would be in existence following such designation. "Warehouse Facility" means any funding arrangement, including a Purchase Facility, with a financial institution or other lender or purchaser, to the extent (and only to the extent) funding thereunder is used exclusively to finance or refinance the purchase or origination of Receivables by the Company or a Restricted Subsidiary of the Company for the purpose of (i) pooling such Receivables prior to securitization or (ii) sale, in each case in the ordinary course of business. "Warehouse Indebtedness" means the greater of (x) the consideration received by the Company or its Restricted Subsidiaries under a Warehouse Facility and (y) in the case of a Purchase Facility, the book value of the Receivables financed under such Warehouse Facility until such time as such Receivables are (i) securitized, (ii) repurchased by the Company or its Restricted Subsidiaries or (iii) sold by the counterparty under the Warehouse Facility to a Person who is not an Affiliate of the Company. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the product obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person and one or more Wholly Owned Subsidiaries of such Person. Section 1.02 Other Definitions
Defined in Term Section - ---- ---------- "Accredited Investor"....................... 2.01 "Applicable Interest Rate".................. 4.01 "Affiliate Transaction"..................... 4.12 "Asset Sale Offer".......................... 4.07 "Asset Sale Offer Period"................... 4.07
25 "Asset Sale Offer Purchase Date"............ 4.07 "Bankruptcy Law"............................ 6.01 "Benefitted Party".......................... 10.01 "Change of Control Offer"................... 4.06 "Change Of Control Offer Period"............ 4.06 "Change of Control Payment"................. 4.06 "Change of Control Purchase Date"........... 4.06 "Custodian"................................. 6.01 "DTC"....................................... 2.03 "Event of Default".......................... 6.01 "Extension Period".......................... 4.01 "incur"..................................... 4.09 "Initial Interest Rate"..................... 4.01 "Legal Holiday"............................. 12.07 "Notice of Election"........................ 3.12 "Paying Agent".............................. 2.03 "Payment Blockage Notice"................... 11.03 "Payment Default"........................... 6.01 "QIB"....................................... 2.01 "Registrar"................................. 2.03 "Restricted Payments"....................... 4.08 "Transfer Restricted Security".............. 2.06 "Transfer Restricted Security Redemption"... 3.11 "Trustee"................................... 8.05
Section 1.03 Incorporation by Reference of Trust Indenture Act Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Debentures; "indenture security holder" means a Holder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Debentures means the Company or any successor obligor upon the Debentures. 26 All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. Section 1.04 Rules of Construction Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; and (5) provisions apply to successive events and transactions. ARTICLE 2 THE DEBENTURES Section 2.01 Form and Dating The Debentures and Subsidiary Guarantees and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A-1, which is part of this Indenture. The Debentures may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Debenture shall be dated the date of its authentication. The Debentures shall be issued initially in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Debentures shall constitute, and are hereby expressly made, a part of this Indenture, and the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. (a) Rule 144A Global Debentures. Debentures offered and sold within the United States to qualified institutional buyers as defined in Rule 144A ("QIBs") in reliance on Rule 144A shall be issued initially in the form of Rule 144A Global Debentures, which shall be deposited on behalf of the purchasers of the Debentures represented thereby with the Depositary at its New York office, and registered in the 27 name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Rule 144A Global Debentures may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee as hereinafter provided. (b) Regulation S Global Debentures. Debentures offered and sold in reliance on Regulation S shall be issued initially in the form of the Regulation S Temporary Global Debenture, which shall be deposited on behalf of the purchasers of the Debentures represented thereby with the Trustee, at its New York office, as custodian for the Depositary, and registered in the name of the Depositary or the nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The "40-day restricted period" (as defined in Regulation S) shall be terminated upon the receipt by the Trustee of (i) a written certificate from the Depositary certifying that it has received certification of non-United States beneficial ownership of 100% of the aggregate principal amount of the Regulation S Temporary Global Debenture (except to the extent of any beneficial owners thereof who acquired an interest therein pursuant to another exemption from registration under the Securities Act and who will take delivery of a beneficial ownership interest in a Rule 144A Global Debenture, all as contemplated by Section 2.06(a)(ii) hereof), and (ii) an Officers' Certificate from the Company. Following the termination of the 40- day restricted period, beneficial interests in the Regulation S Temporary Global Debenture shall be exchanged for beneficial interests in Regulation S Permanent Global Debentures pursuant to the Applicable Procedures. Simultaneously with the authentication of Regulation S Permanent Global Debentures, the Trustee shall cancel the Regulation S Temporary Global Debenture. The aggregate principal amount of the Regulation S Temporary Global Debenture and the Regulation S Permanent Global Debentures may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee, as the case may be, in connection with transfers of interest as hereinafter provided. (c) Global Debentures in General. Each Global Debenture shall represent such of the outstanding Debentures as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Debentures from time to time endorsed thereon and that the aggregate amount of outstanding Debentures represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Debenture to reflect the amount of any increase or decrease in the amount of outstanding Debentures represented thereby shall be made by the Trustee or the Debenture Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. 28 Except as set forth in Section 2.06 hereof, the Global Debentures may be transferred, in whole and not in part, only to another nominee of the Depositary or to a successor of the Depositary or its nominee. (d) Book-Entry Provisions. This Section 2.01(d) shall apply only to Rule 144A Global Debentures and the Regulation S Permanent Global Debentures deposited with or on behalf of the Depositary. The Company shall execute and the Trustee shall, in accordance with this Section 2.01(d) and Section 2.02, authenticate and deliver the Global Debentures that (i) shall be registered in the name of the Depositary or the nominee of the Depositary and (ii) shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions or held by the Trustee as custodian for the Depositary. Agent Members shall have no rights either under this Indenture with respect to any Global Debenture held on their behalf by the Depositary or by the Trustee as custodian for the Depositary or under such Global Debenture, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Debenture for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices of such Depositary governing the exercise of the rights of an owner of a beneficial interest in any Global Debenture. (e) Certificated Debentures. At any time after the Remarketing Settlement Date, a Holders may request that its interest in a Global Debenture be exchanged for Debentures in certificated form substantially in the form of Exhibit A-1 attached hereto (but without including the text referred to in footnotes 1 and 2 thereto). Section 2.02 Execution and Authentication Two Officers shall sign the Debentures for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Debentures and may be in facsimile form. If an Officer whose signature is on a Debenture no longer holds that office at the time a Debenture is authenticated, the Debenture shall nevertheless be valid. 29 A Debenture shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Debenture has been authenticated under this Indenture. The Trustee shall, upon delivery of an Authentication Order, authenticate Debentures for original issue up to the aggregate principal amount stated in paragraph 4 of the Debentures. The aggregate principal amount of Debentures outstanding at any time may not exceed such amount except as provided in Section 2.07 hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Debentures. An authenticating agent may authenticate Debentures whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. Neither the Company nor the Trustee shall have any responsibility for any defect in the CUSIP number that appears on any Debenture, check, advice of payment or redemption notice, and any such document may contain a statement to the effect that CUSIP numbers have been assigned by an independent service for convenience of reference and that neither the Company nor the Trustee shall be liable for any inaccuracy in such numbers. Section 2.03 Registrar and Paying Agent The Company shall maintain in the Borough of Manhattan, the City of New York, State of New York, and in such other locations as it shall determine, (i) an office or agency where Debentures may be presented for registration of transfer or for exchange ("Registrar") and (ii) an office or agency where Debentures may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Debentures and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Debentures. 30 The Company initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Debenture Custodian with respect to the Global Debentures. The Company initially appoints the Trustee to act as the Registrar and Paying Agent with respect to the Certificated Debentures. Section 2.04 Paying Agent to Hold Money in Trust The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium, if any, interest and Additional Interest, if any, on the Debentures, and shall notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for the money. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the Company, the Trustee shall serve as Paying Agent for the Debentures. Section 2.05 Holder Lists The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA (S) 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Debentures, and the Company shall otherwise comply with TIA (S) 312(a). Section 2.06 Transfer and Exchange (a) Transfer and Exchange of Global Debentures. The transfer and exchange of Global Debentures or beneficial interests therein shall be effected through the Depositary, in accordance with this Indenture and the procedures of the Depositary therefor, which shall include restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Beneficial interests in a Global Debenture may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Global Debenture in accordance with the transfer restrictions set forth in the legend in subsection (g) of this Section 2.06. Transfers of beneficial interests in 31 the Global Debentures to Persons required to take delivery thereof in the form of an interest in another Global Debenture shall be permitted as follows: (i) Rule 144A Global Debenture to Regulation S Global Debenture. If, at any time, an owner of a beneficial interest in a Rule 144A Global Debenture deposited with the Depositary (or the Trustee as custodian for the Depositary) wishes to transfer its interest in such Rule 144A Global Debenture to a Person who is required or permitted to take delivery thereof in the form of an interest in a Regulation S Global Debenture, such owner shall, subject to the Applicable Procedures, exchange or cause the exchange of such interest for an equivalent beneficial interest in a Regulation S Global Debenture as provided in this Section 2.06(a)(i). Upon receipt by the Trustee of (1) instructions given in accordance with the Applicable Procedures from an Agent Member directing the Trustee to credit or cause to be credited a beneficial interest in the Regulation S Global Debenture in an amount equal to the beneficial interest in the Rule 144A Global Debenture to be exchanged, (2) a written order given in accordance with the Applicable Procedures containing information regarding the participant account of the Depositary to be credited with such increase and (3) a certificate in the form of Exhibit B-1 hereto given by the owner of such beneficial interest stating that the transfer of such interest has been made in compliance with the transfer restrictions applicable to the Global Debentures and pursuant to and in accordance with Rule 903 or Rule 904 of Regulation S, then the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of the applicable Rule 144A Global Debenture and to increase or cause to be increased the aggregate principal amount at maturity of the applicable Regulation S Global Debenture by the principal amount at maturity of the beneficial interest in the Rule 144A Global Debenture to be exchanged, to credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Regulation S Global Debenture equal to the reduction in the aggregate principal amount at maturity of the Rule 144A Global Debenture, and to debit, or cause to be debited, from the account of the Person making such exchange or transfer the beneficial interest in the Rule 144A Global Debenture that is being exchanged or transferred. (ii) Regulation S Global Debenture to Rule 144A Global Debenture. If, at any time, an owner of a beneficial interest in a Regulation S Global Debenture deposited with the Depositary (or with the Trustee as custodian for the Depositary) wishes to transfer its interest in such Regulation S Global Debenture to a Person who is required or permitted to take delivery thereof in the form of an interest in a Rule 144A Global Debenture, such owner shall, subject to the Applicable Procedures, exchange or cause the exchange of such interest for an 32 equivalent beneficial interest in a Rule 144A Global Debenture as provided in this Section 2.06(a)(ii). Upon receipt by the Trustee of (1) written instructions from the Depositary, directing the Trustee, as Registrar, to credit or cause to be credited a beneficial interest in the Rule 144A Global Debenture equal to the beneficial interest in the Regulation S Global Debenture to be exchanged, such instructions to contain information regarding the participant account with the Depositary to be credited with such increase, (2) a written order given in accordance with the Applicable Procedures containing information regarding the participant account of the Depositary and (3) a certificate in the form of Exhibit B-2 attached hereto given by the owner of such beneficial interest stating (A) if the transfer is pursuant to Rule 144A, that the Person transferring such interest in a Regulation S Global Debenture reasonably believes that the Person acquiring such interest in a Rule 144A Global Debenture is a QIB and is obtaining such beneficial interest in a transaction meeting the requirements of Rule 144A and any applicable blue sky or securities laws of any state of the United States, (B) that the transfer complies with the requirements of Rule 144 under the Securities Act and any applicable blue sky or securities laws of any state of the United States or (C) if the transfer is pursuant to any other exemption from the registration requirements of the Securities Act, that the transfer of such interest has been made in compliance with the transfer restrictions applicable to the Global Debentures and pursuant to and in accordance with the requirements of the exemption claimed, such statement to be supported by an Opinion of Counsel from the transferee or the transferor in form reasonably acceptable to the Company and to the Registrar, then the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of such Regulation S Global Debenture and to increase or cause to be increased the aggregate principal amount at maturity of the applicable Rule 144A Global Debenture by the principal amount at maturity of the beneficial interest in the Regulation S Global Debenture to be exchanged, and the Trustee, as Registrar, shall instruct the Depositary, concurrently with such reduction, to credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the applicable Rule 144A Global Debenture equal to the reduction in the aggregate principal amount at maturity of such Regulation S Global Debenture and to debit or cause to be debited from the account of the Person making such transfer the beneficial interest in the Regulation S Global Debenture that is being transferred. (b) Transfer and Exchange of Certificated Debentures. After the Remarketing Settlement Date, when Certificated Debentures are presented by a Holder to the Registrar with a request: (x) to register the transfer of the Certificated Debentures; or 33 (y) to exchange such Certificated Debentures for an equal principal amount of Certificated Debentures of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested; provided, however, that the Certificated Debentures presented or surrendered for register of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing; and (ii) in the case of a Certificated Debenture that is a Transfer Restricted Security, such request shall be accompanied by the following additional information and documents, as applicable: (A) if such Transfer Restricted Security is being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, or such Transfer Restricted Security is being transferred to the Company, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto); (B) if such Transfer Restricted Security is being transferred to a QIB in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto); or (C) if such Transfer Restricted Security is being transferred in reliance on any other exemption from the registration requirements of the Securities Act (including Rule 904 thereunder), a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto) and an Opinion of Counsel from such Holder or the transferee reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act. (c) Transfer of a Beneficial Interest in a Rule 144A Global Debenture or Regulation S Permanent Global Debenture for a Certificated Debenture (i) At any time after the Remarketing Settlement Date, any Person having a beneficial interest in a Rule 144A Global Debenture or Regulation S Permanent Global Debenture may upon request, subject to the Applicable 34 Procedures, exchange such beneficial interest for a Certificated Debenture. Upon receipt by the Trustee of written instructions or such other form of instructions as is customary for the Depositary, from the Depositary or its nominee on behalf of any Person having a beneficial interest in a Rule 144A Global Debenture or Regulation S Permanent Global Debenture, and, in the case of a Transfer Restricted Security, the following additional information and documents (all of which may be submitted by facsimile): (A) if such beneficial interest is being transferred to the Person designated by the Depositary as being the beneficial owner, a certification to that effect from such Person (in substantially the form of Exhibit B-4 hereto); (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B-4 hereto); or (C) if such beneficial interest is being transferred in reliance on any other exemption from the registration requirements of the Securities Act (including Rule 904 thereunder), a certification to that effect from the transferor (in substantially the form of Exhibit B-4 hereto) and an Opinion of Counsel from the transferee or the transferor reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act, in which case the Trustee or the Debenture Custodian, at the direction of the Trustee, shall, in accordance with the standing instructions and procedures existing between the Depositary and the Debenture Custodian, cause the aggregate principal amount of Rule 144A Global Debentures or Regulation S Permanent Global Debentures, as applicable, to be reduced accordingly and, following such reduction, the Company shall execute and the Trustee shall authenticate and deliver to the transferee a Certificated Debenture in the appropriate principal amount. (ii) Certificated Debentures issued in exchange for a beneficial interest in a Rule 144A Global Debenture or Regulation S Permanent Global Debenture, as applicable, pursuant to this Section 2.06(c) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Certificated Debentures to the Persons 35 in whose names such Debentures are so registered. Following any such issuance of Certificated Debentures, the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of the applicable Global Debenture to reflect the transfer. (d) Restrictions on Transfer and Exchange of Global Debentures. Notwithstanding any other provision of this Indenture (other than the provisions set forth in subsection (f) of this Section 2.06), a Global Debenture may not be transferred as a whole except by the Depositary to a nominee of the Depositary, or by a nominee of the Depositary to the Depositary or another nominee of the Depositary, or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (e) Transfer and Exchange of a Certificated Debenture for a Beneficial Interest in a Global Debenture. Holders of Certificated Debentures may offer, resell, pledge or otherwise transfer such Debentures only pursuant to an effective registration statement under the Securities Act, inside the United States to a QIB in a transaction meeting the requirements of Rule 144A, in a transaction meeting the requirements of Rule 144 under the Securities Act, outside the United States in a transaction meeting the requirements of Rule 904 under the Securities Act or to the Company, in each case in compliance with any applicable securities laws of any State of the United States or any other applicable jurisdiction. When Certificated Debentures are presented by a Holder to the Registrar with a request (x) to register the transfer of the Certificated Debentures or (y) to exchange such Certificated Debentures for an equal principal amount of Certificated Debentures of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; provided, however, that the Certificated Debentures presented or surrendered for register of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing, which instructions, if applicable, shall direct the Trustee (A) to cancel any Certificated Debenture being exchanged for another Certificated Debenture or a beneficial interest in a Global Debenture in accordance with Section 2.11 hereof, and (B) to make, or to direct the Registrar to make, an endorsement on the appropriate Global Debenture to reflect an increase in the aggregate principal amount of the Debentures represented by such Global Debenture; and (ii) such request shall be accompanied by the following additional information and documents, as applicable: 36 (A) if such Certificated Debenture is being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification to that effect from such Holder (in substantially the form of Exhibit B-5 hereto); or (B) if such Certificated Debenture is being transferred to a QIB in accordance with Rule 144A, pursuant to Rule 144 under the Securities Act or pursuant to an exemption from registration in accordance with Rule 904 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B-5 hereto). (f) Authentication of Certificated Debentures in Absence of Depositary. If at any time after the Remarketing Settlement Date: (i) the Depositary for the Debentures notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Debentures and a successor Depositary for the Global Debentures is not appointed by the Company within 90 days after delivery of such notice; or (ii) the Company delivers to the Trustee an Officers' Certificate or an order signed by two Officers of the Company notifying the Trustee that it elects to cause the issuance of Certificated Debentures under this Indenture, then the Company shall execute, and the Trustee shall, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, authenticate and deliver, Certificated Debentures in an aggregate principal amount equal to the principal amount of the Global Debentures in exchange for such Global Debentures. (g) Legends (i) Except as permitted by the following paragraphs (ii), (iii) and (iv), each Debenture certificate evidencing Global Debentures and, after the Remarketing Settlement Date, Certificated Debentures (and all Debentures issued in exchange therefor or substitution thereof) shall bear a legend in substantially the following form (each a "Transfer Restricted Security"): "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD 37 OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." (ii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Debenture) pursuant to Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act: (A) in the case of any Transfer Restricted Security that is a Certificated Debenture, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Certificated Debenture that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Transfer Restricted Security upon receipt of a certification from the transferring Holder substantially in the form of Exhibit B-3 hereto; and 38 (B) in the case of any Transfer Restricted Security represented by a Global Debenture, such Transfer Restricted Security shall not be required to bear the legend set forth in (i) above, but shall continue to be subject to the provisions of Section 2.06(a) and (b) hereof; provided, however, that with respect to any request for an exchange of a Transfer Restricted Security that is represented by a Global Debenture for a Certificated Debenture that does not bear the legend set forth in (i) above, which request is made in reliance upon Rule 144, the Holder thereof shall certify in writing to the Registrar that such request is being made pursuant to Rule 144 (such certification to be substantially in the form of Exhibit B-4 hereto). (iii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Debenture) in reliance on any exemption from the registration requirements of the Securities Act (other than exemptions pursuant to Rule 144A or Rule 144 under the Securities Act) in which the Holder or the transferee provides an Opinion of Counsel to the Company and the Registrar in form and substance reasonably acceptable to the Company and the Registrar (which Opinion of Counsel shall also state that the transfer restrictions contained in the legend are no longer applicable): (A) in the case of any Transfer Restricted Security that is a Certificated Debenture, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Certificated Debenture that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Transfer Restricted Security; and (B) in the case of any Transfer Restricted Security represented by a Global Debenture, such Transfer Restricted Security shall not be required to bear the legend set forth in (i) above, but shall continue to be subject to the provisions of Section 2.06(a) and (b) hereof. (iv) Notwithstanding the foregoing, upon consummation of the Exchange Offer in accordance with the Registration Rights Agreement, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate Series B Debentures in exchange for Series A Debentures accepted for exchange in the Exchange Offer, which Series B Debentures shall not bear the legend set forth in (i) above, and the Registrar shall rescind any restriction on the transfer of such Series B Debentures, in each case unless the Holder of such Series A Debentures is either (A) a broker-dealer, (B) a Person participating in the distribution of the Series 39 A Debentures or (C) a Person who is an affiliate (as defined in Rule 144A) of the Company. (h) Cancellation and/or Adjustment of Global Debentures. At such time as all beneficial interests in Global Debentures have been exchanged for Certificated Debentures, redeemed, repurchased or cancelled, all Global Debentures shall be returned to or retained and cancelled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Debenture is exchanged for an interest in another Global Debenture or for Certificated Debentures, redeemed, repurchased or cancelled, the principal amount of Debentures represented by such Global Debenture shall be reduced accordingly and an endorsement shall be made on such Global Debenture, by the Trustee or the Debenture Custodian, at the direction of the Trustee, to reflect such reduction. (i) General Provisions Relating to Transfers and Exchanges (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Global Debentures and, after the Remarketing Settlement Date, Certificated Debentures, at the Registrar's request. (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Article 3 and Sections 4.06, 4.07 and 9.05 hereof). (iii) The Registrar shall not be required to register the transfer of or exchange any Debenture selected for redemption in whole or in part, except the unredeemed portion of any Debenture being redeemed in part. (iv) All Certificated Debentures and Global Debentures issued upon any registration of transfer or exchange of Certificated Debentures or Global Debentures shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Certificated Debentures or Global Debentures surrendered upon such registration of transfer or exchange. (v) The Company shall not be required: (A) to issue, to register the transfer of or to exchange Debentures during a period beginning at the opening of business 15 days 40 before the day of any selection of Debentures for redemption under Section 3.02 hereof and ending at the close of business on the day of selection; or (B) to register the transfer of or to exchange any Debenture so selected for redemption in whole or in part, except the unredeemed portion of any Debenture being redeemed in part; or (C) to register the transfer of or to exchange a Debenture between a record date and the next succeeding interest payment date. (vi) Prior to due presentment for the registration of a transfer of any Debenture, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Debenture is registered as the absolute owner of such Debenture for the purpose of receiving payment of principal of and interest and Additional Interest, if any, on such Debentures, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. (vii) The Trustee shall authenticate Certificated Debentures and Global Debentures in accordance with the provisions of Section 2.02 hereof. The Registrar may rely on information set forth in a certificate substantially in the form of Exhibit B-1, B-2, B-3, B-4 or B-5 hereto, and other certificates and opinions received pursuant to this Section 2.06 and, in the absence of receipt of such a certificate or opinion, shall not be deemed to have knowledge of a transfer of an interest in a Global Security absent actual knowledge of such transfer. Section 2.07 Replacement Debentures If any mutilated Debenture is surrendered to the Trustee, or the Company and the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Debenture, the Company shall issue and the Trustee, upon the written order of the Company signed by two Officers of the Company, shall authenticate a replacement Debenture if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Debenture is replaced. The Company may charge for its expenses in replacing a Debenture. 41 Every replacement Debenture is an additional obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Debentures duly issued hereunder. Section 2.08 Outstanding Debentures The Debentures outstanding at any time are all the Debentures authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation, those reductions in the interest in a Global Debenture effected by the Trustee in accordance with the provisions hereof, and those described in this Section as not outstanding. Except as set forth in Section 2.09 hereof, a Debenture does not cease to be outstanding because the Company or an Affiliate of the Company holds the Debenture. If a Debenture is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Debenture is held by a bona fide purchaser. If the principal amount of any Debenture is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest and Additional Interest, if any, on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, on a redemption date or maturity date, money sufficient to pay the principal amount of any Debentures due and payable on that date, then on and after that date such Debentures shall be deemed to be no longer outstanding and shall cease to accrue interest and Additional Interest. Section 2.09 Treasury Debentures In determining whether the Holders of the required principal amount of Debentures have concurred in any direction, waiver or consent, Debentures owned by the Company, or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company, shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Debentures that the Trustee knows are so owned shall be so disregarded. 42 Section 2.10 Temporary Debentures Until Certificated Debentures are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Debentures upon a written order of the Company signed by two Officers of the Company. Temporary Debentures shall be substantially in the form of Certificated Debentures but may have variations that the Company considers appropriate for temporary Debentures and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate Certificated Debentures in exchange for temporary Debentures. Holders of temporary Debentures shall be entitled to all of the benefits of this Indenture. Section 2.11 Cancellation The Company at any time may deliver Debentures to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Debentures surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Debentures surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy cancelled Debentures (subject to the record retention requirement of the Exchange Act). Certification of the destruction of all cancelled Debentures shall be delivered to the Company. The Company may not issue new Debentures to replace Debentures that it has paid or that have been delivered to the Trustee for cancellation. Section 2.12 Defaulted Interest If the Company defaults in a payment of interest on the Debentures, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, in each case at the rate provided in the Debentures and in Section 4.01 hereof. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Debenture and the date of the proposed payment. The Company shall fix or cause to be fixed each such special record date and payment date; provided that no such special record date shall be less than 10 days prior to the related payment date for such defaulted interest. At least 15 days before the special record date, the Company (or, upon the written request of the Company, the Trustee in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. 43 ARTICLE 3 REDEMPTION AND REMARKETING Section 3.01 Notices to Trustee If the Company elects to redeem Debentures pursuant to the optional redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 45 days but not more than 60 days before a redemption date (unless a shorter notice shall be satisfactory to the Trustee), an Officers' Certificate setting forth the Section of this Indenture pursuant to which the redemption shall occur, the redemption date, the principal amount of Debentures to be redeemed and the redemption price. Section 3.02 Selection of Debentures to Be Redeemed If less than all of the Debentures are to be redeemed, the Trustee shall select the Debentures to be redeemed among the Holders of the Debentures in compliance with the requirements of the principal national securities exchange, if any, on which the Debentures are listed or, if the Debentures are not so listed, on a pro rata basis, by lot or by such other method as the Trustee shall deem fair and appropriate. In the event of partial redemption by lot, the Trustee shall make the selection not less than 30 nor more than 60 days prior to the redemption date from the outstanding Debentures not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Debentures selected for redemption and, in the case of any Debenture selected for partial redemption, the portion of the principal amount thereof to be redeemed. Debentures and portions of them selected to be redeemed shall be in principal amounts of $1,000 or whole multiples of $1,000; except that if all of the Debentures of a Holder are to be redeemed, the entire outstanding amount of Debentures held by such Holder, even if not a multiple of $1,000, shall be redeemed. Except as provided in the preceding sentence, provisions of this Indenture that apply to Debentures called for redemption also apply to portions of Debentures called for redemption. Section 3.03 Notice of Redemption At least 30 days but not more than 60 days before a redemption date (other than a redemption in connection with a Special Mandatory Redemption), the Company shall mail, by first class mail, a notice of redemption to each Holder whose Debentures are to be redeemed at its registered address. The notice shall identify the Debentures to be redeemed and shall state: 44 (1) the redemption date; (2) the redemption price; (3) if any Debenture is being redeemed in part, the portion of the principal amount of such Debenture to be redeemed and that, after the redemption date, upon surrender of such Debenture, a new Debenture or Debentures in principal amount equal to the unredeemed portion will be issued; (4) the name and address of the Paying Agent; (5) that Debentures called for redemption must be surrendered to the Paying Agent to collect the redemption price; (6) that, unless the Company defaults in making such redemption payment, interest and Additional Interest, if any, on Debentures called for redemption ceases to accrue on and after the redemption date; (7) the paragraph of the Debentures pursuant to which the Debentures called for redemption are being redeemed; and (8) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Debentures. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense. Section 3.04 Effect of Notice of Redemption Once notice of redemption is mailed, Debentures called for redemption become irrevocably due and payable on the redemption date at the price set forth in the Debenture. Section 3.05 Deposit of Redemption Price (a) On or before the redemption date, the Company shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of and accrued interest and Additional Interest, if any, on all Debentures to be redeemed on that date. The Trustee or the Paying Agent shall return to the Company any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption price of, and accrued interest and Additional Interest, if any, on all Debentures to be redeemed. 45 (b) If the Company is required to redeem Debentures on the Scheduled Remarketing Settlement Date as part of a Special Mandatory Redemption, by 12:00 P.M., New York City time, on the Business Day prior to the Scheduled Remarketing Settlement Date, the Company shall deposit irrevocably, with the Trustee, sufficient funds to pay the Redemption Price with respect to the Debentures to be redeemed. Promptly thereafter, and in any event no later than 12:30 P.M., New York City time, on such Business Day prior to the Scheduled Remarketing Settlement Date, the Indenture Trustee shall give notice to the Remarketing Agent, in writing, of the receipt or non-receipt of such funds. Interest on the Debentures to be redeemed will cease to accrue on the applicable redemption date, whether or not such Debentures are presented for payment, if the Company makes the redemption payment. If any Debenture called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest will be paid on the unpaid principal, from the redemption date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case at the rate provided in the Debentures and in Section 4.01 hereof. Section 8.06 shall apply to any Debentures not redeemed within 2 years from the redemption date. Section 3.06 Debentures Redeemed in Part Upon surrender of a Debenture that is redeemed in part, the Company shall issue and the Trustee shall authenticate for the Holder at the expense of the Company a new Debenture equal in principal amount to the unredeemed portion of the Debenture surrendered. 46 Section 3.07 Optional Redemption The Debentures are redeemable at the option of the Company, in whole or in part, at any time or from time to time through and including June 15, 2001 at a redemption price (the "Initial Optional Redemption Price") equal to the greater of (i) 100% of the principal amount of such Debentures and (ii) as determined by a Quotation Agent, the sum of the present values of the principal amount of such Debentures as if redeemed on June 14, 2002, together with scheduled prepayments of interest from the prepayment date to but excluding June 14, 2002, discounted to the prepayment date on a semi-annual basis (assuming a 360-day year consisting of 30-day months) at the Adjusted Treasury Rate, plus, in each case, accrued and unpaid interest and Additional Interest, if any, to the date of redemption. On and after June 15, 2012, the Debentures are redeemable prior to maturity at the option of the Company, in whole or in part, at any time at the redemption prices described in the next sentence, plus accrued and unpaid interest and Additional Interest, if any, to the date of redemption. The redemption price (expressed as a percentage of principal amount) shall be equal to 100% plus the product of (x) the Adjusted Distribution Rate and (y) the applicable Factor if redeemed during the twelve-month period beginning on June 15th of the years indicated below, the applicable "Factor" shall equal:
YEAR % ---- --- 2012....................... 50% 2013....................... 45% 2014....................... 40% 2015....................... 35% 2016....................... 30% 2017....................... 25% 2018....................... 20% 2019....................... 15% 2020....................... 10% 2021....................... 5%
On and after June 15, 2022, the redemption price will be 100% of the principal amount of the Debentures to be redeemed, plus accrued and unpaid interest and Additional Interest, if any, to the date of redemption. Any redemption pursuant to this Section 3.07 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. 47 Section 3.08 Special Mandatory Redemption If, by 4:00 P.M., New York City time, on any Scheduled Remarketing Date, the Remarketing Agent is unable to remarket, at a price of $1,000 per Security, all of the Securities tendered or deemed tendered for purchase in the Remarketing on such Scheduled Remarketing Date, then (i) such unsold Securities shall be exchanged on the related Scheduled Remarketing Settlement Date with the Trust for Debentures having an aggregate principal amount equal to the aggregate liquidation amount of such unsold Securities and such Debentures shall be immediately redeemed, unless (ii) as a result of such redemption, less than $25,000,000 principal amount of Debentures would remain outstanding. In such latter event, the Company shall redeem on such Scheduled Remarketing Settlement Date all of the Debentures (thereby causing the Trust to redeem all of the outstanding Securities) and the Remarketing will be cancelled. In either case of (i) or (ii) above, the redemption price of the Debentures shall be 100% of the principal amount of the outstanding Debentures so redeemed. If a Dissolution Event occurs prior to a Scheduled Remarketing Date, references in this Section 3.08 to Securities shall be deemed to be references to the Debentures and references to a Remarketing of Securities shall be deemed to be references to a Remarketing of the Debentures. Any redemption pursuant to this Section 3.08 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. Section 3.09 Special Event Redemption; Shortening of Maturity If an Investment Company Event shall occur and be continuing, the Company has option, after the Remarketing Settlement Date, to redeem the Debentures, in whole but not in part, at any time within 90 days following the occurrence of such an Investment Company Event at a redemption price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest and Additional Interest, if any, to the date of redemption. If a Tax Event shall occur and be continuing and in the opinion of independent tax counsel to the Trust experienced in such matters, there would in all cases, after effecting the termination of the Trust and the distribution of the Debentures to the holders of the Trust Securities in exchange therefor upon liquidation of the Trust, be more than an insubstantial risk that the Tax Event would continue to exist, then the Company will have the right (a) to shorten the Stated Maturity of the Debentures to a date not earlier than June 14, 2012 (a "Maturity Advancement") such that, in the opinion of such independent tax counsel, after advancing the Stated Maturity of the Debentures, interest paid on the Debentures will be deductible by the Company for United States federal 48 income tax purposes or (b) after the Scheduled Remarketing Date, to redeem the Debentures, in whole but not in part, at any time within 90 days following the occurrence of a Tax Event at a redemption price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest and Additional Interest to the date of redemption. Any redemption pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. Section 3.10 Tax Opinion Redemption If the Company receives a Tax Opinion at least 35 business days prior to the Election Date, the Remarketing may be cancelled at the option of the Company, in which case the Debentures shall be redeemed by the Company on the Scheduled Remarketing Settlement Date, in whole but not in part, at a redemption price equal to 100% of the principal amount of such Debentures plus accrued and unpaid interest and Additional Interest thereon to such Scheduled Remarketing Settlement Date. Any redemption pursuant to this Section 3.10 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. Section 3.11 Transfer Restricted Security Redemption If an Exchange Offer occurs under the Registration Rights Agreement, the Company shall be required, on the Remarketing Settlement Date, to redeem, in whole (but not in part), Series A Debentures which were not exchanged pursuant to the Exchange Offer (a "Transfer Restricted Security Redemption"). As part of a Transfer Restricted Security Redemption, on the Schedule Remarketing Settlement Date, Remarketed Par Securities, Series A of the Trust which were not exchanged pursuant to the Exchange Offer shall be exchanged with the Trust for Series A Debentures having an aggregate principal amount equal to the aggregate liquidation of such Securities and such Debentures shall immediately be redeemed by the Company at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest and Additional Interest, if any, to the date of redemption. If the Company is required to redeem Debentures in connection with a Transfer Restricted Security Redemption, holders of such Securities shall receive notice of such redemption at or prior to the time that the Notice of Remarketing is required to be given to the Depository pursuant to Section 3.12. Any redemption pursuant to this Section 3.11 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. 49 Section 3.12 Remarketing This Section 3.12 shall only become effective upon a Dissolution Event which occurs prior to the Remarketing of the Securities pursuant to Section 7.5 of the Declaration. Until such Dissolution Event, this Section 3.12 shall have no force and effect. (a) If the Company receives a Tax Opinion at least 35 Business Days prior to an Election Date, the Company shall have the option to cancel the Remarketing by giving, to the Property Trustee, the Depositary and the Remarketing Agent, written notice of such cancellation. In such event, all of the Debentures are subject to a Tax Opinion Redemption in accordance with Section 3.10. (b) If the Company does not receive such a Tax Opinion or if the Company does not elect to cancel the Remarketing after receiving such a Tax Opinion, not less than 20 nor more than 35 Business Days prior to the Election Date, the Company shall give a Notice of Remarketing of the Debentures to the Depositary, with copies to the Trustee and the Remarketing Agent, not less than 20 nor more than 35 Business Days prior to the Election Date. (c) Not later than 4:00 P.M., New York City time, on the Election Date, each holder of Debentures may give a Notice of Election ("Notice of Election"), to the Trustee of its election (i) to retain and not to have all or any portion of the Debentures owned by it remarketed in the Remarketing to be conducted on the Scheduled Remarketing Date or (ii) to tender all or any portion of such Debentures for purchase in such Remarketing (such portion, in either case, shall be in a principal amount of $1,000 or any integral multiple thereof). Any Notice of Election given to the Trustee shall be irrevocable and may not be conditioned upon the level at which the Adjusted Interest Rate is established in the Remarketing. Promptly after 4:30 P.M., New York City time, on the Election Date, the Trustee, based on the Notices of Election received by it through the Depositary prior to such time, shall notify the Company and the Remarketing Agent of the aggregate principal amount of Debentures to be retained by Holders and the aggregate principal amount of Debentures tendered for purchase in the Remarketing. (d) If any holder of Debentures gives a Notice of Election to tender Debentures as described in clause (ii) of Section 3.12(b), the Debentures so subject to such Notice of Election shall be deemed tendered for purchase in the Remarketing, notwithstanding any failure by such holder of Debentures to deliver or properly deliver such Debentures to the Remarketing Agent for purchase. If any holder of Debentures fails timely to deliver a Notice of Election, as described in Section 3.12(b), such Debentures shall be deemed tendered for purchase in the Remarketing, notwithstanding 50 such failure or the failure by such holder to deliver or properly deliver Debentures to the Remarketing Agent for purchase. (e) The right of each holder of Debentures to have Debentures tendered for purchase shall be limited to the extent that (i) the Remarketing Agent conducts a remarketing pursuant to the terms of the Remarketing Agreement, (ii) Debentures tendered have not been called for redemption, (iii) the Remarketing Agent is able to find a purchaser or purchasers for tendered Debentures at an Adjusted Interest Rate that does not exceed the Maximum Adjusted Distribution Rate and (iv) such purchaser or purchasers deliver the purchase price therefor to the Remarketing Agent. (f) Prior to 4:00 P.M., New York City time, on the Scheduled Remarketing Date, the Remarketing Agent shall determine the Adjusted Distribution Rate, which shall be the rate per annum (rounded to the nearest one-thousandth (0.001) of one percent per annum) which the Remarketing Agent determines, in its sole judgment, to be the lowest rate per annum, if any, not exceeding the Maximum Adjusted Interest Rate that will enable it to remarket all Debentures tendered or deemed tendered for purchase at a price of 100% of the aggregate principal amount of such Debentures (the "Adjusted Interest Rate "). Notwithstanding the foregoing, if the Remarketing Agent is able to remarket some, but is unable to remarket all, of the Debentures tendered or deemed tendered for purchase in the Remarketing, the Adjusted Interest Rate shall be the highest rate, not exceeding the Maximum Adjusted Interest Rate, required to remarket Debentures sold in the Remarketing . If holders of Securities submit Notices of Election to retain all of the Securities then outstanding, the Adjusted Distribution Rate will be the rate determined by the Remarketing Agent in its sole discretion, as the rate that would have been established had a Remarketing been held on the Scheduled Remarketing Date. Under Section 4 of the Remarketing Agreement, the Company, in its capacity as the issuer of Debentures, shall be liable for, and shall pay, any and all costs and expenses incurred in connection with the Remarketing and the Trust shall not be liable for any such costs and expenses. (g) By approximately 4:30 P.M., New York City time, on the Scheduled Remarketing Date, the Remarketing Agent shall advise, by telephone (i) the Depositary, the Trustee, the Trust and the Company of the Adjusted Interest Rate determined in the Remarketing and the aggregate principal amount of Debentures sold in the Remarketing, (ii) each purchaser (or the Depositary Participant thereof) of the Adjusted Interest Rate determined in the Remarketing and the aggregate principal amount of Debenture such purchaser is to purchase and (iii) each purchaser to give instructions to its Depositary Participant to pay the purchase price on the Scheduled Remarketing Settlement Date in same day funds against delivery of the Debentures purchased through the facilities of the Depositary. 51 (h) In accordance with the Depositary's normal procedures, on the Remarketing Settlement Date, the transactions described above with respect to the Debentures tendered for purchase and sold in the Remarketing shall be executed through the Depositary, if the Depositary or its nominee is the holder of such Debentures, and the accounts of the respective Depositary Participants shall be debited and credited and such Debentures delivered by book entry as necessary to effect purchases and sales of such Debentures. The Depositary shall make payment in accordance with its normal procedures. (i) If any holder selling Debentures in the Remarketing fails to deliver such Debentures, the Depositary Participant of such selling holder and of any other person that was to have purchased Debentures in the Remarketing may deliver to any such other person an aggregate principal amount of Debentures that is less than the aggregate principal amount of the Debentures that otherwise was to be purchased by such person. In such event, the aggregate principal amount of the Debentures that is to be so delivered shall be determined by such Depositary Participant, and delivery of such lesser amount of Debentures shall constitute good delivery. (j) The Remarketing Agent is not obligated to purchase any Debentures that would otherwise remain unsold in a Remarketing. Neither the Trust nor any Trustee nor the Company nor the Remarketing Agent shall be obligated in any case to provide funds to make payment upon tender of Debentures for Remarketing. ARTICLE 4 COVENANTS Section 4.01 Payment of Debentures (a) The Company shall pay or cause to be paid the principal of, premium, if any, and interest and Additional Interest, if any, on the Debentures on the dates and in the manner provided in the Debentures. Principal, premium, if any, and interest and Additional Interest, if any, shall be considered paid on the date due if the Paying Agent (other than the Company or a Subsidiary), holds at least one Business Day before that date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest and Additional Interest, if any, then due. Such Paying Agent shall return to the Company, no later than five Business Days following the due date for payment, any money (including accrued interest, if any) that exceeds such amount of principal, premium, if any, and interest and Additional Interest, if any, required for payment on the Debentures. 52 (b) The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the applicable interest rate on the Debentures to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the same rate to the extent lawful. (c) From the Issue Date to but excluding the Remarketing Settlement Date, the "Applicable Interest Rate" will be 10 1/4% per annum (the "Initial Interest Rate"). From the Remarketing Settlement Date to but excluding the date of redemption of the Debentures, the Applicable Interest Rate will equal the Adjusted Distribution Rate (or, if a Dissolution Event occurs prior to the Scheduled Remarketing Date, the Adjusted Interest Rate) that results from the Remarketing consummated on the Remarketing Settlement Date. The Debentures shall accrue interest at the Applicable Interest Rate, from the Issue Date or from the most recent Interest Payment Date to which interest has been paid or duly provided for, as the case may be, and shall be payable, semi-annually in arrears, on June 15 (June 14 in 2002) and December 15 of each year, commencing December 15, 1997, and on each Scheduled Remarketing Settlement Date (each, an "Interest Payment Date"), until the principal thereof is paid or made available for payment, to the holder of such Debenture on the close of business on the regular record rate. Interest that is not paid on an applicable Interest Payment Date, to the extent permitted by law, will compound semi-annually and will accrue at the Applicable Interest Rate in effect at the beginning of the related interest period, including (to the extent permitted by applicable law) during an extension of an interest payment period as set forth below in Section 4.01(d). The amount of interest payable for any period will be computed (i) for any full 180-day semi-annual interest payment period, on the basis of a 360-day year of twelve 30-day months and (ii) for any period shorter than a full 180-day semi-annual interest payment period, on the basis of 30-day months and for periods of less than a month, the actual number of days elapsed per 30-day month. In the event that any date on which interest is payable on the Debentures is not a Business Day, then payment of the interest payable on such date will be made on the next succeeding day that is a Business Day (and without any additional interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such payment was originally payable. 53 The term "interest", as used herein, shall include interest payments, Additional Interest and interest on interest payments not paid on the applicable Interest Payment Date. (d) Following the Remarketing Settlement Date, as long as no Event of Default has occurred and is continuing, the Company shall have the right, at any time during the term of the Debentures, from time to time, to defer payment of interest on such Debentures, for a period not to exceed to 10 consecutive semi- annual periods (an "Extension Period"); provided, that no Extension Period may extend beyond the Stated Maturity of the Debentures. There may be multiple Extension Periods of varying lengths during the term of the Debentures. At the end of each Extension Period, if any, the Company shall pay all interest and Additional Interest then accrued and unpaid, together with interest thereon, compounded semi-annually at the Applicable Interest Rate in effect at the beginning of such Extension Period, to the extent permitted by applicable law. During any such Extension Period, the Company may not, and may not permit any Subsidiary of the Company to, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank on a parity with or junior in interest to the Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any Subsidiary of the Company if such guarantee ranks on a parity or junior in interest to the Debentures (other than (a) dividends or distributions in common stock of the Company, (b) payments under the Company Guarantee, (c) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (d) purchases of common stock related to the issuance of common stock or rights under any of the Company's benefit plans). Prior to the termination of any such Extension Period, the Company may further extend the interest payment period, provided that no Extension Period may exceed 10 consecutive semi-annual periods or extend beyond the Stated Maturity of the Debentures. Upon the termination of any such Extension Period and the payment of all amounts then due on any Interest Payment Date, the Company may elect to begin a new Extension Period subject to the above requirements. No interest shall be due and payable during an Extension Period, except at the end thereof. (e) The Company shall give the Property Trustee, the Regular Trustees and the Trustee written notice of its election of such Extension Period not less than one Business Day prior to the record date for the related interest payment. The Property Trustee shall promptly give notice of the Company's selection of such Extension Period to the holders of the Securities. 54 Section 4.02 Maintenance of Office or Agency The Company shall maintain in the Borough of Manhattan, The City of New York, an office or agency (which may be an office of the Trustee or Registrar) where Debentures may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Debentures and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Debentures may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.03. Section 4.03 Compliance Certificate (a) The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether each has kept, observed, performed and fulfilled in all respects its obligations under this Indenture and further stating, as to each such Officer signing such certificate, that to the best of his knowledge each has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in any respect in default in the performance or observance of any of the terms, provisions and conditions hereof or thereof (or, if such Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he may have knowledge and what action each is taking or proposes to take with respect thereto). (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements delivered pursuant to Section 4.03 above shall be accompanied by a written statement of the 55 Company's independent public accountants (who shall be a firm of established national reputation reasonably satisfactory to the Trustee) that in making the examination necessary for certification of such financial statements nothing has come to their attention which would lead them to believe that either the Company or any of its Subsidiaries has violated any provisions of Article 4 or Article 5 of this Indenture or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any person for any failure to obtain knowledge of any such violation. (c) The Company shall, so long as any of the Debentures are outstanding, deliver to the Trustee, forthwith upon becoming aware of (i) any Default or Event of Default or (ii) any event of default under any other mortgage, indenture or instrument as that term is used in Section 6.01(v) which permits an acceleration that could become an Event of Default, an Officers' Certificate specifying such Default, Event of Default or event of default and what action the Company is taking or proposes to take with respect thereto. Section 4.04 Taxes The Company shall, and shall cause each of its Subsidiaries to, pay prior to delinquency all material taxes, assessments, and governmental levies except as contested in good faith and by appropriate proceedings. Section 4.05 Stay, Extension and Usury Laws The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. Section 4.06 Change of Control Upon the occurrence of a Change of Control on or prior to the Remarketing Settlement Date, each Holder of Debentures shall have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Debentures pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof 56 plus accrued and unpaid interest and Additional Interest, if any, thereon to the date of purchase (the "Change of Control Payment"). If at the time of the Change of Control the Trust is the owner of all of the Debentures, the Trust shall make the Change of Control Offer for the Securities in accordance with the procedures set forth in Section 7.15 of the Declaration, and the Company shall repurchase the Debentures exchanged by the Trust for the Securities as set forth in the Declaration. In connection with such a Change of Control Offer, on the Change of Control Purchase Date, the Company shall promptly deposit with the Trustee an amount equal to the Change of Control Payment in respect of all Securities or portions thereof so exchanged. The Trustee shall promptly mail to each holder of Securities so exchanged the Change of Control Payment for such Securities. The following procedures apply to a Change of Control Offer when the Trust is not the owner of all of the Debentures: Within 10 days following any Change of Control, the Company shall mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Debentures pursuant to the procedures required by this Indenture and described in such notice. The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Debentures as a result of a Change of Control. The Change of Control Offer shall remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Change of Control Offer Period"). No later than five Business Days after the termination of the Change of Control Offer Period (the "Change of Control Purchase Date"), the Company shall purchase all Debentures tendered in response to the Change of Control Offer. Payment for any Debentures so purchased shall be made in the same manner as interest payments are made. If the Change of Control Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest shall be paid to the Person in whose name a Debenture is registered at the close of business on such record date, and no additional interest or Additional Interest, if any, shall be payable to Holders who tender Debentures pursuant to the Change of Control Offer. On the Change of Control Payment Date, the Company shall, to the extent lawful, (a) accept for payment all Debentures or portions thereof properly tendered pursuant to the Change of Control Offer, (b) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Debentures or portions thereof so tendered and (c) deliver or cause to be delivered to the Trustee the Debentures so 57 accepted together with an Officers' Certificate stating the aggregate principal amount of Debentures or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to each Holder of Debentures so tendered the Change of Control Payment for such Debentures, and the Trustee shall promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Debenture equal in principal amount to any unpurchased portion of the Debentures surrendered, if any; provided that each such new Debenture shall be in a principal amount of $1,000 or an integral multiple thereof. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. Section 4.07 Asset Sales On or prior to the Remarketing Settlement Date, the Company shall not, and shall not permit any of its Restricted Subsidiaries to, consummate an Asset Sale in excess of $1,000,000 unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors, except for sales of Securitization Related Assets, which require no such resolution) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents; provided that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet, excluding contingent liabilities and trade payables), of the Company or any such Restricted Subsidiary that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability and (y) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are promptly, but in no event more than 30 days after receipt, converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received), shall be deemed to be cash for purposes of this provision. Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Company or the Restricted Subsidiary may apply such Net Proceeds, (a) to permanently reduce Senior Indebtedness (other than the Debentures or the 9 7/8% Senior Notes or the Subsidiary Guarantees thereof) of the Company or of the Subsidiary Guarantors, or (b) to an Investment (excluding Guarantees of Indebtedness or other obligations), the making of a capital expenditure or the acquisition of other tangible assets, in each case in or with respect to a Related Business. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph shall be deemed to constitute "Excess Proceeds." If at the time of the Asset Sale Offer the Trust is the owner of all of the Debentures, the Trust shall make the Asset Sale Offer for the Securities in accordance with the procedures set forth in Section 7.16 of the Declaration, 58 and the Company shall repurchase the Debentures exchanged by the Trust for the Securities as set forth in the Declaration. Promptly following such exchange, the Company shall (but in any case not later than five days after the Asset Sale Purchase Date) mail or deliver to each tendering holder of Securities an amount equal to 100% of the principal amount of the Debentures exchanged therefor plus accrued and unpaid interest thereon, including Additional Interest to the date of purchase. The following procedures apply to an Asset Sale Offer when the Trust is not the owner of all of the Debentures: When the aggregate amount of Excess Proceeds exceeds $5,000,000, the Company shall be required to make an offer to all Holders of Debentures and, at the Company's election, the 9 7/8% Senior Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Debentures (and, if applicable, the 9 7/8% Senior Notes) that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Additional Interest, if any, thereon to the date of purchase, in accordance with the procedures set forth in this Indenture and in the indenture governing the 9 7/8% Senior Notes. To the extent that the aggregate amount of Debentures (and, if applicable, the 9 7/8% Senior Notes) tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. An Asset Sale Offer shall remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Asset Sale Offer Period"). No later than five Business Days after the termination of the Asset Sale Offer Period (the "Asset Sale Purchase Date"), the Company shall purchase the principal amount of Debentures (and, if applicable, the 9 7/8% Senior Notes) required to be purchased pursuant to this covenant (the "Asset Sale Offer Amount") or, if less than the Asset Sale Offer Amount has been tendered, all Debentures (and, if applicable, the 9 7/8% Senior Notes) tendered in response to the Asset Sale Offer. Payment for any Debentures (and, if applicable, the 9 7/8% Senior Notes) so purchased shall be made in the same manner as interest payments are made. If the Asset Sale Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest and Additional Interest, if any, shall be paid to the Person in whose name a Debenture is registered at the close of business on such record date, and no additional interest or Additional 59 Interest, if any, shall be payable to Holders who tender Debentures pursuant to the Asset Sale Offer. On or before the Asset Sale Purchase Date, the Company shall, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Asset Sale Offer Amount of Debentures (and, if applicable, the 9 7/8% Senior Notes) or portions thereof tendered pursuant to the Asset Sale Offer, or if less than the Asset Sale Offer Amount has been tendered (and, if applicable, the 9 7/8% Senior Notes), all Debentures (and, if applicable, the 9 7/8% Senior Notes) tendered, and shall deliver to the Trustee an Officers' Certificate stating that such Debentures (and, if applicable, the 9 7/8% Senior Notes) or portions thereof were accepted for payment by the Company in accordance with the terms of this covenant. The Company, the Depository or the Paying Agent, as the case may be, shall promptly (but in any case not later than five days after the Asset Sale Purchase Date) mail or deliver to each tendering Holder an amount equal to the purchase price of the Debentures (and, if applicable, the 9 7/8% Senior Notes) tendered by such Holder and accepted by the Company for purchase. The Company shall promptly issue a new Debenture, and the Trustee, upon written request from the Company shall authenticate and mail or deliver such new Debenture to such Holder, in a principal amount equal to any unpurchased portion of the Debenture surrendered. Any Debenture not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company shall publicly announce the results of the Asset Sale Offer on the Asset Sale Purchase Date. Section 4.08 Restricted Payments On or prior to the Remarketing Settlement Date, the Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company) or to the direct or indirect holders of the Company's or any of its Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or dividends or distributions payable to the Company or any Restricted Subsidiary that is a Subsidiary Guarantor or to SPTL); (ii) purchase, redeem or otherwise acquire or retire for value (including without limitation in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company or other Affiliate of the Company (other than any such Equity Interests owned by the Company or any Restricted Subsidiary of the Company that is a Subsidiary Guarantor or by SPTL); (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Debentures (other than Debentures), except a payment of interest or principal at Stated Maturity; or (iv) 60 make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; (b) at the time of and immediately after giving effect to such Restricted Payment, the Company would be able to incur at least $1.00 of additional Indebtedness pursuant to the test in the first sentence of Section 4.09; and (c) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Subsidiaries after the Issue Date (excluding Restricted Payments permitted by clauses (x) and (y) of the next succeeding paragraph), is less than the sum of (i) 25% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the Issue Date to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds received by the Company from the issue or sale since the Issue Date of Equity Interests (other than Disqualified Stock) of the Company or of debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or convertible debt securities) sold to a Subsidiary of the Company and other than Disqualified Stock or debt securities that have been converted into Disqualified Stock), (iii) to the extent that any Restricted Investment that was made after the Issue Date is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment, (iv) 25% of any dividends received by the Company or a Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor or by SPTL after the Issue Date from an Unrestricted Subsidiary of the Company, plus (v) $15,000,000. The foregoing provisions shall not prohibit: (v) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of this Indenture; (w) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company or any Restricted Subsidiary in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than any Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph; (x) the defeasance, redemption or repurchase of subordinated Indebtedness with the net cash 61 proceeds from an incurrence of Permitted Refinancing Indebtedness or the substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests of the Company (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph; (y) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Subsidiary of the Company held by any member of the Company's (or any of its Subsidiaries') management pursuant to any management equity subscription agreement or stock option agreement or other management agreement or plan; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed $500,000 in any twelve- month period plus the aggregate cash proceeds received by the Company during such twelve-month period from any reissuance of Equity Interests by the Company to members of management of the Company and its Subsidiaries; and (z) the repurchase, redemption or other retirement for value of any Equity Interests of any Restricted Subsidiary in a Strategic Investor Repurchase Transaction; and no Default or Event of Default shall have occurred and be continuing immediately after such transaction. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated shall be deemed to be Restricted Payments at the time of such designation and shall reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments shall be deemed to constitute Investments in an amount equal to the greatest of (x) the net book value of such Investments at the time of such designation, (y) the fair market value of such Investments at the time of such designation and (z) the original fair market value of such Investments at the time they were made. Such designation shall only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all Restricted Payments (other than cash) shall be the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) on the date of the Restricted Payment of the asset(s) proposed to be transferred by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this Section 4.08 were computed, which calculations may be based upon the Company's latest available financial statements. 62 Section 4.09 Incurrence of Indebtedness and Issuance of Preferred Stock On or prior to the Remarketing Settlement Date, the Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume, guaranty or otherwise become directly or indirectly liable with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and the Company shall not permit any of its Restricted Subsidiaries to issue any shares of preferred stock; provided, however, that the Company or any Subsidiary Guarantor may incur Indebtedness (including Acquired Debt) or any Subsidiary Guarantor may issue preferred stock or SPTL may incur Permitted SPTL Preferred Stock if, on the date of such incurrence and after giving effect thereto, the Company's Consolidated Leverage Ratio does not exceed 2.0 to 1.0. The foregoing provisions shall not apply to: (i) Indebtedness of the Company existing on the Issue Date; (ii) the incurrence by the Company of Indebtedness represented by the Debentures or by the Subsidiary Guarantors of Indebtedness represented by the Subsidiary Guarantees; (iii) the incurrence of Permitted Warehouse Indebtedness by the Company or any of its Restricted Subsidiaries, and any Guarantee by the Company of such Indebtedness incurred by a Restricted Subsidiary, provided, however, that to the extent any such Indebtedness of the Company or a Subsidiary Guarantor ceases to constitute Permitted Warehouse Indebtedness, such Indebtedness shall be deemed to be incurred at such time by the Company or such Subsidiary Guarantor, as the case may be; (iv) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness that was permitted by this Indenture to be incurred or that was outstanding at the Issue Date; (v) the incurrence by the Company or a Restricted Subsidiary of Hedging Obligations directly related to (A) Indebtedness of the Company or a Restricted Subsidiary incurred in conformity with the provisions of this Indenture, (B) Receivables held by the Company or its Restricted Subsidiaries pending sale in a Qualified Securitization Transaction, (C) Receivables of the Company or its Restricted Subsidiaries that have been sold pursuant to a Warehouse Facility, (D) Receivables that the Company or the Restricted Subsidiary reasonably expects to purchase or commit to purchase, finance or accept as collateral, or (E) Securitization Related Assets and other assets owned or financed by the Company or its Restricted Subsidiaries in the ordinary course 63 of business; provided, however, that, in the case of each of the foregoing clauses (A) through (E), such Hedging Obligations are eligible to receive hedge accounting treatment in accordance with GAAP as applied by the Company and its Restricted Subsidiaries on the Issue Date; and (vi) Indebtedness of the Subsidiary Guarantors or of SPTL to the Company or Permitted SPTL Preferred Stock issued to the Company to the extent that such Indebtedness or such Permitted SPTL Preferred Stock constitutes a Permitted Investment of the Company of the type permitted under the definition of Permitted Investments; (vii) the incurrence by the Company or any of its Restricted Subsidiaries other than a Special Purpose Subsidiary of intercompany Indebtedness owing to the Company or any of its Restricted Subsidiaries other than a Special Purpose Subsidiary; provided, however, that (i) any subsequent issuance or transfer of any Capital Stock which results in any such Indebtedness being held by a Person other than a Restricted Subsidiary and (ii) any sale or transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary (other than a Special Purpose Subsidiary) shall be deemed, in each case, to constitute the incurrence of such Indebtedness by the Company or such Subsidiary, as the case may be; (viii) the incurrence by a Special Purpose Subsidiary of Non-Recourse Debt in a Qualified Securitization Transaction and the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt; provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of the Special Purpose Subsidiary or other Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company; and (ix) the incurrence by the Company and its Restricted Subsidiaries of Indebtedness in an aggregate principal amount which, together with the principal amount of all Indebtedness of the Company and its Restricted Subsidiaries outstanding on the date of Incurrence (other than Indebtedness permitted by clauses (ii) through (vii) above, or the first paragraph of this covenant), does not exceed $10,000,000. Section 4.10 Liens On or prior to the Remarketing Settlement Date, the Company shall not, and shall not permit any of its Restricted Subsidiaries to, create, incur or otherwise cause or suffer to exist or become effective any Lien for the benefit of any Indebtedness ranking pari passu with or junior to the Debentures, other than Permitted Liens, upon any property or assets of the Company or any Restricted Subsidiary of the Company or any shares of stock or debt of any Restricted Subsidiary of the Company which owns property or assets, now owned or hereafter acquired, unless (i) if such lien secures Indebtedness 64 which is pari passu with the Debentures, then the Debentures are secured on an equal and ratable basis or (ii) if such lien secures Indebtedness which is junior to the Debentures, any such lien shall be junior to a lien granted to the holders of the Debentures. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien on any asset now owned or hereafter acquired, or any income or profits therefrom or assign or convey any right to receive income therefrom, except Permitted Liens. Section 4.11 Dividend and Other Payment Restrictions Affecting Subsidiaries On or prior to the Remarketing Settlement Date, the Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the Issue Date, (b) the Warehouse Facilities as in effect as of the Issue Date, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, additions, replacements or refinancings thereof; provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, additions, replacements or refinancings are no more restrictive with respect to such dividend and other payment restrictions than those contained in the Warehouse Facilities as in effect on the Issue Date, (c) Indebtedness or other contractual requirements of a Special Purpose Subsidiary in connection with a Qualified Securitization Transaction; provided that such restrictions apply only to such Special Purpose Subsidiary, (d) this Indenture and the Debentures, (e) applicable law, (f) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired; provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of this Indenture to be incurred, (g) by reason of customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (h) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired, or (i) Permitted Refinancing Indebtedness; 65 provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced. Section 4.12 Transactions with Affiliates On or prior to the Remarketing Settlement Date, the Company shall not, and shall not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $2,000,000, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10,000,000, in addition to such Officers' Certificate, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an investment banking firm of national standing which is not an Affiliate of the Company; provided, however, that such fairness opinion shall not be required with respect to a Qualified Securitization Transaction or other transaction that is made in the ordinary course of business of the Company or such Restricted Subsidiary, as the case may be, and is consistent with the past business practice of the Company or such Restricted Subsidiary. Notwithstanding the foregoing, the following shall not be deemed Affiliate Transactions: (i) any employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (ii) any issuance of securities, or other payments, compensation, benefits, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (iii) the grant of stock options or similar rights to employees and directors of the Company pursuant to plans approved by the Board of Directors in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (iv) loans or advances to employees in the ordinary course of business in accordance with the past practices of the Company or its Restricted Subsidiaries, but in any event not to exceed $500,000 in aggregate principal amount 66 outstanding at any one time, (v) the payment of reasonable fees to directors of the Company and its Restricted Subsidiaries who are not employees of the Company or its Restricted Subsidiaries, (vi) transactions between or among the Company and/or its Restricted Subsidiaries, (vii) Restricted Payments and Permitted Investments (other than Strategic Investor Repurchase Transactions) that are permitted by Section 4.08, and (viii) transactions between a Special Purpose Subsidiary and any Person in which the Special Purpose Subsidiary has an Investment. Section 4.13 Business Activities On or prior to the Remarketing Settlement Date, the Company shall not, and shall not permit any Restricted Subsidiary to, engage in any line of business that is not a Related Business (except as a result of Investments in other businesses made or acquired in connection with the activities or conduct of the Related Businesses in the ordinary course of business by the Company and its Restricted Subsidiaries, including Investments obtained as a result of the foreclosure of Liens securing amounts lent by the Company or any of its Restricted Subsidiaries). Section 4.14 Reports On or prior to the Remarketing Settlement Date, whether or not required by the rules and regulations of the SEC, so long as any Debentures are outstanding, the Company shall furnish to the Holders of Debentures (i) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K even if the Company were not required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the SEC on Form 8-K even if the Company were not required to file such reports. In addition, whether or not required by the rules and regulations of the SEC, the Company shall file a copy of all such information and reports with the SEC for public availability (unless the SEC shall not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, the Company and the Subsidiary Guarantors have agreed that, for so long as any Debentures remain outstanding, they shall furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. Section 4.15 Additional Subsidiary Guarantees On or prior to the Remarketing Settlement Date, the Company shall not, and shall not permit any of the Subsidiary Guarantors to, make any Investment in any Subsidiary 67 that is not a Subsidiary Guarantor unless either (i) such Investment is permitted by the Section 4.08, or (ii) such Subsidiary executes a Subsidiary Guarantee and delivers an opinion of counsel in accordance with the provisions of this Indenture. Section 4.16 Fees and Expenses Because the Trust is being formed solely to facilitate an investment in the Debentures, the Company, as borrower, hereby covenants to pay all debts and obligations (other than with respect to the Securities) and all costs and expenses of the Trust (including, but not limited to, all costs and expenses of the Trustees, all costs and expenses relating to the operation of the Trust, and all costs and expenses attributable to the Remarketing) and to pay any and all taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed on the Trust by the United States, or any other taxing authority, so that the net amounts received and retained by the Trust and the Property Trustee after paying such expenses will be equal to the amounts the Trust and the Property Trustee would have received had no such costs or expenses been incurred by or imposed on the Trust. The foregoing obligations of the Company are for the benefit of, and shall be enforceably by, any person to whom any such debts, obligations, costs, expenses and taxes are owed (each, a "Creditor") whether or not such Creditor has received notice thereof. Any such Creditor may enforce such obligations of the Company directly against the Company, and the Company irrevocably waives any right or remedy to require that any such Creditor take any action against the Trust or any other person before proceeding against the Company. The Company shall execute such additional agreements as may be necessary or desirable to give full effect to the foregoing. ARTICLE 5 SUCCESSORS Section 5.01 Limitations on Merger, Consolidation or Sale of Substantially All Assets The Company shall not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person unless: (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia, (ii) the entity or Person formed by or surviving any such consolidation or 68 merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Debentures and this Indenture pursuant to a supplemental Indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; and (iv) except in the case of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of the Company, the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (A) will have Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction and (B) will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the test described in the first sentence of Section 4.09. The Company shall deliver to the Trustee prior to the consummation of the proposed transaction an Officers' Certificate to the foregoing effect and an Opinion of Counsel stating that the proposed transaction and such supplemental indenture if applicable comply with this Indenture. The Trustee shall be entitled to conclusively rely upon such Officers' Certificate and Opinion of Counsel. Section 5.02 Successor Corporation Substituted Upon any consolidation or merger, or any sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.01, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation and not to the Company), and may exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; provided, however, that the Company shall not be released or discharged from the obligation to pay the principal of or interest on the Debentures. 69 ARTICLE 6 DEFAULTS AND REMEDIES Section 6.01 Events of Default On or prior to the Remarketing Settlement Date, the following constitute "Events of Default": (i) default for 30 days in the payment when due of interest on any Debenture; (ii) default in payment when due of the principal of or premium, if any, on any Debenture; (iii) failure by the Company for 30 days to comply with any of Sections 4.06, 4.07, 4.08 or 4.09 of this Indenture; (iv) failure by the Company for 60 days after notice to comply with any of its other agreements in this Indenture or the Debentures; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of this Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of any grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5,000,000 or more; (vi) failure by the Company or any of its Significant Subsidiaries to pay final judgments aggregating in excess of $5,000,000, which judgments are not paid, discharged or stayed for a period of 60 days; (vii) except as permitted by this Indenture or if, at the time thereof, any Subsidiary Guarantee of a Subsidiary Guarantor that is a Significant Subsidiary shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect, or any Subsidiary Guarantor, or any Person acting on behalf of any such Subsidiary Guarantor, shall deny or disaffirm, in writing, its obligation under its Subsidiary Guarantee; (viii) the Company or any of its Significant Subsidiaries pursuant to or within the meaning of any Bankruptcy Law (a) commences a voluntary case, (b) consents to the entry of an order for relief against it in an involuntary case, (c) consents to the appointment of a Custodian of it or for all or substantially all of its property, (d) makes a general assignment for the benefit of its creditors, (e) generally is unable to pay its debts as the same become due; or (ix) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (a) is for relief against the Company or any of its Significant Subsidiaries in an involuntary case, (b) appoints a Custodian of the Company or any of its Significant Subsidiaries or for all or substantially all of their property, (c) orders the liquidation of the Company or any of its Significant Subsidiaries, and the order or decree remains unstayed and in effect for 60 days. 70 After the Remarketing Settlement Date, only the events described in subparagraphs (i), (ii), (iv) and (viii) will constitute "Events of Default." The term "Bankruptcy Law" means title 11, U.S. Code or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. Section 6.02 Acceleration If an Event of Default (other than an Event of Default specified in clauses (viii) and (ix) of Section 6.01, with respect to the Company or any Restricted Subsidiary) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the then outstanding Debentures by written notice to the Company and the Trustee may declare the unpaid principal of and any accrued interest on all the Debentures to be due and payable immediately. Upon such declaration the principal and interest shall be due and payable immediately. If an Event of Default specified in clause (viii) or (ix) of Section 6.01 occurs with respect to the Company or any Restricted Subsidiary, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. In the event of a declaration of acceleration of the Debentures because an Event of Default in Section 6.01(v) hereof has occurred and is continuing, such declaration of acceleration shall be automatically annulled if the holders of the Indebtedness described in Section 6.01(v) hereof have rescinded the declaration of acceleration in respect of such Indebtedness within 15 Business Days thereof and if (i) the annulment of such acceleration would not conflict with any judgment or decree of a court of competent jurisdiction, (ii) all existing Events of Default, except non-payment of principal or interest which shall have become due solely because of the acceleration, have been cured or waived and (iii) the Company has delivered an Officers' Certificate to the Trustee to the effect of clauses (i) and (ii) above. In accordance with the provisions of Section 6.04, the Holders of a majority in principal amount of the then outstanding Debentures by written notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. In the case of any Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Debentures pursuant to the optional redemption provisions of Section 3.07 of this Indenture, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Debentures. If an Event of Default occurs prior to June 15, 2000 by reason of any 71 willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Debentures prior to such date, then the premium specified in Section 3.07 for optional redemptions shall also become immediately due and payable to the extent permitted by law upon the acceleration of the Debentures. Section 6.03 Other Remedies If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Debentures or to enforce the performance of any provision of the Debentures or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Debentures or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. Section 6.04 Waiver of Past Defaults (1) Holders of a majority in aggregate principal amount of the Debentures then outstanding by written notice to the Trustee may on behalf of the Holders of all of the Debentures waive any existing Default or Event of Default and its consequences under this Indenture (except a continuing Default or Event of Default in the payment of interest or premium or Additional Interest on, or the principal of, any Debenture held by a non-consenting Holder). Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. (2) The Trustee may, without the consent of any Holders of the Debentures, waive any Event of Default that relates to untimely or incomplete reports or information if the legal rights of the Holders would not be materially adversely affected thereby and may waive any other defaults the effect of which would not materially adversely affect the rights of the Holders under this Indenture. Section 6.05 Control by Majority The Holders of a majority in principal amount of the then outstanding Debentures may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that 72 the Trustee determines may be unduly prejudicial to the rights of other Holders, or that may involve the Trustee in personal liability. Section 6.06 Limitation on Suits A Holder may pursue a remedy with respect to this Indenture or the Debentures only if: (1) the Holder gives to the Trustee written notice of a continuing Event of Default; (2) the Holders of at least 25% in principal amount of the then outstanding Debentures make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (5) during such 60-day period the Holders of a majority in aggregate principal amount of the then outstanding Debentures do not give the Trustee a direction inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. Section 6.07 Rights of Holders to Receive Payment Notwithstanding any other provision of this Indenture, the right of any Holder of a Debenture to receive payment of principal, premium, if any, and interest on the Debenture, on or after the respective due dates expressed in the Debenture, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or adversely affected without the consent of the Holder. Section 6.08 Collection Suit by Trustee If an Event of Default specified in Section 6.01(i) or (ii) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an 73 express trust against the Company for the whole amount of principal and interest remaining unpaid on the Debentures and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. Section 6.09 Trustee May File Proofs of Claim The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relative to the Company (or any other obligor upon the Debentures), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties which the Holders of the Debentures may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.10 Priorities If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.07, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; 74 Second: to Holders for amounts due and unpaid on the Debentures for principal, premium, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Debentures for principal, premium and interest, respectively; Third: without duplication, to Holders of Debentures for any other Obligations owing to the Holders of Debentures under the Debentures or this Indenture; and Fourth: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders. Section 6.11 Undertaking for Costs In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07, or a suit by Holders of more than 10% in principal amount of the then outstanding Debentures. ARTICLE 7 TRUSTEE Section 7.01 Duties of Trustee (1) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (2) Except during the continuance of an Event of Default: (a) The duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no 75 implied covenants or obligations shall be read into this Indenture against the Trustee. (b) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (3) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (a) This paragraph does not limit the effect of paragraph (2) of this Section. (b) The Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (c) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05. (4) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (1), (2) and (3) of this Section. (5) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (6) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (7) All indemnifications and releases from liability granted herein to the Trustee shall extend to the directors, officers, employees and agents of the Trustee and to the Paying Agent and Registrar. 76 Section 7.02 Rights of Trustee (1) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document, but the Trustee may, in its discretion, make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney. (2) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (3) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (4) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers conferred upon it by this Indenture. (5) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (6) The permissive rights of the Trustee to do things enumerated in this Indenture shall not be construed as a duty unless so specified herein. Section 7.03 Individual Rights of Trustee The Trustee in its individual or any other capacity may become the owner or pledgee of Debentures and may otherwise deal with the Company or an Affiliate with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 7.10 and 7.11. Subject to the provisions of Section 310(b) of the TIA, the Trustee shall be permitted to engage in transactions with the Company and its Subsidiaries other than those contemplated by this Indenture. 77 Section 7.04 Trustee's Disclaimer The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Debentures, it shall not be accountable for the Company's use of the proceeds from the Debentures or any money paid to the Company or upon the Company or upon the Company's direction under any provision hereof. The Trustee shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee and it shall not be responsible for any statement or recital herein or any statement in the Debentures or any other document in connection with the sale of the Debentures or pursuant to this Indenture other than its certificate of authentication. Section 7.05 Notice of Defaults The Trustee shall not be deemed to have notice of a Default or an Event of Default unless (i) the Trustee has received written notice thereof from the Company or any Holder or (ii) a Responsible Officer of the Trustee shall have actual knowledge thereof. Except as otherwise expressly provided herein, the Trustee shall not be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements herein, or of any of the documents executed in connection with the Debentures, or as to the existence of a Default or Event of Default hereunder. Subject to Section 6.04(2), if a Default or Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to Holders a notice of the Default or Event of Default within 90 days after it obtains knowledge of the existence of such Event of Default. Except in the case of a Default or Event of Default in payment of principal, premium or interest on any Debenture, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of Holders. Section 7.06 Reports by Trustee to Holders Within 60 days after each October 15 beginning with the October 15 following the date of this Indenture, the Trustee shall mail to Holders a brief report dated as of such reporting date that complies with TIA (S) 313(a) (but if no event described in TIA (S) 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA (S) 313(b). The Trustee shall also transmit by mail all reports as required by TIA (S) 313(c). Commencing at the time this Indenture is qualified under the TIA, a copy of each report at the time of its mailing to Holders shall be filed with the SEC and each stock 78 exchange on which the Debentures are listed. The Company shall promptly notify the Trustee when the Debentures are listed on any stock exchange. Section 7.07 Compensation and Indemnity The Company shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee and its agents, employees, officers and directors against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, except as set forth in the next paragraph. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through its own negligence or bad faith. The obligations of the Company under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. To secure the Company's payment obligations in this Section, the Trustee shall have a Lien prior to the Debentures on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Debentures. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(viii) or (ix) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. 79 Section 7.08 Replacement of Trustee A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Debentures may remove the Trustee by so notifying the Trustee and the Company. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (3) a Custodian or public officer takes charge of the Trustee or its property; or (4) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of at least 10% in principal amount of the then outstanding Debentures may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee after written request by any Holder who has been a Holder for at least six months fails to comply with Section 7.10, such Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, 80 the Company's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. Section 7.09 Successor Trustee by Merger, etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. Section 7.10 Eligibility; Disqualification There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States of America or of any state thereof authorized under such laws to exercise corporate trustee power, shall be subject to supervision or examination by Federal or state authority and shall have (or in the case of a corporation included in a bank holding company system, the related bank holding company shall have) a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA (S) 310(a)(1) and 310(a)(5). The Trustee is subject to TIA (S) 310(b). Section 7.11 Preferential Collection of Claims Against the Company The Trustee is subject to TIA (S) 311(a), excluding any creditor relationship listed in TIA (S) 311(b). A Trustee who has resigned or been removed shall be subject to TIA (S) 311(a) to the extent indicated therein. ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE Section 8.01 Option to Effect Legal Defeasance or Covenant Defeasance The Company may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, with respect to the Debentures, elect to have either Section 8.02 or 8.03 be applied to all outstanding Debentures upon compliance with the conditions set forth below in this Article Eight. 81 Section 8.02. Legal Defeasance and Discharge Upon the Company's exercise under Section 8.01 of the option applicable to this Section 8.02, the Company shall be deemed to have been discharged from its obligations with respect to all outstanding Debentures on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Debentures, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.05 and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other obligations under such Debentures and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Debentures to receive solely from the trust fund described in Section 8.04, and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest and Additional Interest, if any, on such Debentures when such payments are due, (b) the Company's obligations with respect to such Debentures under Sections 2.03, 2.05, 2.06, 2.07, 2.10 and 4.02, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Company's obligations in connection therewith and (d) this Article Eight. Subject to compliance with this Article Eight, the Company may exercise its option under this Section 8.02 notwithstanding the prior exercise of its option under Section 8.03 with respect to the Debentures. Section 8.03 Covenant Defeasance Upon the Company's exercise under Section 8.01 of the option applicable to this Section 8.03, the Company shall be released from its obligations under the covenants contained in Sections 4.03, 4.04, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.14 and 4.15 and Article Five with respect to the outstanding Debentures on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Debentures shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Debentures shall not be deemed outstanding for accounting purposes). For this purpose, such Covenant Defeasance means that, with respect to the outstanding Debentures, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document 82 and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01(iii) or (iv), but, except as specified above, the remainder of this Indenture and such Debentures shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 of the option applicable to this Section 8.03, Sections 6.01(iii) through 6.01(vii) shall not constitute Events of Default. Section 8.04 Conditions to Legal or Covenant Defeasance The following shall be the conditions to the application of either Section 8.02 or Section 8.03 to the outstanding Debentures: (1) the Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 7.10 who shall agree to comply with the provisions of this Article Eight applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Debentures, (a) cash in U.S. Dollars in an amount, or (b) non-callable Government Securities which through the scheduled payment of principal and interest and Additional Interest, if any, in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, cash in U.S. Dollars in an amount, or (c) a combination thereof, in such amounts, as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge the principal of, premium, if any, and interest and Additional Interest, if any, on the outstanding Debentures on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Debentures are being defeased to maturity or to a particular redemption date of such principal or installment of principal, premium, if any, or interest; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such non-callable Government Securities to said payments with respect to the Debentures; (2) In the case of an election under Section 8.02, either (i) (A) the Debentures will become due and payable at their stated maturity within one year after the date of such election pursuant to Section 8.02 or, within one year after the date of such election, the Debentures will be redeemable at the option of the Company and will be redeemed by the Company pursuant to irrevocable instructions issued to the Trustee at the time of such election for the giving of a notice of redemption by the Trustee for such redemption and (B) the Company shall have delivered to the Trustee an Opinion of Counsel in the United States 83 reasonably satisfactory to the Trustee to the effect that the Holders of the outstanding Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to Federal income tax in the same amount, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred or (ii) the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably satisfactory to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date hereof, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the outstanding Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance has not occurred; (3) In the case of an election under Section 8.03, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably satisfactory to the Trustee to the effect that the Holders of the outstanding Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to Federal income tax in the same amount, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (4) No Default or Event of Default with respect to the Debentures shall have occurred and be continuing on the date of such deposit or, in so far as Section 6.01(viii) or (ix) is concerned, at any time in the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period); (5) Such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (6) In the case of an election under either Section 8.02 or 8.03, the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit made by the Company pursuant to its election under Section 8.02 or 8.03 was not made by the Company with the intent of preferring the Holders 84 over other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (7) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel in the United States, each stating that all conditions precedent provided for relating to either the Legal Defeasance under Section 8.02 or the Covenant Defeasance under Section 8.03 (as the case may be) have been complied with as contemplated by this Section 8.04. Section 8.05 Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions Subject to Section 8.06, all money and Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 in respect of the outstanding Debentures shall be held in trust and applied by the Trustee, in accordance with the provisions of such Debentures and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Debentures of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or Government Securities deposited pursuant to Section 8.04 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Debentures. Anything in this Article Eight to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the request of the Company any money or Government Securities held by it as provided in Section 8.04 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(1)), are in excess of the amount thereof which would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. Section 8.06 Repayment to the Company Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Debenture and remaining unclaimed for two years after such principal, and premium, 85 if any, or interest has become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Debenture shall thereafter, as a creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. Section 8.07 Reinstatement If the Trustee or Paying Agent is unable to apply any United States Dollars or Government Securities in accordance with Section 8.02 or 8.03, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Debentures shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03 until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 or 8.03, as the case may be; provided, however, that, if the Company makes any payment of principal of, premium, if any, or interest on any Debenture following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Debentures to receive such payment from the money held by the Trustee or Paying Agent and provided further that if such order or judgment is issued in connection with the insolvency, receivership or other similar occurrence with respect to the Trustee, upon the reinstatement of such obligations the Company shall be released from its obligations under Sections 4.03, 4.04, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.14 and 4.15 and Article 5. ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER Section 9.01 Without Consent of Holders Notwithstanding Section 9.02 of this Indenture, the Company and the Trustee may amend or supplement this Indenture or the Debentures without the consent of any Holder of a Debenture: (a) to cure any ambiguity, defect or inconsistency; 86 (b) to provide for uncertificated Debentures in addition to or in place of certificated Debentures; (c) to provide for the assumption of the Company's obligations to the Holders of the Debentures in the case of a merger or consolidation pursuant to Article Five hereof; (d) to provide for additional Subsidiary Guarantors as set forth in Section 4.15; (e) to make any change that would provide any additional rights or benefits to the Holders of the Debentures or that does not adversely affect the legal rights hereunder of any Holder of the Debenture; or (f) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA. Upon the request of the Company, accompanied by a resolution of its Board of Directors authorizing the execution of any such supplemental indenture, and upon receipt by the Trustee of the documents described in Section 9.06 hereof, the Trustee shall join with the Company in the execution of any supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations which may be therein contained, but the Trustee shall not be obligated to enter into such supplemental indenture which affects its own rights, duties or immunities under this Indenture or otherwise. For purposes of Section 9.01(e), any amendment or supplement which extends the period of time during which the Debentures may not be redeemed at the option of the Company shall not be deemed to adversely affect the legal rights under the Indenture of any holders. Section 9.02 With Consent of Holders The Company and the Trustee may amend or supplement this Indenture or the Debentures with the written consent of the Holders of at least a majority in principal amount of the then outstanding Debentures (including consents obtained in connection with a tender offer or exchange offer for the Debentures) and any existing Default (including, without limitation, an acceleration of the Debentures) or compliance with any provision of this Indenture or the Debentures may be waived with the written consent of the Holders of at least a majority in principal amount of the then outstanding Debentures (including consents obtained in connection with a tender offer or exchange offer for the Debentures). 87 Upon the request of the Company, accompanied by a resolution of its Board of Directors authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders as aforesaid, and upon receipt by the Trustee of the documents described in Section 9.06 hereof, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After a supplement, amendment or waiver under this Section becomes effective, the Company shall mail to the Holders of each Debenture affected thereby a notice briefly describing the supplement, amendment or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture, amendment or waiver. Subject to Sections 6.04(1) and 6.07 hereof, the Holders of a majority in principal amount of the Debentures then outstanding may waive compliance in a particular instance by the Company with any provision of this Indenture or the Debentures. However, without the consent of each Holder affected, a supplement, amendment or waiver under this Section may not (with respect to any Debentures held by a non-consenting Holder): (1) reduce the principal amount of Debentures whose Holders must consent to an amendment, supplement or waiver; (2) reduce the principal of or change the fixed maturity of any Debenture or alter the provisions with respect to redemption of the Debentures other than pursuant to Sections 4.06 and 4.07 hereof; (3) reduce the rate of or change the time for payment of interest, including default interest, or Additional Interest on any Debenture; (4) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest or Additional Interest on any Debenture (except a recision of acceleration of the Debentures by the Holders of at least a majority in aggregate principal amount of the Debentures and a waiver of the payment default that resulted from such acceleration); 88 (5) make any Debenture payable in money other than that stated in the Debenture; (6) make any change in Section 6.04(1) or 6.07 hereof or in this sentence of this Section 9.02 or the rights of Holders of Debentures to receive payments of principal of or premium, if any, or interest or Additional Interest on the Debentures; (7) waive a redemption payment with respect to any Debenture (other than a payment required by the provisions of Sections 4.06 or 4.07 hereof); or (8) make any change in the foregoing amendment and waiver provisions. Section 9.03 Compliance with Trust Indenture Act Every amendment to this Indenture or the Debentures shall be set forth in a supplemental indenture that complies with the TIA as then in effect. Section 9.04 Revocation and Effect of Consents Until a supplement, amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder or portion of a Debenture that evidences the same debt as the consenting Holder's Debenture, even if notation of the consent is not made on any Debenture. However, any such Holder or subsequent Holder may revoke the consent as to its Debenture if the Trustee receives written notice of revocation before the date the waiver or amendment becomes effective. An amendment or waiver becomes effective in accordance with its terms and thereafter binds every Holder. The Company may fix a record date for determining which Holders must consent to such amendment or waiver. If the Company fixes a record date, the record date shall be fixed at (i) the later of 30 days prior to the first solicitation of such consent or the date of the most recent list of Holders furnished to the Trustee prior to such solicitation pursuant to Section 2.05, or (ii) such other date as the Company shall designate. Section 9.05 Notation on or Exchange of Debentures The Trustee may place an appropriate notation about a supplement, amendment or waiver on any Debenture thereafter authenticated. The Company in exchange for all Debentures may issue and the Trustee shall authenticate new Debentures that reflect the supplement, amendment or waiver. 89 Failure to make the appropriate notation or issue a new Debenture shall not affect the validity and effect of such supplement, amendment or waiver. Section 9.06 Trustee to Sign Amendments, etc. The Trustee shall sign any amendment or supplemental indenture authorized pursuant to this Article 9 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing or refusing to sign such amendment or supplemental indenture, the Trustee shall be entitled to receive, if requested, an indemnity reasonably satisfactory to it and to receive and, subject to Section 7.01, shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel as conclusive evidence that such amendment or supplemental indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company in accordance with its terms. The Company may not sign an amendment or supplemental indenture until the Board of Directors approves it. ARTICLE 10 SUBSIDIARY GUARANTEES Section 10.01 Subsidiary Guarantees Subject to the provisions of this Article 10, each Subsidiary Guarantor, jointly and severally, hereby unconditionally guarantees to each Holder of a Debenture authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, that: (a) the principal of, and premium, if any, and interest on the Debentures shall be duly and punctually paid in full when due, whether at maturity, by acceleration or otherwise, and interest on overdue principal, and premium, if any, and (to the extent permitted by law) interest on any interest, if any, on the Debentures and all other obligations of the Company to the Holders or the Trustee hereunder or under the Debentures (including fees, expenses or other) shall be promptly paid in full or performed, all in accordance with the terms hereof; and (b) in case of any extension of time of payment or renewal of any Debentures or any of such other obligations, the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or failing performance of any other obligation of the Company to the Holders, for whatever reason, each Subsidiary Guarantor shall be obligated to pay, or to perform or to cause the performance of, the same immediately. An Event of Default under this Indenture or the Debentures shall constitute an event of default under this Subsidiary Guarantee, and shall entitle the Trustee or the Holders of Debentures to accelerate the obligations of each Subsidiary 90 Guarantor hereunder in the same manner and to the same extent as the obligations of the Company. Each Subsidiary Guarantor hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Debentures or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Debentures with respect to any thereof, the entry of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Guarantor. Each Subsidiary Guarantor hereby waives and relinquishes: (a) any right to require the Trustee, the Holders or the Company (each, a "Benefitted Party") to proceed against the Company, the Subsidiaries or any other Person or to proceed against or exhaust any security held by a Benefitted Party at any time or to pursue any other remedy in any secured party's power before proceeding against the Subsidiary Guarantors; (b) any defense that may arise by reason of the incapacity, lack of authority, death or disability of any other Person or Persons or the failure of a Benefitted Party to file or enforce a claim against the estate (in administration, bankruptcy or any other proceeding) of any other Person or Persons; (c) demand, protest and notice of any kind (except as expressly required by this Indenture), including but not limited to notice of the existence, creation or incurring of any new or additional Indebtedness or obligation or of any action or non-action on the part of the Subsidiary Guarantors, the Company, the Subsidiaries, any Benefitted Party, any creditor of the Subsidiary Guarantors, the Company or the Subsidiaries or on the part of any other Person whomsoever in connection with any obligations the performance of which are hereby guaranteed; (d) any defense based upon an election of remedies by a Benefitted Party, including but not limited to an election to proceed against the Subsidiary Guarantors for reimbursement; (e) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (f) any defense arising because of a Benefitted Party's election, in any proceeding instituted under the Bankruptcy Law, of the application of Section 1111(b)(2) of the Bankruptcy Code; and (g) any defense based on any borrowing or grant of a security interest under Section 364 of the Bankruptcy Code. The Subsidiary Guarantors hereby covenant that the Subsidiary Guarantees shall not be discharged except by payment in full of all principal, premium, if any, and interest on the Debentures and all other costs provided for under this Indenture, or as provided in Section 8.01. If any Holder or the Trustee is required by any court or otherwise to return to either the Company or the Subsidiary Guarantors, or any trustee or similar official acting in relation to either the Company or the Subsidiary Guarantors, any amount paid by the Company or the Subsidiary Guarantors to the Trustee or such Holder, the Subsidiary Guarantees, to the extent theretofore discharged, shall be reinstated in full force and effect. Each of the Subsidiary Guarantors agrees that it shall not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. Each Subsidiary Guarantor 91 agrees that, as between it, on the one hand, and the Holders of Debentures and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 6 hereof for the purposes hereof, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any acceleration of such obligations as provided in Article 6 hereof, such obligations (whether or not due and payable) shall forthwith become due and payable by such Subsidiary Guarantor for the purpose of the Subsidiary Guarantee. Section 10.02 Execution and Delivery of Subsidiary Guarantees To evidence the Subsidiary Guarantees set forth in Section 10.01 hereof, each of the Subsidiary Guarantors agrees that a notation of the Subsidiary Guarantees substantially in the form included in Exhibit A-1 hereto shall be endorsed on each Debenture authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of the Subsidiary Guarantors by the Chairman of the Board, any Vice Chairman, the President or one of the Vice Presidents or Manager-Members, as applicable, of the Subsidiary Guarantors, under a facsimile of its seal reproduced on this Indenture and attested to by an Officer other than the Officer executing this Indenture. Each of the Subsidiary Guarantors agree that the Subsidiary Guarantees set forth in this Article 10 will remain in full force and effect and apply to all the Debentures notwithstanding any failure to endorse on each Debenture a notation of the Subsidiary Guarantees. If an Officer whose facsimile signature is on a Debenture no longer holds that office at the time the Trustee authenticates the Debenture on which the Subsidiary Guarantees are endorsed, the Subsidiary Guarantees shall be valid nevertheless. The delivery of any Debenture by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Subsidiary Guarantees set forth in this Indenture on behalf of the Subsidiary Guarantors. Section 10.03 Subsidiary Guarantors May Consolidate, etc., on Certain Terms (a) Nothing contained in this Indenture or in the Debentures shall prevent any consolidation or merger of a Subsidiary Guarantor with or into the Company or another Subsidiary Guarantor, or shall prevent the transfer of all or substantially all of the assets of a Subsidiary Guarantor to the Company or another Subsidiary Guarantor. Upon any such consolidation, merger, transfer or sale, the Subsidiary Guarantee of such Subsidiary Guarantor shall no longer have any force or effect. 92 (b) Each Subsidiary Guarantor shall not, in a single transaction or series of related transactions, consolidate or merge with or into (whether or not such Subsidiary Guarantor is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity other than the Company or another Subsidiary Guarantor unless (i) subject to the provisions of Section 10.04 hereof, the entity or Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of such Subsidiary Guarantor under its Guarantee and this Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (ii) immediately after such transaction no Default or Event of Default exists; (iii) such Subsidiary Guarantor or the entity or Person formed by or surviving any such consolidation or merger (if other than Subsidiary Guarantor), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (A) shall have Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of such Subsidiary Guarantor immediately preceding the transaction and (B) shall, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four- quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.10; and (iv) such Subsidiary Guarantor shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel addressed to the Trustee, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or disposition and such supplemental indenture, if any, comply with this Indenture and that such supplemental indenture is enforceable. In case of any such consolidation, merger or transfer of assets and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the Subsidiary Guarantees endorsed upon the Debentures and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by such Guarantor, such successor corporation shall succeed to and be substituted for such Subsidiary Guarantor with the same effect as if it had been named herein as a Subsidiary Guarantor. Such successor corporation thereupon may cause to be signed any or all of the Subsidiary Guarantees to be endorsed upon all of the Debentures issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All the Subsidiary Guarantees so issued shall in all respects have the same legal rank and benefit under this Indenture as the Subsidiary Guarantees theretofore and thereafter issued in accordance with the terms of this Indenture as though all of such Subsidiary Guarantees had been issued at the date of the execution hereof. (c) The Trustee, subject to the provisions of Section 10.04 hereof, shall be entitled to receive an Officers' Certificate and an Opinion of Counsel as conclusive 93 evidence that any such consolidation, merger, sale or conveyance, and any such assumption of Obligations, comply with the provisions of this Section 10.03. Such Officers' Certificate and Opinion of Counsel shall comply with the provisions of Section 12.05. Section 10.04 Releases Following Sale of Assets In the event of a sale or other disposition of all or substantially all of the assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all (or substantially all) of the Capital Stock of any Subsidiary Guarantor, which sale or other disposition otherwise complies with the terms of this Indenture, then such Subsidiary Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all or substantially all of the Capital Stock of such Subsidiary Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all or substantially all of the assets of such Subsidiary Guarantor) shall be released from and relieved of any obligations under its Subsidiary Guarantee; provided that the Net Proceeds from such sale or other disposition are treated in accordance with the provisions of Section 4.08 hereof. Upon delivery by the Company to the Trustee of an Officer's Certificate and Opinion of Counsel, to the effect that such sale or other disposition was made by the Company in accordance with the provisions of this Indenture, including without limitation Section 4.08 hereof, the Trustee shall execute any documents reasonably required in order to evidence the release of any such Subsidiary Guarantor from its obligations under its Subsidiary Guarantee. Any Subsidiary Guarantor not released from its obligations under its Subsidiary Guarantee shall remain liable for the full amount of principal of and interest on the Debentures and for the other obligations of any Subsidiary Guarantor under this Indenture as provided in this Article 10. Section 10.05 Limitation of Subsidiary Guarantor's Liability Each Subsidiary Guarantor, and by its acceptance hereof each Holder, hereby confirms that it is the intention of all such parties that the guarantee by such Subsidiary Guarantor pursuant to its Subsidiary Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law. To effectuate the foregoing intention, the Holders and such Subsidiary Guarantor hereby irrevocably agree that the obligations of such Subsidiary Guarantor under this Article 10 shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under this Article 10, result in the 94 obligations of such Subsidiary Guarantor under the Subsidiary Guarantee of such Subsidiary Guarantor not constituting a fraudulent transfer or conveyance. Section 10.06 Application of Certain Terms and Provisions to the Subsidiary Guarantors (a) For purposes of any provision of this Indenture which provides for the delivery by any Subsidiary Guarantor of an Officers' Certificate and/or an Opinion of Counsel, the definitions of such terms in Section 1.01 shall apply to such Subsidiary Guarantor as if references therein to the Company were references to such Subsidiary Guarantor. (b) Any request, direction, order or demand which by any provision of this Indenture is to be made by any Guarantor, shall be sufficient if evidenced as described in Section 12.02 as if references therein to the Company were references to such Subsidiary Guarantor. (c) Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Debentures to or on any Subsidiary Guarantor may be given or served as described in Section 12.02 as if references therein to the Company were references to such Subsidiary Guarantor. (d) Upon any demand, request or application by any Subsidiary Guarantor to the Trustee to take any action under this Indenture, such Subsidiary Guarantor shall furnish to the Trustee such certificates and opinions as are required in Section 12.04 hereof as if all references therein to the Company were references to such Subsidiary Guarantor. ARTICLE 11 SUBORDINATION Notwithstanding anything in this Article 11 to the contrary, from the Issue Date until the Remarketing Settlement Date, this Article 11 shall not apply to the Debentures and shall have no effect. Section 11.01 Agreement to Subordinate The Company agrees, and each Holder by accepting a Debenture agrees, that after the Remarketing Settlement Date the Indebtedness evidenced by the Debenture will be subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Senior Debt (whether outstanding on the date 95 thereof or thereafter created, incurred, assumed or guaranteed), and that the subordination is for the benefit of the holders of Senior Debt. Section 11.02 Liquidation; Dissolution; Bankruptcy After the Remarketing Settlement Date, upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, in an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities: (1) holders of Senior Debt shall be entitled to receive payment in full of all Obligations due in respect of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt) before Holders shall be entitled to receive any payment with respect to the Debentures (except that Holders may receive (i) Permitted Junior Securities and (ii) payments and other distributions made from any defeasance trust created pursuant to Section 8.01 hereof); and (2) until all Obligations with respect to Senior Debt (as provided in subsection (1) above) are paid in full, any distribution to which Holders would be entitled but for this Article shall be made to holders of Senior Debt (except that Holders may receive (i) Permitted Junior Securities and (ii) payments and other distributions made from any defeasance trust created pursuant to Section [8.01] hereof), as their interests may appear. Section 11.03 Default on Designated Senior Debt After the Remarketing Settlement Date, the Company may not make any payment or distribution to the Trustee or any Holder in respect of Obligations with respect to the Debentures and may not acquire from the Trustee or any Holder any Debentures for cash or property (other than (i) Permitted Junior Securities and (ii) payments and other distributions made from any defeasance trust created pursuant to Section 8.01 hereof) until all principal and other Obligations with respect to the Senior Debt have been paid in full if: (i) a default in the payment of any principal or other Obligations with respect to Designated Senior Debt occurs and is continuing beyond any applicable grace period in the agreement, indenture or other document governing such Designated Senior Debt; or 96 (ii) a default, other than a payment default, on Designated Senior Debt occurs and is continuing that then permits holders of the Designated Senior Debt to accelerate its maturity and the Trustee receives a notice of the default (a "Payment Blockage Notice") from a Person who may give it pursuant to Section 11.11 hereof. If the Trustee receives any such Payment Blockage Notice, no subsequent Payment Blockage Notice shall be effective for purposes of this Section unless and until (i) at least 360 days shall have elapsed since the effectiveness of the immediately prior Payment Blockage Notice and (ii) all scheduled payments of principal, premium, if any, and interest on the Debentures that have come due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. The Company may and shall resume payments on and distributions in respect of the Debentures and may acquire them upon the earlier of: (1) the date upon which the default is cured or waived, or (2) in the case of a default referred to in Section 11.03(ii) hereof, 179 days pass after notice is received if the maturity of such Designated Senior Debt has not been accelerated, if this Article otherwise permits the payment, distribution or acquisition at the time of such payment or acquisition. Section 11.04 Acceleration of Debentures After the Remarketing Settlement Date, if payment of the Debentures is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Debt of the acceleration. Section 11.05 When Distribution Must Be Paid Over After the Remarketing Settlement Date, in the event that the Trustee or any Holder receives any payment of any Obligations with respect to the Debentures at a time when the Trustee or such Holder, as applicable, has actual knowledge that such payment is prohibited by Section 11.03 hereof, such payment shall be held by the Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Debt as their interests may appear or their Representative under the indenture or other agreement (if any) pursuant to which Senior Debt may have been issued, as their respective interests may appear, for application to 97 the payment of all Obligations with respect to Senior Debt remaining unpaid to the extent necessary to pay such Obligations in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. With respect to the holders of Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 11, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders or the Company or any other Person money or assets to which any holders of Senior Debt shall be entitled by virtue of this Article 11, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. Section 11.06 Notice by Company After the Remarketing Settlement Date, the Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of any Obligations with respect to the Debentures to violate this Article, but failure to give such notice shall not affect the subordination of the Debentures to the Senior Debt as provided in this Article. Section 11.09 Subrogation After all Senior Debt is paid in full and until the Debentures are paid in full, Holders shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Debentures) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Debt. A distribution made under this Article to holders of Senior Debt that otherwise would have been made to Holders is not, as between the Company and Holders, a payment by the Company on the Debentures. Section 11.08 Relative Rights This Article defines the relative rights of Holders and holders of Senior Debt. Nothing in this Indenture shall: (1) impair, as between the Company and Holders, the obligation of the Company, which is absolute and unconditional, to pay principal of and interest on the Debentures in accordance with their terms; 98 (2) affect the relative rights of Holders and creditors of the Company other than their rights in relation to holders of Senior Debt; or (3) prevent the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Debt to receive distributions and payments otherwise payable to Holders. If the Company fails because of this Article to pay principal of or interest on a Debenture on the due date, the failure is still a Default or Event of Default. Section 11.09 Subordination May Not Be Impaired by Company No right of any holder of Senior Debt to enforce the subordination of the Indebtedness evidenced by the Debentures shall be impaired by any act or failure to act by the Company or any Holder or by the failure of the Company or any Holder to comply with this Indenture. Section 11.10 Distribution or Notice to Representative Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their Representative. Upon any payment or distribution of assets of the Company referred to in this Article 11, the Trustee and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 11. Section 11.11 Rights of Trustee and Paying Agent Notwithstanding the provisions of this Article 11 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Debentures, unless the Trustee shall have received at its Corporate Trust Office at least five Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Debentures to violate this Article. Only 99 the Company or a Representative may give the notice. Nothing in this Article 11 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. Section 11.12 Authorization to Effect Subordination Each Holder of a Debenture by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 11, and appoints the Trustee to act as the Holder's attorney-in- fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in Section 6.09 hereof at least 30 days before the expiration of the time to file such claim, the Representatives of the Designated Senior Debt are hereby authorized to file an appropriate claim for and on behalf of the Holders of the Debentures. Section 11.14 Amendments The provisions of this Article 11 shall not be amended or modified in a manner materially adverse to the interest of the holders of Senior Debt without the written consent of the holders of all Designated Senior Debt. ARTICLE 12 MISCELLANEOUS Section 12.01 Trust Indenture Act Controls If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA (S)318(c), the duties imposed by TIA (S) 318(c) shall control. Section 12.02 Notices Any notice or communication by the Company, any Subsidiary Guarantor or the Trustee to the other is duly given if in writing and delivered in Person or mailed by first-class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the other's address: 100 If to the Company or a Subsidiary Guarantor: Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard Building 1, Suite 210 Torrance, CA 90505 Attention: General Counsel Telecopier No.: (310) 791-8230 If to the Trustee: Chase Trust Company of California 101 California Street Suite 2725 San Francisco, CA 94111 Attention: Corporate Trust Department Telecopier No.: (415) 693-8850 The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first-class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA (S) 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. 101 Section 12.03 Communication by Holders with Other Holders Holders may communicate pursuant to TIA (S) 312(b) with other Holders with respect to their rights under this Indenture or the Debentures. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA (S) 312(c). Section 12.04 Certificate and Opinion as to Conditions Precedent Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 12.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 12.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been complied with. Section 12.05 Statements Required in Certificate or Opinion Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA (S) 314(a)(4)) shall include: (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with. 102 Section 12.06 Rules by Trustee and Agents The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. Section 12.07 Legal Holidays A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions in The City of New York or at a place of payment are authorized or obligated by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 12.08 No Recourse Against Others No director, officer, manager, member, organizer, employee, incorporator or shareholder of the Company or any Subsidiary Guarantor, as such, shall have any liability for any Obligations of the Company or any Subsidiary Guarantor under the Debentures, this Indenture or any Subsidiary Guarantee or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting a Debenture waives and releases all such liability. This waiver and release are part of the consideration for issuance of the Debentures. Section 12.09 Duplicate Originals The parties may sign any number of copies of this Indenture. One signed copy is enough to prove this Indenture. Section 12.10 Governing Law The internal law of the State of New York shall govern and be used to construe this Indenture and the Debentures (without regard to conflicts of law provisions). Each party hereto irrevocably submits itself to the non-exclusive jurisdiction of the state and federal courts of New York for purposes of this Indenture and agrees and consents that service of process may be made upon it in any legal proceeding relating to this Indenture by any means allowed under federal or New York law. The parties hereto hereby waive and agree not to assert, by way of motion, as a defense or otherwise, that any such proceeding is brought in an inconvenient forum or that the venue thereof is improper. 103 Section 12.11 No Adverse Interpretation of Other Agreements This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 12.12 Successors All agreements of the Company in this Indenture, and the Debentures shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successor. Section 12.13 Severability In case any provision in this Indenture or the Debentures shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 12.14 Counterpart Originals The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. Section 12.15 Table of Contents, Headings, etc. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. SIGNATURES IMPERIAL CREDIT INDUSTRIES, INC. By: /s/ H. Wayne Snavely ---------------------------------------------------- Name: H. Wayne Snavely Title: Chairman Dated as of June 9, 1997 Attest:____________________ IMPERIAL BUSINESS CREDIT, INC. By: /s/ H. Wayne Snavely Name: H. Wayne Snavely Title: Chairman Dated as of June 9, 1997 Attest:____________________ IMPERIAL CREDIT ADVISORS, INC. By: /s/ H. Wayne Snavely ---------------------------------------------------- Name: H. Wayne Snavely Title: Chairman Dated as of June 9, 1997 Attest:____________________ FRANCHISE MORTGAGE ACCEPTANCE CO. LLC By: /s/ H. Wayne Snavely ---------------------------------------------------- Name: H. Wayne Snavely Title: Chairman Dated as of June 9, 1997 Attest:____________________ AUTO MARKETING NETWORK, INC. By: /s/ H. Wayne Snavely ---------------------------------------------------- Name: H. Wayne Snavely Title: Chairman Dated as of June 9, 1997 Attest:____________________ IMPERIAL CREDIT CAPITAL TRUST I By: /s/ H. Wayne Snavely ---------------------------------------------------- Name: H. Wayne Snavely Title: Chairman Dated as of June 9, 1997 Attest:____________________ CHASE TRUST COMPANY OF CALIFORNIA, as Trustee By: /s/ Hans H. Helley ---------------------------------------------------- Name: Hans H. Helley Title: Assistant Vice President Dated as of: June 9, 1997 Attest:______________________ (Face of Security) Resettable Rate Debentures, Series A No. 1 $72,165,000 CUSIP No. 452729 AE6 IMPERIAL CREDIT INDUSTRIES, INC. promises to pay to Chase Trust Company of California or registered assigns, the principal sum of Seventy-Two Million One Hundred Sixty-Five Thousand Dollars on June 15, 2032, or earlier in certain circumstances as described on the reverse hereof Interest Payment Dates: June 15 (June 14 in 2002) and December 15, commencing December 15, 1997, and on each Scheduled Remarketing Settlement Date Record Dates: June 1 and December 1 (whether or not a Business Day) IMPERIAL CREDIT INDUSTRIES, INC. By: -------------------------------------- Name: Title: By: -------------------------------------- Name: Title: TRUSTEE CERTIFICATE OF AUTHENTICATION Dated: June ___, 1997 This is one of the Debentures referred to in the within-mentioned Indenture CHASE TRUST COMPANY OF CALIFORNIA, as Trustee By: ---------------------------------- (Authorized Signature) A1-2 (Back of Security) Resettable Rate Debentures, Series A Unless and until it is exchanged, after the Remarketeing Settlement Date, in whole or in part for Debentures in definitive form, this Debenture may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. A1-3 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. Interest. Imperial Credit Industries, Inc., a California corporation (the "Company"), promises to pay interest on the principal amount of this Debenture at the rate and in the manner specified below and shall pay the Additional Interest, if any, payable pursuant to Section 5 of the Registration Rights Agreement referred to below. Interest on the Debentures will be payable semi-annually in arrears on each June 15 (June 14 in 2002) and December 15, commencing on December 15, 1997, and on each Scheduled Remarketing Settlement Date (each an "Interest Payment Date"), to Holders of record on the immediately preceding June 1 and December 1, respectively. If any such Interest Payment Date is not a Business Day, then payment of the interest payable on such date shall be made on the next succeeding Business Day (and without any additional interest or other payment in respect of any such delay), except that, if, such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such payment was originally payable. Interest will be computed (i) for any full 180-day semi-annual interest payment period, on the basis of a 360-day year of twelve 30-day months and (ii) for any period shorter than a full 180-day semi-annual interest payment period for which interest payments are computed, on the basis of 30-day months and for periods of less than a month, the actual number of days elapsed per 30-day month. Interest on the Debentures will accrue from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from the date of original issuance of the Debentures. To the extent lawful, the Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the applicable interest rate on the Debentures; it shall pay interest on overdue installments of interest (without regard to applicable grace periods) at the same rate, to the extent lawful, (i) if payment is made during the period of five Business Days following the date on which such interest was due, to the Persons who were to receive payment on the date such interest was due or (ii) if payment is made after such period, to the Persons who are Holders on a subsequent special record date, which date shall be at the earliest practicable date but in all events at least five Business Days prior to the payment date. From the Issue Date to but excluding the Remarketing Settlement Date, the "Applicable Interest Rate" will be 10 1/4% per annum (the "Initial Interest Rate"). From and after the Remarketing Settlement Date to but excluding the date of redemption of the Debentures, the Applicable Interest Rate will equal the Adjusted Distribution Rate (or, if a Dissolution Event occurs prior to a Scheduled Remarketing Date, the Adjusted Interest Rate) that results from the Remarketing consummated on the Remarketing Settlement Date. Following the Remarketing Settlement Date, as long as no Event of Default has occurred and is continuing, the Company shall have the right, at any time during the term of the Debentures, from time to time, to defer payment of interest on such Debentures, for a period not to exceed to 10 consecutive semi- annual periods (an "Extension A1-4 Period"); provided, that no Extension Period may extend beyond the Stated Maturity of the Debentures. There may be multiple Extension Periods of varying lengths during the term of the Debentures. At the end of each Extension Period, if any, the Company shall pay all interest and Additional Interest then accrued and unpaid, together with interest thereon, compounded semi-annually at the Applicable Interest Rate in effect at the beginning of such Extension Period, to the extent permitted by applicable law. During any such Extension Period, the Company may not, and may not permit any Subsidiary of the Company to, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank on a parity with or junior in interest to the Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any Subsidiary of the Company if such guarantee ranks on a parity or junior in interest to the Debentures (other than (a) dividends or distributions in common stock of the Company, (b) payments under the Company Guarantee, (c) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (d) purchases of common stock related to the issuance of common stock or rights under any of the Company's benefit plans). Prior to the termination of any such Extension Period, the Company may further extend the interest payment period, provided that no Extension Period may exceed 10 consecutive semi-annual periods or extend beyond the Stated Maturity of the Debentures. Upon the termination of any such Extension Period and the payment of all amounts then due on any Interest Payment Date, the Company may elect to begin a new Extension Period subject to the above requirements. No interest shall be due and payable during an Extension Period, except at the end thereof. The Company shall give the Property Trustee, the Regular Trustees and the Trustee written notice of its election of such Extension Period not less than one Business Day prior to the record date for the related interest payment. The Property Trustee shall promptly give notice of the Company's election of such Extension Period to the holders of the Securities. 2. Maturity Advancement; Tax Event Redemption. If a Tax Event shall occur and be continuing and in the opinion of independent tax counsel to the Trust experienced in such matters, there would in all cases, after effecting the termination of the Trust and the distribution of the Debentures to the holders of the Trust Securities in exchange therefor upon liquidation of the Trust, be more than an insubstantial risk that the Tax Event would continue to exist, then the Company will have the right (a) to shorten the Stated Maturity of the Debentures to a date not earlier than June 14, 2012 (a "Maturity Advancement") such that, in the opinion of such independent tax counsel, after advancing the Stated Maturity of the Debentures, interest paid on the Debentures will be deductible by the Company for United States federal income tax purposes or (b) after the Scheduled Remarketing Date, to redeem the Debentures, in whole but not in part, at any time within 90 days following the occurrence of a Tax Event at a redemption price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest and Additional Interest to the date of redemption. A1-5 3. Method of Payment. The Company will pay interest on the Debentures (except defaulted interest) and Additional Interest, if any, to the Persons who are registered Holders of Debentures at the close of business on the record date next preceding the Interest Payment Date, even if such Debentures are cancelled after such record date and on or before such Interest Payment Date. Principal, premium, if any, interest and Additional Interest, if any, on the Debentures will be payable at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, payment of interest and Additional Interest, if any, may be made by check mailed to the Holders of the Debentures at their respective addresses set forth in the register of Holders of Debentures; provided that all payments with respect to Debentures the Holders of which have given wire transfer instructions to the Company and the Trustee will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. The Company will pay principal, premium, if any, and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. 4. Paying Agent and Registrar. Initially the Trustee under the Indenture will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. 5. Indenture. The Company issued the Debentures under an Indenture dated as of June 9, 1997 ("Indenture") among the Company, the Subsidiary Guarantors and the Trustee. The terms of the Debentures include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code (S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture. The Debentures are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The terms of the Indenture shall govern any inconsistencies between the Indenture and the Debentures. Terms not otherwise defined herein shall have the meanings assigned in the Indenture. The Debentures are general unsecured obligations of the Company limited to $72,165,000 in aggregate principal amount. 6. Optional Redemption. The Debentures are redeemable at the option of the Company, in whole or in part, at any time or from time to time through and including June 15, 2001 at a redemption price (the "Initial Optional Redemption Price") equal to the greater of (i) 100% of the principal amount of such Debentures and (ii) as determined by a Quotation Agent, the sum of the present values of the principal amount of such Debentures as if redeemed on June 14, 2002, together with scheduled prepayments of interest from the prepayment date to but excluding June 14, 2002, discounted to the prepayment date on a semi- annual basis (assuming a 360-day year consisting of 30-day months) at the Adjusted Treasury Rate, plus, in each case, accrued and unpaid interest and Additional Interest, if any, to the date of redemption. On and after June 15, 2012, the Debentures are redeemable prior to maturity at the option of the Company, in whole or in part, at any time at the redemption prices described in the next sentence, plus accrued and unpaid interest and Additional Interest, if any, to the date of redemption. The redemption price (expressed as a percentage of principal amount) shall be equal to 100% plus the product of (x) the Adjusted A1-6 Distribution Rate and (y) the applicable Factor if redeemed during the twelve- month period beginning on June 15th of the years indicated below, the applicable "Factor" shall equal:
YEAR % - ---- --- 2012....................................... 50 2013....................................... 45 2014....................................... 40 2015....................................... 35 2016....................................... 30 2017....................................... 25 2018....................................... 20 2019....................................... 15 2020....................................... 10 2021....................................... 5
On and after June 15, 2022, the redemption price will be 100% of the principal amount of the Debentures to be redeemed, plus accrued and unpaid interest and Additional Interest, if any, to the date of redemption. 7. Special Mandatory Redemption. If, by 4:00 P.M., New York City time, on any Scheduled Remarketing Date, the Remarketing Agent is unable to remarket, at a price of $1,000 per Security, all of the Securities tendered or deemed tendered for purchase in the Remarketing on such Scheduled Remarketing Date, then (i) such unsold Securities shall be exchanged on the related Scheduled Remarketing Settlement Date with the Trust for Debentures having an aggregate principal amount equal to the aggregate liquidation amount of such unsold Securities and such Debentures shall be immediately redeemed, unless (ii) as a result of such redemption, less than $25,000,000 principal amount of Debentures would remain outstanding. In such latter event, the Company shall redeem on such Scheduled Remarketing Settlement Date all of the Debentures (thereby causing the Trust to redeem all of the outstanding Securities) and the Remarketing will be cancelled. In either case of (i) or (ii) above, the redemption price of the Debentures shall be 100% of the principal amount of the outstanding Debentures so redeemed. 8. Investment Company Event Redemption. If an Investment Company Event shall occur and be continuing, the Company has the option, after the Remarketing Settlement Date, to redeem the Debentures, in whole but not in part, at any time within 90 days following the occurrence of such Investment Company Event at a redemption price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest and Additional Interest, if any, to the date of redemption. A1-7 9. Tax Opinion Redemption. If the Company receives a Tax Opinion at least 35 business days prior to the Election Date, the Remarketing may be cancelled at the option of the Company, in which case the Debentures shall be redeemed by the Company on the Scheduled Remarketing Settlement Date, in whole but not in part, at a redemption price equal to 100% of the principal amount of such Debentures plus accrued and unpaid interest and Additional Interest thereon to such Scheduled Remarketing Settlement Date. 10. Transfer Restricted Security Redemption. If an Exchange Offer occurs under the Registration Rights Agreement, the Company will be required, on the Remarketing Settlement Date, to redeem, in whole (but not in part), certain Debentures which were not exchanged pursuant to the Exchange Offer (a "Transfer Restricted Security Redemption"). As part of a Transfer Restricted Security Redemption, on the Schedule Remarketing Settlement Date such Securities will be exchanged with the Trust for Debentures having an aggregate principal amount equal to the aggregate liquidation of such Securities and such Debentures shall immediately be redeemed by the Company at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest and Additional Interest, if any, to the date of redemption. 11. Remarketing. If the holders of Securities receive Debentures upon the liquidation or dissolution of the Trust, the Debentures will be subject to Remarketing procedures as set forth in the Indenture. 12. Change of Control. If there is a Change of Control, the Company shall be required to offer to purchase all or any part (equal to $1,000 or an integral multiple thereof) of each Holder's Debentures at a purchase price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. Holders of Debentures that are subject to an offer to purchase will receive an offer to purchase from the Company prior to any related purchase date, and may elect to have such Debentures purchased by completing the form entitled "Option of Holder to Elect Purchase" appearing below. If at the time of the Change of Control the Trust is the owner of all of the Debentures, the Trust shall make the Change of Control Offer for the Securities and the Company will repurchase the Debentures exchanged by the Trust for the Securities as set forth in the Declaration. 13. Asset Sale. If the Company consummates any Asset Sale, the Company will be required, under certain circumstances, to apply the Excess Proceeds thereof to an offer to all Holders of Debentures to purchase the maximum principal amount of Debentures that may be purchased out of the Excess Proceeds at an offer price in cash equal to 100% of the principal amount of the Debentures plus accrued and unpaid interest, if any, to the date of purchase, in accordance with the procedures set forth in the Indenture. Holders of Debentures that are subject to an offer to purchase will receive an offer to purchase from the Company prior to any related purchase date, and may elect to have such Debentures purchased by completing the form entitled "Option of Holder to Elect Purchase" appearing below. If at the time of the Asset Sale Offer the Trust is the owner of all of the Debentures, the Trust shall make the Asset Sale Offer for the Securities and the Company will repurchase the Debentures exchanged by the Trust for the Securities as set forth in the Declaration. A1-8 14. Denominations, Transfer, Exchange. The Debentures are in face denominations of $1,000 and integral multiples of $1,000. The Debentures may be transferred and exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Debenture or portion of a Debenture selected for redemption. 15. Persons Deemed Owners. Prior to due presentment to the Trustee for registration of the transfer of this Debenture, the Trustee, any Agent and the Company may deem and treat the Person in whose name this Debenture is registered as its absolute owner for the purpose of receiving payment of principal of and interest on this Debenture and for all other purposes whatsoever, whether or not this Debenture is overdue, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. The registered holder of a Debenture shall be treated as its owner for all purposes. 16. Amendment, Supplement and Waiver. Subject to certain exceptions, the Indenture and the Debentures may be amended or supplemented with the written consent of the Holders of at least a majority in principal amount of the then outstanding Debentures, and any existing Default (except a Default or Event of Default relating to the payment of principal, premium or interest) or compliance with any provision of the Indenture or the Debentures may be waived with the written consent of the Holders of at least a majority in principal amount of the then outstanding Debentures. Without the consent of any Holder, the Indenture or the Debentures may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Debentures in addition to or in place of certificated Debentures, to provide for the assumption of the Company's obligations to Holders of the Debentures in case of a merger or consolidation, to provide for additional Subsidiary Guarantors, to make any change that would provide any additional rights or benefits to the Holders of the Debentures or that does not materially adversely affect the legal rights of any such Holder under the Indenture, or to comply with the requirements of the Securities and Exchange Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. 17. Defaults and Remedies. On or prior to the Remarketing Settlement Date, Events of Default include: (i) a default for 30 days in the payment when due of interest on any Debenture; (ii) a default in payment when due of the principal of or premium, if any, on any Debenture; (iii) failure by the Company for 30 days to comply with any of Sections 4.06, 4.07, 4.08 or 4.09 of the Indenture; (iv) failure by the Company for 60 days after notice to comply with any of its other agreements in the Indenture or the Debentures; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of any grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the A1-9 acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $5,000,000 or more; (vi) failure by the Company or any of its Significant Subsidiaries to pay final judgments aggregating in excess of $5,000,000, which judgments are not paid, discharged or stayed for a period of 60 days; (vii) except as permitted by the Indenture or if, at the time thereof, any Subsidiary Guarantee of a Subsidiary Guarantor that is a Significant Subsidiary shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Subsidiary Guarantor that is a Significant Subsidiary, or any Person acting on behalf of any such Subsidiary Guarantor, shall deny or disaffirm, in writing, its obligation under its Subsidiary Guarantee; or (viii) certain events of bankruptcy or insolvency with respect to the Company or any Restricted Subsidiary. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Debentures may declare all the Debentures to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company or any Restricted Subsidiary, all outstanding Debentures will become due and payable without further action or notice. Holders may not enforce the Indenture or the Debentures except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Debentures. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Debentures may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Debentures notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal, premium or interest) if it determines that withholding notice is in their interest. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. After the Remarketing Settlement Date, only the events described in subparagraphs (i), (ii), (iv) and (viii) will constitute "Events of Default." 18. Ranking. Until the Remarketing Settlement Date, the Debentures will be general unsecured obligations of the Company ranking on a parity with all Indebtedness of the Company, if any, that is not subordinated to the Debentures and senior to any Indebtedness of the Company that is subordinated to the Debentures. Until the Remarketing Settlement Date, when the Subsidiary Guarantees will be released, the Subsidiary Guarantees will rank on a parity with all future Indebtedness of the Subsidiary Guarantors, if any, that is not subordinated to the Subsidiary Guarantees and senior to any Indebtedness of the Subsidiary Guarantors that is subordinated to the Subsidiary Guarantees. After the Remarketing Settlement Date, the Debentures will be subordinated and junior in right of payment to all Senior Debt (as defined in the Indenture) of the Company. After the Remarketing Settlement Date, the Indenture does not limit the incurrence or issuance of other secured or unsecured debt of the Company, whether under the Indenture or any existing or other indenture that the Company may enter into in the future or otherwise. A1-10 19. Trustee Dealings with the Company. Subject to the provisions of the Indenture, the Trustee in its individual or any other capacity may become the owner or pledgee of Debentures and may otherwise deal with the Company or an Affiliate with the same rights it would have if it were not Trustee. Subject to the provisions of Section 310(b) of the Trust Indenture Act, the Trustee shall be permitted to engage in transactions with the Company and its Subsidiaries other than those contemplated by the Indenture. 20. No Recourse Against Others. No director, officer, employee, incorporator, organizer, manager, member or shareholder of the Company or any Subsidiary Guarantor, as such, shall have any liability for any obligations of the Company or any Subsidiary Guarantor under the Debentures, the Indenture or any Subsidiary Guarantee or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Debentures, by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Debentures. 21. Authentication. This Debenture shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 22. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 23. Additional Rights of Holders of Transfer Restricted Securities. In addition to the rights provided to Holders of Debentures under the Indenture, Holders of Transferred Restricted Securities shall have all the rights set forth in the Registration Rights Agreement dated as of the date of the Indenture, between the Company and the parties named on the signature pages thereof (the "Registration Rights Agreement"). 24. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Debentures and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Debentures or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to: Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard Building 1, Suite 210 Torrance, CA 90505 A1-11 Attention: General Counsel Telecopier No.: (310) 791-8230 A1-12 SUBSIDIARY GUARANTEE The Subsidiary Guarantors listed below (hereinafter referred to as the "Subsidiary Guarantors," which term includes any successors or assigns under the Indenture (the "Indenture") and any additional Subsidiary Guarantors), have jointly and severally irrevocably and unconditionally guaranteed (i) the due and punctual payment of the principal of, premium, if any, and interest on the Resettable Rate Debentures, Series A (the "Debentures"), of Imperial Credit Industries, Inc., a California corporation (the "Company"), whether at stated maturity, by acceleration or otherwise, the due and punctual payment of interest on the overdue principal, and premium if any, and (to the extent permitted by law) interest on any interest, if any, on the Debentures, and the due and punctual performance of all other obligations of the Company, to the Holders or the Trustee all in accordance with the terms set forth in Article 10 of the Indenture, (ii) in case of any extension of time of payment or renewal of any Debentures or any such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise, and (iii) the payment of any and all costs and expenses (including reasonable attorneys' fees) incurred by the Trustee or any Holder in enforcing any rights under this Subsidiary Guarantee. The obligations of each Subsidiary Guarantor to the Holder and to the Trustee pursuant to this Subsidiary Guarantee and the Indenture are expressly set forth in Article 10 of the Indenture and reference is hereby made to such Indenture for the precise terms of this Guarantee. No shareholder, officer, director, manager, member, organizer or incorporator, as such, past, present or future of each Subsidiary Guarantor shall have any liability under this Subsidiary Guarantee by reason of his or its status as such shareholder, officer, director, member, manager, organizer or incorporator. This is a continuing Guarantee and shall remain in full force and effect and shall be binding upon each Subsidiary Guarantor and its successors and assigns until the Scheduled Remarketing Settlement Date and shall inure to the benefit of the successors and assigns of the Trustee and the Holders, and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. This is a Guarantee of payment and not of collectibility. This Subsidiary Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Debenture upon which this Subsidiary Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized officers. A1-13 The Obligations of each Subsidiary Guarantor under this Subsidiary Guarantee shall be limited to the extent necessary to insure that it does not constitute a fraudulent conveyance or fraudulent transfer under applicable law. THE TERMS OF ARTICLE 10 OF THE INDENTURE ARE INCORPORATED HEREIN BY REFERENCE. Capitalized terms used herein have the same meanings given in the Indenture unless otherwise indicated. IMPERIAL BUSINESS CREDIT, INC. By: ---------------------------------------------------- Name: Title: Dated as of _______________, 1997 Attest:____________________ IMPERIAL CREDIT ADVISORS, INC. By: ---------------------------------------------------- Name: Title: Dated as of _______________, 1997 Attest:____________________ FRANCHISE MORTGAGE ACCEPTANCE CO. LLC By: ---------------------------------------------------- Name: Title: Dated as of _______________, 1997 Attest:____________________ A1-14 AUTO MARKETING NETWORK, INC. By: ---------------------------------------------------- Name: Title: Dated as of _______________, 1997 Attest:____________________ IMPERIAL CREDIT CAPITAL TRUST I By: ---------------------------------------------------- Name: Title: Dated as of _______________, 1997 Attest:____________________ A1-15 Assignment Form To assign this Debenture, fill in the form below: (I) or (we) assign and transfer this Debenture to - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint ---------------------------------------------------- agent to transfer this Debenture on the books of the Company. The agent may substitute another to act for him. Date: ------------------- Your Signature: ------------------------ (Sign exactly as your name appears on the face of this Debenture) Signature Guarantee./*/ - ------------------- /*/ Signature(s) must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program) pursuant to Securities and Exchange Commission Rule 17 Ad-15. A-16 Option of Holder to Elect Purchase If you want to elect to have all or any part of this Debenture purchased by the Company pursuant to Section 4.06 or 4.07 of the Indenture, check the box below: [_] Section 4.06 [_] Section 4.07 If you want to elect to have only part of the Debenture purchased by the Company pursuant to Section 4.06 or 4.07 of the Indenture, state the amount you elect to have purchased (if all, write "ALL"): $___________ Date: Your Signature: -------------------------- ------------------------------ (Sign exactly as your name appears on the face of this Debenture) Tax Identification No.:____________________ _____ Signature Guarantee./*/ __________________________________ /*/ Signature(s) must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program) pursuant to Securities and Exchange Commission Rule 17 Ad-15. A-17 SCHEDULE OF EXCHANGES FOR CERTIFICATED DEBENTURES/2/ The following exchanges of a part of this Global Debenture for Certificated Debentures have been made:
Principal Amount of this Signature of Amount of decrease in Amount of increase in Global Debenture authorized officer of Principal Amount of Principal Amount of following such decrease Trustee or Debenture Date of Exchange this Global Debenture this Global Debenture (or increase) Custodian - ------------------------------------------------------------------------------------------------------------------------
- -------------------------- 2. To be included only if the Note is issued in global form. A2-1 Exhibit A-2 (Face of Regulation S Temporary Global Security) Resettable Rate Debentures, Series A No. 1 $__________ CUSIP No. IMPERIAL CREDIT INDUSTRIES, INC. promises to pay to _______________________________________ or registered assigns, the principal sum of ___________________ Dollars on June 15, 2032, or earlier in certain circumstances as described on the reverse. Interest Payment Dates: June 15 (June 14 in 2001) and December 15, commencing December 15, 1997, and on each Scheduled Remarketing Settlement Date Record Dates: June 1 and December 1 (whether or not a Business Day) A2-1 IMPERIAL CREDIT INDUSTRIES, INC. By: ----------------------------------------------- Name: Title: By: ----------------------------------------------- Name: Title: TRUSTEE CERTIFICATE OF AUTHENTICATION Dated: _________________ This is one of the Debentures referred to in the within-mentioned Indenture CHASE TRUST COMPANY OF CALIFORNIA, as Trustee By: ------------------------ (Authorized Signature) A2-2 (Back of Security) Resettable Rate Debentures, Series A Unless and until it is exchanged in whole or in part for Debentures in definitive form, this Debenture may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL DEBENTURE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED DEBENTURES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). A2-3 NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL DEBENTURE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST THEREON. Subject to the provisions hereof, Imperial Credit Industries, Inc., a California corporation (the "Company"), promises to pay to ______ the principal sum of ______________ UNITED STATES DOLLARS (U.S. $_________) on June 15, 2032, or earlier in certain circumstances as defined in the Indenture, and to pay interest on the principal amount of this Debenture at the Applicable Interest Rate. Interest on the Debentures will be payable semi-annually in arrears on each June 15 (June 14 in 2002) and December 15, commencing on December 15, 1997, and on each Scheduled Remarketing Settlement Date (each an "Interest Payment Date"). If any such Interest Payment Date is not a Business Day, then payment of the interest payable on such date shall be made on the next succeeding Business Day (and without any additional interest or other payment in respect of any such delay), except that, if, such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such payment was originally payable.Interest will be computed (i) for any full 180- day semi-annual interest payment period, on the basis of a 360-day year of twelve 30-day months and (ii) for any period shorter than a full 180-day semi- annual interest payment period for which interest payments are computed, on the basis of 30-day months and for periods of less than a month, the actual number of days elapsed per 30-day month. Interest on the Debentures will accrue from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from the date of the original issuance of this Debenture. This Regulation S Temporary Global Debenture is issued in respect of an issue of Resettable Rate Debentures, Series A (the "Debentures") of the Company, limited to the aggregate principal amount of U.S. $_____________ issued pursuant to an Indenture (the "Indenture") dated as of June 9, 1997, among the Company and Chase Trust Company of California, as trustee (the "Trustee"), and is governed by the terms and conditions of the Indenture, which terms and conditions are incorporated herein by reference and, except as otherwise provided herein, shall be binding on the Company and the Holder hereof as if fully set forth herein. Unless the context otherwise requires, the terms used herein shall have the meanings specified in the Indenture. Until this Regulation S Temporary Global Debenture is exchanged for Regulation S Permanent Global Debentures, the Holder hereof shall not be entitled to receive payments of interest hereon; until so exchanged in full, this Regulation S Temporary Global Debenture shall in all other respects be entitled to the same benefits as other Debentures under the Indenture. This Regulation S Temporary Global Debenture is exchangeable in whole or in part for one or more Regulation S Permanent Global Debentures or Rule 144A Global Debentures only (i) on or after the termination of the 40-day restricted period (as defined in Regulation S) and (ii) upon presentation of certificates (accompanied by an Opinion of Counsel, if applicable) required by Article 2 of the Indenture. Upon exchange of all interest in this Regulation S Temporary Global Debenture for one or more Regulation S Permanent Global Debentures or Rule 144A Global Debentures, the Trustee shall cancel this Regulation S Temporary Global Debenture. This Regulation S Temporary Global Debenture shall not become valid or obligatory until the certificate of authentication hereon shall have been duly manually signed by the Trustee in accordance with the Indenture. This Regulation S Temporary Global Debenture shall be governed by and construed A2-4 in accordance with the laws of the State of the New York. All references to "$," "Dollars," "dollars" or "U.S. $" are to such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts therein. A2-5 SCHEDULE OF EXCHANGES FOR GLOBAL Debentures The following exchanges of a part of this Regulation S Temporary Global Debenture for other Global Debentures have been made:
Amount of decrease Principal Amount of this Signature of in Amount of increase in Global Debenture authorized officer of Principal Amount of Principal Amount of following such decrease Trustee or Debenture Date of Exchange this Global Debenture this Global Debenture (or increase) Custodian - -----------------------------------------------------------------------------------------------------------------------
A2-6 Exhibit B-1 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM RULE 144A GLOBAL DEBENTURE TO REGULATION S GLOBAL DEBENTURE (Pursuant to Section 2.06(a)(i) of the Indenture) Chase Trust Company of California 101 California Street Suite 2725 San Francisco, CA 94111 Attention: Corporate Trust Department Re: Resettable Rate Debentures, Series A of Imperial Credit Industries, Inc. Reference is hereby made to the Indenture, dated as of June 9, 1997 (the "Indenture"), among Imperial Credit Industries, Inc., as issuer (the "Company"), the Subsidiary Guarantors and Chase Trust Company of California, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $_______ principal amount of Debentures which are evidenced by one or more Rule 144A Global Debentures (CUSIP No. U45021AB5) and held with the Depositary in the name of ____________________________ (the "Transferor"). The Transferor has requested a transfer of such beneficial interest in the Debentures to a Person who will take delivery thereof in the form of an equal principal amount of Debentures evidenced by one or more Regulation S Global Debentures (CUSIP No. U452729AE6), which amount, immediately after such transfer, is to be held with the Depositary. In connection with such request and in respect of such Debentures, the Transferor hereby certifies that such transfer has been effected in compliance with the transfer restrictions applicable to the Global Debentures and pursuant to and in accordance with Rule 903 or Rule 904 under the United States Securities Act of 1933, as amended (the "Securities Act"), and accordingly the Transferor hereby further certifies that: (1) The offer of the Debentures was not made to a person in the United States; (2) either: (a) at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its behalf reasonably believed and believes that the transferee was outside the United States; or (b) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was prearranged with a buyer in the United States; (3) no directed selling efforts have been made in contravention of the requirements of Rule 904(b) of Regulation S; B1-1 (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and (5) upon completion of the transaction, the beneficial interest being transferred as described above is to be held with the Depositary. Upon giving effect to this request to exchange a beneficial interest in a Rule 144A Global Debenture for a beneficial interest in a Regulation S Global Debenture, the resulting beneficial interest shall be subject to the restrictions on transfer applicable to Regulation S Global Debentures pursuant to the Indenture and the Securities Act and, if such transfer occurs prior to the end of the 40-day restricted period associated with the initial offering of Debentures, the additional restrictions applicable to transfers of interest in the Regulation S Temporary Global Debenture. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Lehman Brothers Inc., Montgomery Securities and Dabney/Resnick/Imperial, LLC, the initial purchasers of such Debentures being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. __________________________ [Insert Name of Transferor] By: ______________________ Name: Title: Dated: ____________________, ____ cc: Imperial Credit Industries, Inc. B1-2 Exhibit B-2 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM REGULATION S GLOBAL DEBENTURE TO RULE 144A GLOBAL DEBENTURE (Pursuant to Section 2.06(a)(ii) of the Indenture) Chase Trust Company of California 101 California Street Suite 2725 San Francisco, CA 94111 Attention: Corporate Trust Department Re: Resettable Rate Debentures, Series A of Imperial Credit Industries, Inc. Reference is hereby made to the Indenture, dated as of June 9, 1997 (the "Indenture"), among Imperial Credit Industries, Inc., as issuer (the "Company"), the Subsidiary Guarantors and Chase Trust Company of California, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $_______ principal amount of Debentures which are evidenced by one or more Regulation S Global Debentures (CUSIP No. U452729AE6) and held with the Depositary in the name of __________________ (the "Transferor"). The Transferor has requested a transfer of such beneficial interest in the Debentures to a Person who will take delivery thereof in the form of an equal principal amount of Debentures evidenced by one or more Rule 144A Global Debentures (CUSIP No. 45021AE6), to be held with the Depositary. In connection with such request and in respect of such Debentures, the Transferor hereby certifies that: [CHECK ONE] [_] such transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the Debentures are being transferred to a Person that the Transferor reasonably believes is purchasing the Debentures for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A; or [_] such transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or B2-1 [_] such transfer is being effected pursuant to an effective registration statement under the Securities Act; or [_] such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further certifies that the Debentures are being transferred in compliance with the transfer restrictions applicable to the Global Debentures and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and such Debentures are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. Upon giving effect to this request to exchange a beneficial interest in Regulation S Global Debentures for a beneficial interest in Rule 144A Global Debentures, the resulting beneficial interest shall be subject to the restrictions on transfer applicable to Rule 144A Global Debentures pursuant to the Indenture and the Securities Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Lehman Brothers Inc., Montgomery Securities and Dabney/Resnick/Imperial, LLC, the initial purchasers of such Debentures being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. __________________________ [Insert Name of Transferor] By: ---------------------------- Name: Title: Dated: _____________, _____ cc: Imperial Credit Industries, Inc. B2-1 Exhibit B-3 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER OF CERTIFICATED DEBENTURES (Pursuant to Section 2.06(b) of the Indenture) Chase Trust Company of California 101 California Street Suite 2725 San Francisco, CA 94111 Attention: Corporate Trust Department Re: Resettable Rate Debentures, Series A of Imperial Credit Industries, Inc. Reference is hereby made to the Indenture, dated as of June 9, 1997 (the "Indenture"), among Imperial Credit Industries, Inc., as issuer (the "Company"), the Subsidiary Guarantors and Chase Trust Company of California, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. In connection with such request and in respect of the Debentures surrendered to the Trustee herewith for exchange (the "Surrendered Debentures"), the Holder of such Surrendered Debentures hereby certifies that: [CHECK ONE] [_] the Surrendered Debentures are being acquired for the Transferor's own account, without transfer; or [_] the Surrendered Debentures are being transferred to the Company; or [_] the Surrendered Debentures are being transferred pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the Surrendered Debentures are being transferred to a Person that the Transferor reasonably believes is purchasing the Surrendered Debentures for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A; or B3-1 [_] the Surrendered Debentures are being transferred in a transaction permitted by Rule 144 under the Securities Act; or [_] the Surrendered Debentures are being transferred pursuant to an effective registration statement under the Securities Act; or [_] such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further certifies that the Debentures are being transferred in compliance with the transfer restrictions applicable to the Global Debentures and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and the Surrendered Debentures are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Lehman Brothers Inc., the initial purchaser of such Debentures being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. __________________________ [Insert Name of Transferor] By: --------------------------------------- Name: Title: Dated: _____________, _____ cc: Imperial Credit Industries, Inc. B3-2 Exhibit B-4 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM RULE 144A GLOBAL DEBENTURE OR REGULATION S PERMANENT GLOBAL DEBENTURE TO CERTIFICATED DEBENTURE (Pursuant to Section 2.06(c) of the Indenture) Chase Trust Company of California 101 California Street Suite 2725 San Francisco, CA 94111 Attention: Corporate Trust Department Re: Resettable Rate Debentures, Series A of Imperial Credit Industries, Inc. Reference is hereby made to the Indenture, dated as of June 9, 1997 (the "Indenture"), among Imperial Credit Industries, Inc., as issuer (the "Company"), the Subsidiary Guarantors and Chase Trust Company of California, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $_______ principal amount of Debentures which are evidenced by one or more [Rule 144A Global Debentures (CUSIP No. 452729AE6)] [Regulation S Permanent Global Debenture (CUSIP No. U45021AB5)] and held with the Depositary in the name of ____________________________ (the "Transferor"). The Transferor has requested a transfer of such beneficial interest in the Debentures to a Person who will take delivery thereof in the form of an equal principal amount of Debentures evidenced by one or more Certificated Debentures (CUSIP No. 452729AC0), which Debentures, immediately after such transfer, are to be delivered to the transferor at the address set forth below. In connection with such request and in respect of the Debentures surrendered to the Trustee herewith for exchange (the "Surrendered Debentures"), the Holder of such Surrendered Debentures hereby certifies that: [CHECK ONE] [_] the Surrendered Debentures are being transferred to the beneficial owner of such Debentures; or [_] the Surrendered Debentures are being transferred pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the Surrendered Debentures are being transferred to a Person that the Transferor reasonably believes is purchasing the Surrendered Debentures for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified B4-1 institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A; or [_] the Surrendered Debentures are being transferred in a transaction permitted by Rule 144 under the Securities Act; or [_] the Surrendered Debentures are being transferred pursuant to an effective registration statement under the Securities Act; or [_] such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further certifies that the Debentures are being transferred in compliance with the transfer restrictions applicable to the Global Debentures and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and the Surrendered Debentures are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Lehman Brothers Inc., the initial purchasers of such Debentures being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. __________________________ [Insert Name of Transferor] By: ------------------------------------- Name: Title: Dated: _____________, _____ __________________________ [Address of Transferor] __________________________ cc: Imperial Credit Industries, Inc. B4-2 Exhibit B-5 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM CERTIFICATED DEBENTURE TO RULE 144A GLOBAL DEBENTURE OR REGULATION S PERMANENT GLOBAL DEBENTURE (Pursuant to Section 2.06(e) of the Indenture) Chase Trust Company of California 101 California Street Suite 2725 San Francisco, CA 94111 Attention: Corporate Trust Department Re: Resettable Rate Debentures, Series A of Imperial Credit Industries, Inc. Reference is hereby made to the Indenture, dated as of June 9, 1997 (the "Indenture"), among Imperial Credit Industries, Inc., as issuer (the "Company"), the Subsidiary Guarantors and Chase Trust Company of California, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. In connection with such request and in respect of the Debentures surrendered to the Trustee herewith for exchange (the "Surrendered Debentures"), the Holder of such Surrendered Debentures hereby certifies that: [CHECK ONE] [_] the Surrendered Debentures are being transferred to the beneficial owner of such Debentures; or [_] the Surrendered Debentures are being transferred pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the Surrendered Debentures are being transferred to a Person that the Transferor reasonably believes is purchasing the Surrendered Debentures for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A; or [_] the Surrendered Debentures are being transferred in a transaction permitted by Rule 144 under the Securities Act; B5-1 or [_] the Surrendered Debentures are being transferred in a transaction permitted by Rule 904 under the Securities Act; or [_] the Surrendered Debentures are being transferred pursuant to an effective registration statement under the Securities Act; or [_] such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further certifies that the Debentures are being transferred in compliance with the transfer restrictions applicable to the Global Debentures and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and the Surrendered Debentures are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Lehman Brothers Inc., the initial purchasers of such Debentures being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Rule 144 or Regulation S under the Securities Act. __________________________ [Insert Name of Transferor] By: ------------------------------------ Name: Title: Dated: _____________, _____ cc: Imperial Credit Industries, Inc. B5-2 EX-4.4 5 REGISTRATION RIGHTS AGREEMENT, DATED 6/9/97 EXHIBIT 4.4 REGISTRATION RIGHTS AGREEMENT Dated as of June 9, 1997 by and among IMPERIAL CREDIT CAPITAL TRUST I, IMPERIAL CREDIT INDUSTRIES, INC., IMPERIAL BUSINESS CREDIT, INC. IMPERIAL CREDIT ADVISORS, INC., FRANCHISE MORTGAGE ACCEPTANCE CO. LLC., and AUTO MARKETING NETWORK, INC., as Guarantors and LEHMAN BROTHERS INC., as Initial Purchaser This Registration Rights Agreement (this "Agreement") is made and entered --------- into as of June 9, 1997 by and among Imperial Credit Industries, Inc., a California corporation (the "Company"), Imperial Business Credit, Inc., a ------- California corporation, Imperial Credit Advisors, Inc., a California corporation, Franchise Mortgage Acceptance Co. LLC, a California limited liability company, and Auto Marketing Network, Inc., a Florida corporation (together, the "Guarantors"), Imperial Credit Capital Trust I, a Delaware ---------- statutory business trust (the "Trust," and together with the Company and the ----- Guarantors, the "Registrants"), and Lehman Brothers Inc. (the "Initial ----------- ------- Purchaser"). - --------- This Agreement is entered into in connection with the Purchase Agreement, dated as of June 5, 1997, among the Registrants and the Initial Purchaser (the "Purchase Agreement"), which provides for the sale by the Trust to the Initial - --------- --------- Purchaser of $70,000,000 aggregate liquidation amount of the Trust's Remarketed Par Securities, Series A, liquidation amount $1,000 per security (the "Preferred --------- Securities"). The Company will be the owner of all of the beneficial ownership - ---------- interest represented by the common securities (the "Common Securities") of the ------ ---------- Trust. The Preferred Securities and the Common Securities will be guaranteed (the "Guarantee") by the Company, to the extent of funds held by the Trust. --------- Concurrently with the issuance of the Preferred Securities, the Guarantee and the Common Securities, the Trust will invest the proceeds of each thereof in the Company's Resettable Rate Debentures, Series A (the "Debentures" and, together ---------- with the Preferred Securities, the Guarantee and the Debenture Guarantees (as defined herein), the "Securities"). To induce the Initial Purchaser to enter ---------- into the Purchase Agreement and the Remarketing Agreement (as defined herein), the Registrants have agreed to provide the registration rights set forth in this Agreement for the benefit of the Initial Purchaser and its direct and indirect transferees and assigns. The execution and delivery of this Agreement is a condition to the Initial Purchaser's obligation to purchase the Preferred Securities under the Purchase Agreement. The parties hereby agree as follows: SECTION 1. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the following meanings: Act: The Securities Act of 1933, as amended. --- Additional Distributions: As defined in Section 5. ------------------------ Additional Interest: As defined in Section 5. ------------------- Additional Interest Payment Date: With respect to the Transfer Restricted -------------------------------- Securities, each Distribution Date until the earlier of (i) the date on which Additional Interest (and corresponding Additional Distributions) no longer are payable or (ii) maturity of the Securities. Broker-Dealer: Any broker or dealer registered under the Exchange Act. ------------- 1 Closing Date: The date of this Agreement. ------------ Commission: The Securities and Exchange Commission. ---------- Consummate: A registered Exchange Offer shall be deemed "Consummated" for ---------- purposes of this Agreement upon the occurrence of (i) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the New Securities to be issued in the Exchange Offer, (ii) the maintenance of such Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the minimum period required pursuant to Section 3(b) hereof, and (iii) the delivery by the Registrants of the New Securities in the same aggregate principal amount as the aggregate principal amount of Transfer Restricted Securities that were tendered by Holders thereof pursuant to the Exchange Offer. Debenture Guarantees: The Debt Guarantee, dated as of June 9, 1997, among -------------------- the Guarantors, the Company and Chase Trust Company of California, as trustee. Debentures: As defined in the preamble. ---------- Declaration: Declaration of Trust, dated as of June 9, 1997, among Chase ----------- Trust Company of California, as Property Trustee, Chase Manhattan Bank Delaware, as Delaware Trustee and the other trustees named therein, pursuant to which the Preferred Securities are being issued, as amended or supplemented from time to time in accordance with the terms thereof. Distribution: As defined in the Declaration. ------------ Effectiveness Target Date: As defined in Section 5. ------------------------- Exchange Act: The Securities Exchange Act of 1934, as amended. ------------ Exchange Offer: The registration by the Registrants under the Act of the -------------- New Securities pursuant to a Registration Statement pursuant to which the Registrants will offer the Holders of all outstanding Transfer Restricted Securities the opportunity to exchange all such outstanding Transfer Restricted Securities held by such Holders for New Securities in an aggregate principal amount equal to the aggregate amount of the Transfer Restricted Securities tendered in such exchange offer by such Holders. Exchange Offer Registration Statement: The Registration Statement ------------------------------------- relating to the Exchange Offer, including the related Prospectus. Exempt Resales: The transactions in which the purchasers of Transfer -------------- Restricted Securities in the Remarketing propose to sell the Securities to certain "qualified institutional buyers," as such term is defined in Rule 144A under the Securities Act, and to certain non-U.S. persons. 2 Guarantee: The Guarantee, dated as of June 9, 1996, between the Company --------- and Chase Trust Company of California, as Guarantee Trustee, pursuant to which the Guarantee is being issued, as amended or supplemented from time to time in accordance with the terms thereof. Guarantors: As defined in the preamble hereto. ---------- Holders: As defined in Section 2(b) hereof. ------- Indemnified Party: As defined in Section 8(a) hereof. ----------------- Indenture: The Indenture, dated as of June 9, 1997, among the Company, --------- Chase Trust Company of California, as trustee (the "Trustee"), and the ------- Guarantors, pursuant to which the Debentures and the New Debentures are to be issued, as such Indenture is amended or supplemented from time to time in accordance with the terms thereof. Initial Purchaser: As defined in the preamble hereto. ----------------- NASD: National Association of Securities Dealers, Inc. ---- New Debentures: The Company's Resettable Rate Debentures, Series B to be -------------- issued pursuant to the Indenture in the Exchange Offer. New Securities: The securities to be issued pursuant to the Indenture, -------------- the Declaration and the Guarantee in the Exchange Offer, or if the Debentures have been distributed to the Holders of the Preferred Securities in liquidation of the Trust, the New Debentures. Person: An individual, partnership, corporation, trust or unincorporated ------ organization, or a government or agency or political subdivision thereof. Prospectus: The prospectus included in a Registration Statement, as ---------- amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. Registrants: The Trust, the Guarantors and the Company or, if the ----------- Debentures have been distributed to the Holders of the Preferred Securities in liquidation of the Trust, the Company only. Registration Default: As defined in Section 5 hereof. -------------------- Registration Statement: Any registration statement of the Registrants ---------------------- relating to (a) an offering of New Securities pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, which is filed pursuant to the provisions of this Agreement, in each case, including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. 3 Remarketing Agreement: That certain Remarketing Agreement dated as of ---------------------- June 9, 1997 by and among the Company, the Trust and the Broker Dealer or Broker Dealers named therein, as such agreement is amended from time to time. Securities: As defined in the preamble hereto. ---------- Shelf Filing Deadline: As defined in Section 4 hereof. --------------------- Shelf Registration Statement: As defined in Section 4 hereof. ---------------------------- TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as --- in effect on the date of the Indenture. Transfer Restricted Securities: Each Security, (for the purposes of this ------------------------------ definition, if the Debentures have been distributed to the Holders of Preferred Securities in liquidation of the Trust, each Debenture) until the earliest to occur of (a) the date on which such Security has been exchanged by a person other than a Broker-Dealer for New Securities in the Exchange Offer, (b) following the exchange by a Broker-Dealer in the Exchange Offer of such security for one or more New Securities, the date on which such New Securities are sold to a purchaser who receives from such Broker-Dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (c) the date on which such Security has been effectively registered under the Act and disposed of in accordance with the Shelf Registration Statement or (d) the date after the Closing Date on which such Security is sold to the public pursuant to Rule 144 under the Act; Underwritten Registration or Underwritten Offering: A registration in ------------------------- --------------------- which securities of the Registrants are sold to an underwriter for reoffering to the public. SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT (a) Transfer Restricted Securities. The securities entitled to the ------------------------------ benefits of this Agreement are the Transfer Restricted Securities. (b) Holders of Transfer Restricted Securities. A Person is deemed to be a ----------------------------------------- holder of Transfer Restricted Securities (each, a "Holder") whenever such Person ------ owns Transfer Restricted Securities. SECTION 3. REGISTERED EXCHANGE OFFER (a) Unless the Exchange Offer shall not be permissible under applicable law or Commission policy (after the procedures set forth in Section 6(a) below have been complied with), the Registrants shall (i) cause to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 30 days after the Closing Date, an Exchange Offer Registration Statement under the Act relating to the New Securities and the Exchange Offer, (ii) 4 use their respective best efforts to cause such Registration Statement to become effective at the earliest possible time, but in no event later than 90 days after the Closing Date, (iii) in connection with the foregoing, file (A) all pre-effective amendments to such Registration Statement as may be necessary in order to cause such Registration Statement to become effective, (B) if applicable, a post-effective amendment to such Registration Statement pursuant to Rule 430A under the Act and (C) cause all necessary filings in connection with the registration and qualification of the New Securities to be made under the Blue Sky laws of such jurisdictions as are necessary to permit Consummation of the Exchange Offer, and (iv) upon the effectiveness of such Registration Statement, commence the Exchange Offer. The Exchange Offer shall be on the appropriate form permitting registration of the New Securities to be offered in exchange for the Transfer Restricted Securities and to permit resales of New Securities held by Broker-Dealers as contemplated by Section 3(c) below. (b) The Registrants shall cause the Exchange Offer Registration Statement to be effective continuously and shall keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that in no event shall such period be less than 20 business days. Registrants shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the New Securities shall be included in the Exchange Offer Registration Statement. Registrants shall use their respective best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 30 business days thereafter. (c) The Registrants shall indicate in a "Plan of Distribution" section contained in the Prospectus contained in the Exchange Offer Registration Statement that any Broker-Dealer who holds Securities that are Transfer Restricted Securities and that were acquired for its own account as a result of market-making activities or other trading activities (other than Transfer Restricted Securities acquired directly from the Company), may exchange such Securities pursuant to the Exchange Offer; however, such Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with any resales of the New Securities received by such Broker-Dealer in the Exchange Offer, which prospectus delivery requirement may be satisfied by the delivery by such Broker-Dealer of the Prospectus contained in the Exchange Offer Registration Statement. Such "Plan of Distribution" section shall also contain all other information with respect to such resales by Broker-Dealers that the Commission may require in order to permit such resales pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Securities held by any such Broker-Dealer except to the extent required by the Commission as a result of a change in policy after the date of this Agreement. The Registrants shall use their best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented and amended as required by the provisions of Section 6(c) below to the extent necessary to ensure that it is available for resales of New Securities acquired by Broker- Dealers for their own accounts as a result of market-making activities or other trading activities, and to ensure that it conforms with the requirements of this 5 Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of one year from the date on which the Exchange Offer Registration Statement is declared effective. The Registrants shall provide sufficient copies of the latest version of such Prospectus to Broker-Dealers promptly upon request at any time during such one-year period in order to facilitate such resales. SECTION 4. SHELF REGISTRATION (a) Shelf Registration. If (i) the Registrants are not required to file ------------------ an Exchange Offer Registration Statement or to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy (after the procedures set forth in Section 6(a) below have been complied with), (ii) the Company has received an opinion of independent tax counsel, experienced in such matters, to the effect that, as a result of the consummation of the Exchange Offer there is more than an insubstantial risk that (A) the Trust would be subject to United States federal income tax with respect to income received or accrued on the Debentures or New Debentures, (B) interest payable by the Company on the Debentures or New Debentures would not be deductible by the Company, in whole or in part, for United States federal income tax purposes, or (C) the Trust would be subject to more than a de minimis amount of other taxes, duties or other governmental charges or (iii) if any Holder of Transfer Restricted Securities shall notify the Company within 20 business days of the Consummation of the Exchange Offer (A) that such Holder is prohibited by applicable law or Commission policy from participating in the Exchange Offer, or (B) that such Holder may not resell the New Securities acquired by it in the Exchange Offer to the public without delivering a prospectus and that the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder, or (C) that such Holder is a Broker-Dealer and holds Securities acquired directly from the Registrants or one of their affiliates, then the Registrants shall use their respective best efforts to: (x) cause to be filed a shelf registration statement pursuant to Rule 415 under the Act, which may be an amendment to the Exchange Offer Registration Statement (in either event, the "Shelf Registration Statement") ---------------------------- on or prior to the earliest to occur of (1) the 30th day after the date on which the Registrants determine that they are not required to file the Exchange Offer Registration Statement, (2) the 30th day after the date on which the Registrants receive notice from a Holder of Transfer Restricted Securities as contemplated by clause (ii) above, and (3) the 60th day after the Closing Date (such earliest date being the "Shelf Filing Deadline"), --------------------- which Shelf Registration Statement shall provide for resales of all Transfer Restricted Securities the Holders of which shall have provided the information required pursuant to Section 4(b) hereof; and (y) use their best efforts to cause such Shelf Registration Statement to be declared effective by the Commission on or before the 30th day after the Shelf Filing Deadline. 6 The Registrants shall use their best efforts to keep such Shelf Registration Statement continuously effective, supplemented and amended as required by the provisions of Sections 6(b) and (c) hereof to the extent necessary to ensure that it is available for resales of Securities by the Holders of Transfer Restricted Securities entitled to the benefit of this Section 4(a), and to ensure that it conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of at least three years following the Closing Date. (b) Provision by Holders of Certain Information in Connection with the ------------------------------------------------------------------ Shelf Registration Statement. No Holder of Transfer Restricted Securities may - ---------------------------- include any of its Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Registrants in writing, within 20 business days after receipt of a request therefor, such information as the Registrants may reasonably request for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Securities shall be entitled to Additional Interest (and corresponding Additional Distributions) pursuant to Section 5 hereof unless and until such Holder shall have used its best efforts to provide all such reasonably requested information. Each Holder as to which any Shelf Registration Statement is being effected agrees to furnish promptly to the Registrants all information required to be disclosed in order to make the information previously furnished to the Registrants by such Holder not materially misleading. SECTION 5. ADDITIONAL INTEREST AND ADDITIONAL DISTRIBUTIONS If (i) any of the Registration Statements required by this Agreement is not filed with the Commission on or prior to the date specified for such filing in this Agreement, (ii) any of such Registration Statements has not been declared effective by the Commission on or prior to the date specified for such effectiveness in this Agreement (the "Effectiveness Target Date"), (iii) the ------------------------- Exchange Offer has not been Consummated within 30 business days after the Effectiveness Target Date with respect to the Exchange Offer Registration Statement or (iv) any Registration Statement required by this Agreement is filed and declared effective but shall thereafter cease to be effective or fail to be usable for its intended purpose without being succeeded immediately by a post- effective amendment to such Registration Statement that cures such failure and that is itself immediately declared effective (each such event referred to in clauses (i) through (iv), a "Registration Default"), the Company and each of the -------------------- Guarantors hereby jointly and severally will pay additional interest ("Additional Interest") on the Debentures (including in respect of amounts - --------------------- occurring during any Extension Period) and corresponding Additional Distributions (the "Additional Distributions") will become payable on the ------------------------ Transfer Restricted Securities, with respect to the first 90-day period immediately following the occurrence of such Registration Default, in an amount equal to $.05 per week per $1,000 liquidation or principal amount of Transfer Restricted Securities held by such Holder for each week or portion thereof that the Registration Default continues. The amount of the Additional Interest (and corresponding Additional Distributions) shall increase by an additional $.05 per week per $1,000 liquidation or principal amount of Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Additional Interest (and corresponding Additional Distributions) of $.50 per week per $1,000 liquidation 7 or principal amount of Transfer Restricted Securities. All accrued Additional Interest (and corresponding Additional Distributions) shall be paid by the Company to DTC by wire transfer of immediately available funds or by federal funds check and to holders of definitive securities by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified on each Additional Interest Payment Date, as provided in the Indenture. Following the cure of all Registration Defaults relating to any particular Transfer Restricted Securities, the accrual of Additional Interest (and corresponding Additional Distributions) with respect to such Transfer Restricted Securities will cease. All obligations of the Company and the Guarantors set forth in the preceding paragraph that are outstanding with respect to any Transfer Restricted Security at the time such security ceases to be a Transfer Restricted Security shall survive until such time as all such obligations with respect to such Security shall have been satisfied in full. SECTION 6. REGISTRATION PROCEDURES (a) Exchange Offer Registration Statement. In connection with the ------------------------------------- Exchange Offer, the Registrants shall comply with all of the provisions of Section 6(c) below, shall use their best efforts to effect such exchange to permit the sale of Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof, and shall comply with all of the following provisions: (i) If in the reasonable opinion of counsel to the Registrants there is a question as to whether the Exchange Offer is permitted by applicable law, the Registrants hereby agree to seek a no-action letter or other favorable decision from the Commission allowing the Registrants to Consummate an Exchange Offer for the Transfer Restricted Securities. The Registrants each hereby agree to pursue the issuance of such a decision to the Commission staff level but shall not be required to take commercially unreasonable action to effect a change of Commission policy. The Registrants each hereby agree, however, to (A) participate in telephonic conferences with the Commission, (B) deliver to the Commission staff an analysis prepared by counsel to the Registrants setting forth the legal bases, if any, upon which such counsel has concluded that such an Exchange Offer should be permitted and (C) diligently pursue a resolution (which need not be favorable) by the Commission staff of such submission. (ii) As a condition to its participation in the Exchange Offer pursuant to the terms of this Agreement, each Holder of Transfer Restricted Securities shall furnish, upon the request of the Registrants, prior to the Consummation thereof, a written representation to the Registrants (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an affiliate of the Registrants, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the New Securities to be issued in the Exchange Offer and (C) it is acquiring the New Securities in its ordinary course of business. In addition, all such Holders of Transfer Restricted Securities shall otherwise cooperate in the Registrants' preparations for the Exchange Offer. 8 Each Holder hereby acknowledges and agrees that any Broker-Dealer and any such Holder using the Exchange Offer to participate in a distribution of the securities to be acquired in the Exchange Offer (1) could not under Commission policy as in effect on the date of this Agreement rely on the position of the Commission enunciated in Morgan Stanley and Co., Inc. ---------------------------- (available June 5, 1991) and Exxon Capital Holdings Corporation (available ---------------------------------- May 13, 1988), as interpreted in the Commission's letter to Shearman & Sterling dated July 2, 1993, and similar no-action letters (including any no- action letter obtained pursuant to clause (i) above), and (2) must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction should be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K if the resales are of New Securities obtained by such Holder in exchange for Securities acquired by such Holder directly from the Company or the Trust. (iii) Prior to effectiveness of the Exchange Offer Registration Statement, the Registrants shall provide a supplemental letter to the Commission (A) stating that the Company, the Guarantors and the Trust are registering the Exchange Offer in reliance on the position of the Commission enunciated in Exxon Capital Holdings Corporation (available May 13, 1988), ---------------------------------- Morgan Stanley and Co., Inc. (available June 5, 1991) and, if applicable, any ---------------------------- no-action letter obtained pursuant to clause (i) above and (B) including a representation that neither the Company, the Guarantors nor the Trust has entered into any arrangement or understanding with any Person to distribute the New Securities to be received in the Exchange Offer and that, to the best of the Registrants' information and belief, each Holder participating in the Exchange Offer is acquiring the New Securities in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the New Securities received in the Exchange Offer. (b) Shelf Registration Statement. In connection with the Shelf ---------------------------- Registration Statement, the Registrants shall comply with all the provisions of Section 6(c) below and shall use their best efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof, and pursuant thereto the Company will as expeditiously as possible prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Securities in accordance with the intended method or methods of distribution thereof. (c) General Provisions. In connection with any Registration Statement and ------------------ any Prospectus required by this Agreement to permit the sale or resale of Transfer Restricted Securities (including, without limitation, any Registration Statement and the related Prospectus required to permit resales of Securities by Broker-Dealers), the Registrants shall: (i) use their best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements (including, if required by the Act or any regulation thereunder, financial statements of the Guarantors) for the period specified in Section 3 or 4 of this Agreement, as applicable; upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to 9 contain a material misstatement or omission or (B) not to be effective and usable for resale of Transfer Restricted Securities during the period required by this Agreement, the Registrants shall file promptly an appropriate amendment to such Registration Statement, in the case of clause (A), correcting any such misstatement or omission, and, in the case of either clause (A) or (B), use its best efforts to cause such amendment to be declared effective and such Registration Statement and the related Prospectus to become usable for their intended purpose(s) as soon as practicable thereafter; (ii) prepare and file with the Commission such amendments and post- effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof, as applicable, or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with the applicable provisions of Rules 424 and 430A under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (iii) advise the underwriter(s), if any, and selling Holders promptly and, if requested by such Persons, to confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any Registration Statement or any post- effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto, or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or Blue Sky laws, the Company, the Trust and the Guarantors shall use their best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; (iv) furnish to each of the selling Holders and each of the underwriter(s), if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such 10 Registration Statement), which documents will be subject to the review of such Holders and underwriter(s), if any, for a period of at least five business days, and the Company and the Trust will not file any such Registration Statement or Prospectus or any amendment or supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which a selling Holder of Transfer Restricted Securities covered by such Registration Statement or the underwriter(s), if any, shall reasonably object within five business days after the receipt thereof. A selling Holder or underwriter, if any, shall be deemed to have reasonably objected to such filing if such Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains a material misstatement or omission; (v) promptly prior to the filing of any document that is to be incorporated by reference into a Registration Statement or Prospectus, provide copies of such document to the selling Holders and to the underwriter(s), if any, make the Company's and the Trust's representatives available (and representatives of the Guarantors) for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as such selling Holders or underwriter(s), if any, reasonably may request; (vi) make available at reasonable times for inspection by the selling Holders, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney or accountant retained by such selling Holders or any of the underwriter(s), all financial and other records, pertinent corporate documents and properties of each of the Registrants and cause each of the Registrant's officers, directors, managers and employees to supply all information reasonably requested by any such Holder, underwriter, attorney or accountant in connection with such Registration Statement subsequent to the filing thereof and prior to its effectiveness; (vii) if requested by any selling Holders or the underwriter(s), if any, promptly incorporate in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such selling Holders and underwriter(s), if any, may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Securities, information with respect to the principal amount of Transfer Restricted Securities being sold to such underwriter(s), the purchase price being paid therefor and any other terms of the offering of the Transfer Restricted Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company and the Trust are notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; (viii) cause the Transfer Restricted Securities covered by the Registration Statement to be rated with the appropriate rating agencies, if so requested by the Holders of a majority in aggregate principal amount of Securities covered thereby or the underwriter(s), if any; 11 (ix) furnish to each selling Holder and each of the underwriter(s), if any, without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including, if requested in writing by a Holder, all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference); (x) deliver to each selling Holder and each of the underwriter(s), if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Registrants hereby consent to the use of the Prospectus and any amendment or supplement thereto by each of the selling Holders and each of the underwriter(s), if any, in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto; (xi) enter into, and cause the Guarantors to enter into, such agreements (including an underwriting agreement), and make, and cause the Guarantors to make, such representations and warranties, and take all such other actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to any Registration Statement contemplated by this Agreement, all to such extent as may be requested by the Initial Purchaser or by any Holder of Transfer Restricted Securities or underwriter in connection with any sale or resale pursuant to any Registration Statement contemplated by this Agreement; and whether or not an underwriting agreement is entered into and whether or not the registration is an Underwritten Registration, the Registrants shall: (A) furnish to each Purchaser, each selling Holder and each underwriter, if any, in such substance and scope as they may request and as are customarily made by issuers to underwriters in primary underwritten offerings, upon the date of the Consummation of the Exchange Offer and, if applicable, the effectiveness of the Shelf Registration Statement: (1) a certificate, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, signed by (y) the President, any Vice President, or any Manager and (z) a principal financial or accounting officer of each of the Company and each Guarantor, confirming, as of the date thereof, the matters set forth in paragraphs (b), (c), (d) and (e) of Section 8 of the Purchase Agreement and such other matters as such parties may reasonably request; (2) an opinion, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, of counsel for the Registrants covering the matters set forth in paragraph [h] of Section 8 of the Purchase Agreement and such other matter as such parties may reasonably request, and in any event including a statement to the effect that such counsel has participated in conferences with officers and other representatives of the Registrants, representatives of the independent public accountants for the 12 Company, the Initial Purchaser representatives and the Initial Purchaser's counsel in connection with the preparation of such Registration Statement and the related Prospectus and have considered the matters required to be stated therein and the statements contained therein, although such counsel has not independently verified the accuracy, completeness or fairness of such statements; and that such counsel advises that, on the basis of the foregoing (relying as to materiality to a large extent upon facts provided to such counsel by officers and other representatives of the Registrants and without independent check or verification), no facts came to such counsel's attention that caused such counsel to believe that the applicable Registration Statement, at the time such Registration Statement or any post-effective amendment thereto became effective, and, in the case of the Exchange Offer Registration Statement, as of the date of Consummation, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contained in such Registration Statement as of its date and, in the case of the opinion dated the date of Consummation of the Exchange Offer, as of the date of Consummation, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Without limiting the foregoing, such counsel may state further that such counsel assumes no responsibility for, and has not independently verified, the accuracy, completeness or fairness of the financial statements, notes and schedules and other financial data included in any Registration Statement contemplated by this Agreement or the related Prospectus; and (3) a customary comfort letter, dated as of the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters by underwriters in connection with primary underwritten offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 8(m) of the Purchase Agreement, without exception; (B) set forth in full or incorporate by reference in the underwriting agreement, if any, the indemnification provisions and procedures of Section 8 hereof with respect to all parties to be indemnified pursuant to said Section; and (C) deliver such other documents and certificates as may be reasonably requested by such parties to evidence compliance with clause (A) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company and the Trust pursuant to this clause (xi), if any. If at any time the representations and warranties of the Company, the Trust and the Guarantors contemplated in clause (A)(1) above cease to be true and correct, the Company, the Trust or the Guarantors shall so advise the Purchasers and the underwriter(s), if any, 13 and each selling Holder promptly and, if requested by such Persons, shall confirm such advice in writing; (xii) prior to any public offering of Transfer Restricted Securities, cooperate with, and cause the Guarantors to cooperate with, the selling Holders, the underwriter(s), if any, and their respective counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or Blue Sky laws of such jurisdictions as the selling Holders or underwriter(s) may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the Shelf Registration Statement; provided, however, that neither the Company, the Guarantors nor the Trust shall be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; (xiii) shall issue, upon the request of any Holder of Securities covered by the Shelf Registration Statement, New Securities, having an aggregate principal amount equal to the aggregate principal amount of Securities surrendered to the Company by such Holder in exchange therefor or being sold by such Holder; such New Securities to be registered in the name of such Holder or in the name of the purchaser(s) of such Securities, as the case may be; in return, the Securities held by such Holder shall be surrendered to the Company for cancellation; (xiv) cooperate with, and cause the Guarantors to cooperate with, the selling Holders and the underwriter(s), if any, to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and enable such Transfer Restricted Securities to be in such denominations and registered in such names as the Holders or the underwriter(s), if any, may request at least two business days prior to any sale of Transfer Restricted Securities made by such underwriter(s); (xv) use its best efforts to cause the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriter(s), if any, to consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in clause (viii) above; (xvi) if any fact or event contemplated by clause (c)(iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; 14 (xvii) provide a CUSIP number for all Transfer Restricted Securities not later than the effective date of the Registration Statement and provide the Trustee under the Indenture with printed certificates for the Transfer Restricted Securities which are in a form eligible for deposit with The Depositary Trust Company; (xviii) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter") that is required to be retained in accordance with the rules and regulations of the NASD, and use its reasonable best efforts to cause such Registration Statement to become effective and approved by such governmental agencies or authorities as may be necessary to enable the Holders selling Transfer Restricted Securities to consummate the disposition of such Transfer Restricted Securities; (xix) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) for the twelve-month period (A) commencing at the end of any fiscal quarter in which Transfer Restricted Securities are sold to underwriters in a firm or best efforts Underwritten Offering or (B) if not sold to underwriters in such an offering, beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement; (xx) cause the Indenture and, if the Debentures shall not have been distributed to the Holders of the Preferred Securities in liquidation of the Trust, the Declaration and the Guarantee to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement, and, in connection therewith, cooperate, and cause the Guarantors to cooperate, with the Trustee and the Holders of Securities to effect such changes to the Indenture, the Declaration and the Guarantee as may be required for such Indenture, Declaration and Guarantee to be so qualified in accordance with the terms of the TIA; and execute, and cause the Guarantors to execute, and use their best efforts to cause the Indenture Trustee, the Guarantee Trustee and the Property Trustee to execute, all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture, Declaration and the Guarantee to be so qualified in a timely manner; (xxi) cause all Transfer Restricted Securities covered by the Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed if requested by the Holders of a majority in aggregate principal amount of Securities or the managing underwriter(s), if any; and (xxii) provide promptly to each Holder upon request each document filed with the Commission pursuant to the requirements of Section 13 and Section 15 of the Exchange Act. Each Holder agrees by acquisition of a Transfer Restricted Security that, upon receipt of any notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof, such Holder will forthwith discontinue disposition of Transfer Restricted 15 Securities pursuant to the applicable Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xvi) hereof, or until it is advised in writing (the "Advice") by ------ either Registrant that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus. If so directed by either Registrant, each Holder will deliver to either Registrant (at such Registrant's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of such notice. In the event either Registrant shall give any such notice, the time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(c)(iii)(D) hereof to and including the date when each selling Holder covered by such Registration Statement shall have received the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xvi) hereof or shall have received the Advice. SECTION 7. REGISTRATION EXPENSES (a) All expenses incident to the Registrants' performance of or compliance with this Agreement will be borne by the Registrants, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses (including filings made by the Initial Purchaser or Holder with the NASD (and, if applicable, the fees and expenses of any "qualified independent underwriter" and its counsel that may be required by the rules and regulations of the NASD)); (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all expenses of printing (including printing certificates for the New Securities to be issued in the Exchange Offer and printing of Prospectuses), messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Registrants and, subject to Section 7(b) below, the Holders of Transfer Restricted Securities; (v) all application and filing fees in connection with listing Securities on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company and the Trust (including the expenses of any special audit and comfort letters required by or incident to such performance). The Registrants will, in any event, bear their internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Registrants. (b) In connection with any Registration Statement required by this Agreement (including, without limitation, the Exchange Offer Registration Statement and the Shelf Registration Statement), the Company will reimburse the Initial Purchaser and the Holders of Transfer Restricted Securities being tendered in the Exchange Offer and/or resold pursuant to the "Plan of Distribution" contained in the Exchange Offer Registration Statement or registered pursuant to the Shelf Registration Statement, as applicable, for the reasonable fees and disbursements of not more than one counsel, who shall be Latham & Watkins or such other 16 counsel as may be chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit such Registration Statement is being prepared. SECTION 8. INDEMNIFICATION (a) The Company, the Trust and each Guarantor, jointly and severally, agree to indemnify and hold harmless (i) each Holder, each participating Broker- Dealer or the Initial Purchaser selling New Securities and (ii) each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) any such person (any of the persons referred to in this clause (ii) being hereinafter referred to as a "controlling person") and (iii) the ------------------ respective officers, directors, partners, employees, representatives and agents of any Holder or any controlling person (any person referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an "Participant"), to the ----------- fullest extent lawful, from and against any and all losses, claims, damages, liabilities, judgments, actions and expenses (including without limitation and as incurred, reimbursement of all reasonable costs of investigating, preparing, pursuing or defending any claim or action, or any investigation or proceeding by any governmental agency or body, commenced or threatened, including the reasonable fees and expenses of counsel to any Participant) directly or indirectly caused by, related to, based upon, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (or any amendment or supplement thereto), or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any act or failure to act or any alleged act or failure to act in connection with, or relating in any manner to the transactions contemplated hereby, except insofar as such losses, claims, damages, liabilities or expenses are caused by an untrue statement or omission or alleged untrue statement or omission that is made in reliance upon and in conformity with information relating to any of the Holders furnished in writing to the Company and the Trust by any of the Holders expressly for use therein. In case any action or proceeding (including any governmental or regulatory investigation or proceeding) shall be brought or asserted against any of the Participants with respect to which indemnity may be sought against the Company, the Trust or the Guarantors, such Participant (or the Participant controlled by such controlling person) shall promptly notify the Company and the Trust in writing; provided, that the failure to give such notice shall not relieve the Company, the Trust or the Guarantors of its respective obligations pursuant to this Agreement. Such Participant shall have the right to employ its own counsel in any such action and the fees and expenses of such counsel shall be paid, as incurred, by the Company, the Trust and the Guarantors (regardless of whether it is ultimately determined that an Participant is not entitled to indemnification hereunder). The Company, the Trust and the Guarantors shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for such Participants, which firm shall be designated by the Holders. The Company and the Trust shall be liable for any settlement of any such action or proceeding effected with the Company's or the Trust's respective prior written consent, which consent shall not be withheld unreasonably, and the Company and the 17 Trust agree to indemnify and hold harmless any Participant from and against any loss, claim, damage, liability or expense by reason of any settlement of any action effected with the written consent of the Company or the Trust. Neither the Company nor the Trust, without the prior written consent of each Participant, settle or compromise or consent to the entry of judgment in or otherwise seek to terminate any pending or threatened action, claim, litigation or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not any Participant is a party thereto), unless such settlement, compromise, consent or termination includes an unconditional release of each Participant from all liability arising out of such action, claim, litigation or proceeding. (b) Each Participant agrees, severally and not jointly, to indemnify and hold harmless the Company, the Trust and each Guarantor, and their respective directors, officers, and any person controlling (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company, the Trust and the Guarantors, and the respective officers, directors, partners, employees, managers, representatives and agents of each such person, to the same extent as the foregoing indemnity from the Company, the Trust and the Guarantors to each of the Participants, but only with respect to claims and actions based on information relating to such Participant furnished in writing by such Participant expressly for use in any Registration Statement. In case any action or proceeding shall be brought against the Company, the Trust, the Guarantors or their respective directors, managers, officers or any such controlling person in respect of which indemnity may be sought against a Participant, such Participant shall have the rights and duties given the Company, the Trust, and the Guarantors and the Company, the Trust and the Guarantors and their directors or officers or such controlling person shall have the rights and duties given to each Participant by the preceding paragraph. In no event shall the liability of any selling Participant hereunder be greater in amount than the dollar amount of the proceeds received by such Participant upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) If the indemnification provided for in this Section 8 is unavailable to an indemnified party under Section 8(a) or Section 8(b) hereof (other than by reason of exceptions provided in those Sections) in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative benefits received by the Trust and the Company on the one hand and the Participants on the other hand from their sale of Transfer Restricted Securities or if such allocation is not permitted by applicable law, the relative fault of the Trust, the Company and the Guarantors on the one hand and of the Participant on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the Trust, the Company and the Guarantors on the one hand and of the Participant on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Trust or any Guarantor or by the Participant and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, 18 liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 8(a), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Registrants and each Participant agree that it would not be just and equitable if contribution pursuant to this Section 8(c) were determined by pro rata allocation (even if the Participants were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8, none of the Participants shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total discount received by such Participant with respect to the Securities exceeds the amount of any damages which such Participant has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Participant's obligations to contribute pursuant to this Section 8(c) are several in proportion to the respective principal amount of Securities held by each of the Participants hereunder and not joint. SECTION 9. RULE 144A The Registrants hereby agree with each Holder, for so long as any Transfer Restricted Securities remain outstanding, to make available to any Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities from such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A. SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS No Holder may participate in any Underwritten Registration hereunder unless such Holder (a) agrees to sell such Holder's Transfer Restricted Securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all reasonable questionnaires, powers of attorney, indemnities, underwriting agreements, lock-up letters and other documents required under the terms of such underwriting arrangements. 19 SECTION 11. SELECTION OF UNDERWRITERS The Holders of Transfer Restricted Securities covered by the Shelf Registration Statement who desire to do so may sell such Transfer Restricted Securities in an Underwritten Offering. In any such Underwritten Offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Holders of a majority in aggregate principal amount of the Transfer Restricted Securities included in such offering; provided, that such investment bankers and managers must be reasonably satisfactory to the Company. SECTION 12. MISCELLANEOUS (a) Remedies. The Registrants agree that monetary damages (including the -------- liquidated damages contemplated hereby) would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agree to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company and the Trust will not, and -------------------------- will cause the Guarantors not to, on or after the date of this Agreement enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Neither the Company nor the Trust has previously entered into any agreement granting any registration rights, with respect to its securities, to any Person, which are inconsistent with the rights granted to the Holders in this Agreement. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's and the Trust's securities under any agreement in effect on the date hereof. (c) Adjustments Affecting the Securities. The Company and the Trust will ------------------------------------ not take any action, or permit any change to occur, with respect to the Securities that would materially and adversely affect the ability of the Holders to Consummate any Exchange Offer. (d) Amendments and Waivers. The provisions of this Agreement may not be ---------------------- amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless the Company and the Trust have obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Securities. Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders whose securities are being tendered pursuant to the Exchange Offer and that does not affect directly or indirectly the rights of other Holders whose securities are not being tendered pursuant to such Exchange Offer may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Securities being tendered or registered. (e) Notices. All statements, reports, notices and other communications ------- provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or 20 certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Declaration; and (ii) if to the Registrants: Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard Building 1, Suite 210 Torrance, California 90505 Telecopier No.: (310) 373-4305 Attention: Chief Financial Officer With a copy to: Freshman, Marantz, Orlanski, Cooper & Klein 9100 Wilshire Boulevard Beverly Hills, California 90212 Telecopier No.: (310) 274-8357 Attention: Thomas J. Poletti All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. (f) Successors and Assigns. This Agreement shall inure to the benefit of ---------------------- and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders of Transfer Restricted Securities; provided, however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign acquired Transfer Restricted Securities from such Holder. (g) Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. 21 (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ------------- ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (j) Severability. In the event that any one or more of the provisions ------------ contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Entire Agreement. This Agreement, together with the Purchase ---------------- Agreement, the Remarketing Agreement, the Indenture, the Guarantee and the Debenture Guarantees, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company and the Trust with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. (l) Required Consents. Whenever the consent or approval of Holders of a ----------------- specified percentage of Transfer Restricted Securities is required hereunder, Transfer Restricted Securities held by the Company or its affiliates (as such term is defined in Rule 405 under the Act) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. IMPERIAL CREDIT INDUSTRIES, INC. By: /s/ H. Wayne Snavely --------------------------------- Name: H. Wayne Snavely Title: Chairman IMPERIAL CREDIT CAPITAL TRUST I By: /s/ Kevin E. Villani --------------------------------- IMPERIAL BUSINESS CREDIT, INC. By: /s/ H. Wayne Snavely --------------------------------- Name: H. Wayne Snavely Title: Chairman IMPERIAL CREDIT ADVISORS, INC. By: /s/ H. Wayne Snavely --------------------------------- Name: H. Wayne Snavely Title: Chairman FRANCHISE MORTGAGE ACCEPTANCE CO. LLC By: /s/ H. Wayne Snavely --------------------------------- Name: H. Wayne Snavely Title: Chairman AUTO MARKETING NETWORK, INC. By: /s/ H. Wayne Snavely --------------------------------- Name: H. Wayne Snavely Title: Chairman 23 Accepted as of the date hereof LEHMAN BROTHERS INC. By: /s/ David J. Kim --------------------------------- Name: David J. Kim Title: Senior Vice President 24 EX-4.5 6 REMARKETING AGREEMENT, DATED AS OF 6/9/97 EXHIBIT 4.5 $70,000,000 IMPERIAL CREDIT CAPITAL TRUST I REMARKETED PAR SECURITIES, SERIES A REMARKETING AGREEMENT --------------------- June 9, 1997 Lehman Brothers Inc. Three World Financial Center New York, New York 10285 Ladies and Gentlemen: Imperial Credit Capital Trust I, a Delaware statutory business trust (the "Trust"), is issuing today $70,000,000 in aggregate liquidation amount of the Trust's Remarketed Par Securities, Series A (liquidation amount $1,000 per Security) (the "Preferred Securities"), guaranteed (the "Guarantee"; together with the Preferred Securities, the "Securities") by the Company (as defined herein) to the extent set forth in the Guarantee Agreement, dated as of June 9, 1997 (the "Guarantee Agreement"), between the Company and Chase Trust Company of California, as Guarantee Trustee (the "Guarantee Trustee"). Imperial Credit Industries, Inc., a California corporation (the "Company"), will be the owner of all of the beneficial ownership interests represented by common securities (the "Common Securities") of the Trust. Concurrently with the issuance of the Securities and the Company's purchase of all of the Common Securities, the Trust will invest the proceeds of each thereof in the Company's Resettable Rate Debentures, Series A (the "Resettable Rate Debentures, Series A"). The Resettable Rate Debentures, Series A are to be issued pursuant to an Indenture, dated as of June 9, 1997 (the "Indenture"), between the Company, the Trust, Imperial Business Credit, Inc., a California corporation ("IBC"), Imperial Credit Advisors, Inc., a California corporation ("ICA"), Franchise Mortgage Acceptance Co. LLC, a California limited liability company ("FMA"), Auto Marketing Network, Inc., a Florida corporation ("AMN"), and Chase Trust Company of California, as Indenture Trustee (the "Indenture Trustee"). Collectively, IBC, ICA, FMA and AMN are referred to as the "Guarantors". Pursuant to a registration rights agreement, dated as of June 9, 1997 (the "Registration Rights Agreement"), among the Company, the Trust, the Guarantors and the Initial Purchaser, the Company, the Trust and the Guarantors have agreed, subject to the conditions stated therein, to file with the Securities and Exchange Commission (the "Commission") a registration statement within 30 days after the date of original issuance of the Preferred Securities and to use their best efforts to commence an offer to exchange (the "Exchange Offer") the Securities for Preferred Securities, Series B, of the Trust (the "New Preferred Securities" and, together with the Preferred Securities, the "Trust Preferred Securities") and a new Company guarantee pursuant to a new guarantee agreement (the "New Guarantee Agreement") between the Company and the Guarantee Trustee in respect of the New Preferred Securities (the "New Guarantee" and, together with the New Preferred Securities, the "New Securities"), which New Securities will have been registered under the Securities Act, and will otherwise be identical in all respects to the Securities or to cause a 2 shelf registration statement to become effective under the Securities Act with respect to the Securities and the Resettable Rate Debentures, Series A, and to remain effective for the period designated in the Registration Rights Agreement. In connection with the Exchange Offer, the Company's Resettable Rate Debentures, Series B (the "New Debentures" and, together with the Resettable Rate Debentures, Series A, the "Debentures"), to be issued pursuant to the Indenture, are to be exchanged with the Trust for the Resettable Rate Debentures, Series A. The Remarketing Agent (as defined herein) and Holders of Transfer Restricted Securities (as defined in the Registration Rights Agreement) will be entitled to the benefits of the Registration Rights Agreement. The Amended and Restated Declaration of Trust of the Trust, dated as of June 9, 1997 (the "Declaration"), provides for the Remarketing (as defined below) of the New Preferred Securities, unless the New Securities have not been issued pursuant to the Exchange Offer, in which event the Declaration provides for the remarketing of the Preferred Securities; provided that if the Debentures have been distributed to the holders of the Trust Preferred Securities in liquidation of the Trust, the Indenture provides for the remarketing of the New Debentures unless the New Debentures have not been issued in connection with the Exchange Offer, in which event the Indenture provides for the remarketing of the Resettable Rate Debentures, Series A. As used in this Agreement, the term "Remarketed Securities" means the securities remarketed pursuant to the Declaration or the Indenture, as the case may be; the term "Remarketing Procedures" means Section 7.5 of the Declaration and Section 3.12 of the Indenture; and the term "Remarketing" means the remarketing of the Remarketed Securities pursuant to the Remarketing Procedures. In connection with the Remarketing, the Company and the Trust (unless the Debentures have been distributed to the holders of the Trust Preferred Securities in liquidation of the Trust, in which case the Company only) (each, an "Issuer of the Remarketed Securities") will prepare final Offering Materials (as defined below) setting forth or including a description of the terms of the Remarketed Securities, the terms of the Remarketing, a description of each Issuer of the Remarketed Securities and any material developments relating to the Company occurring after the date of the most recent financial statements included therein. Each Issuer of the Remarketed Securities shall deliver copies of the Offering Materials to the Remarketing Agent pursuant to the terms of this Agreement. The Company and the Trust hereby confirm that they have authorized the use of the Offering Materials in connection with the remarketing of the Remarketed Securities by the Remarketing Agent in accordance with Section 1 hereof. As used herein, "Preliminary Offering Materials" and "Offering Materials" shall mean, respectively, (i) if a registration statement is not filed in connection with the Remarketing, any preliminary offering memorandum and the final offering memorandum prepared in connection with such Remarketing and (ii) if a registration statement is filed in connection with the Remarketing, the Registration Statement and any amendments thereto referred to in Section 2(a) and any preliminary prospectus included therein, and the Registration Statement and the Prospectus (each as defined herein). Capitalized terms used herein and not otherwise defined are used as defined in the Declaration or the Indenture, as the case may be. Section 1. Appointment and Obligations of the Remarketing Agent. (a) The Trust and the Company hereby appoint Lehman Brothers Inc., as exclusive remarketing agent (the 3 "Remarketing Agent"), and Lehman Brothers Inc. accepts appointment as Remarketing Agent, for the purpose of (i) remarketing Remarketed Securities on behalf of the holders thereof and (ii) performing such other duties as are assigned to the Remarketing Agent in the Remarketing Procedures, all in accordance with and pursuant to the Remarketing Procedures. (b) The Remarketing Agent agrees (i) to use commercially reasonable efforts to remarket the Remarketed Securities tendered or deemed tendered to the Remarketing Agent in the Remarketing, (ii) to notify each Issuer of the Remarketed Securities promptly of the Adjusted Distribution Rate and (iii) to carry out such other duties as are assigned to the Remarketing Agent in the Remarketing Procedures, all in accordance with the provisions of the Remarketing Procedures. (c) The Remarketing Agent represents and warrants to the Company that it will remarket the Remarketed Securities upon the terms and conditions set forth in this Agreement and in the Offering Materials. (d) On the Scheduled Remarketing Date, the Remarketing Agent shall use commercially reasonable efforts to remarket at a price equal to 100% of the liquidation or principal amount thereof, Remarketed Securities tendered or deemed tendered for purchase. Prior to 4:00 P.M., New York City time, on the Scheduled Remarketing Date, the Remarketing Agent shall determine the Adjusted Distribution Rate, which shall be the rate per annum (rounded to the nearest one-thousandth (0.001) of one percent per annum) which the Remarketing Agent determines, in its sole judgment, to be the lowest rate per annum, if any, not exceeding the Maximum Adjusted Distribution Rate that will enable it to remarket all Remarketed Securities tendered or deemed tendered for remarketing at a price of $1,000 per Remarketed Security. (e) If any holder of Remarketed Securities timely delivered a Notice of Election to tender such Remarketed Securities and separately notifies the Remarketing Agent that such holder desires to purchase a number of Remarketed Securities in the Remarketing, but only if the Adjusted Distribution Rate is not less than a specified rate per annum, the Remarketing Agent shall give priority to such holder's purchase of such number of Remarketed Securities in the Remarketing, provided that the Adjusted Distribution Rate is not less than such specified rate. (f) By approximately 4:30 P.M., New York City time, on the Scheduled Remarketing Date, the Remarketing Agent shall advise, by telephone (i) the Depositary, the Property Trustee, the Indenture Trustee and each Issuer of the Remarketed Securities of the Adjusted Distribution Rate and the number of Remarketed Securities sold in the Remarketing, (ii) each purchaser of Remarketed Securities (or the Depositary Participant thereof) of the Adjusted Distribution Rate and the number of Remarketed Securities such purchaser is to purchase and (iii) each purchaser to give instructions to its Depositary Participant to pay the purchase price on the Remarketing Settlement Date in same day funds against delivery of the Remarketed Securities purchased through the facilities of the Depositary. (g) If the Remarketing Agent is unable to remarket by 4:00 P.M., New York City time, on the Scheduled Remarketing Date all Remarketed Securities tendered or deemed tendered for purchase at a price of $1,000 per Remarketed Security and receives notice from the Indenture 4 Trustee that the Company has deposited with the Indenture Trustee, not later than 12 Noon, New York City time, on the Business Day prior to the related Scheduled Remarketing Settlement Date, sufficient moneys to redeem Debentures in a principal amount equal to the liquidation or principal amount of the Remarketed Securities not so remarketed, then the Remarketing Agent shall make payment to the Depositary Participant of each tendering holder of Remarketed Securities by the close of business on the Remarketing Settlement Date, against delivery through the facilities of the Depositary of such holder's tendered Remarketed Securities, of the purchase price for such tendered Remarketed Securities sold in the Remarketing. If the Company shall not have deposited such moneys with the Indenture Trustee prior to such time, the Remarketing Agent shall not make payment to such Depositary Participant of such purchase price. 2. Representations, Warranties and Agreements of the Company. The Company represents, warrants and agrees (i) on and as of the date the Offering Materials are first distributed to holders of the Remarketed Securities (the "Commencement Date"), (ii) on and as of each Effective Date (as defined herein), if any, if such Effective Date is not the Commencement Date and (iii) on and as of the Scheduled Remarketing Date on which Remarketing occurs (the "Remarketing Date"), that: (a) If a registration statement is required to be filed in connection with the Remarketing, such registration statement, and any required amendment thereto, with respect to the Remarketed Securities have (i) been prepared in conformity in all material respects with the requirements of the Securities Act and the rules and regulations (the "Rules and Regulations") of the Commission thereunder, (ii) been filed with the Commission under the Securities Act and (iii) become effective under the Securities Act. As used in this Agreement, "Effective Time" means the date and the time as of which such registration statement, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission; "Effective Date" means the date of the Effective Time of such registration statement; "Preliminary Prospectus" means each prospectus included in any such registration statement, or amendments thereof, before it became effective under the Securities Act and any prospectus filed with the Commission by the Company with the consent of the Remarketing Agent pursuant to Rule 424(a) of the Rules and Regulations; "Registration Statement" means such registration statement, as amended at its Effective Time, including any documents incorporated by reference therein at such time and all information contained in the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations in accordance with Section 5(b) hereof and deemed to be a part of the Registration Statement as of the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules and Regulations; and "Prospectus" means such final prospectus, as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus. (b) If a registration statement is required to be filed in connection with the Remarketing, the Registration Statement conforms (and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus, when they become effective or are filed with the Commission, as the case may be, will conform) in all respects to the requirements of the Securities Act and the Rules and Regulations. 5 (c) If a registration statement is required to be filed in connection with the Remarketing, the documents incorporated by reference in the Prospectus, when they became effective or were filed with the Commission, as the case may be, conformed in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission thereunder; and any further documents so filed and incorporated by reference in the Prospectus, when such documents become effective or are filed with Commission, as the case may be, will conform in all material respects to the requirements of the Securities Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder. (d) (i) If a registration statement is required to be filed in connection with the Remarketing, the Registration Statement and any amendment thereto did not and will not, as of its Effective Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) each of the other Offering Materials and any amendment or supplement thereto will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty as to information contained in or omitted from the Offering Materials in reliance upon and in conformity with written information furnished to either Issuer of the Remarketed Securities by or on behalf of the Remarketing Agent specifically for inclusion therein. Reference herein to the Offering Materials shall be deemed to refer to and include any document filed by the Company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which is incorporated in the Offering Materials by reference, and any reference to any amendment or supplement to the Offering Materials shall be deemed to refer to and include any document filed under the Exchange Act after the date of the Offering Materials and incorporated by reference in the Offering Materials. (e) If a registration statement is not required to be filed in connection with the Remarketing, it is not required by applicable law or regulation in connection with the Remarketing in the manner contemplated by this Agreement to register the Remarketed Securities or, if the Remarketed Securities include Trust Preferred Securities, the Resettable Rate Debentures, Series A or the New Debentures under the Securities Act or to qualify the Declaration, the New Guarantee (or, if the Exchange Offer has not been consummated, the Guarantee) or the Indenture in respect of Remarketed Securities or the Debentures under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). (f) Each of the Company and IBC, ICA, FMA, AMN and any other subsidiary of the Company (other than the Trust) that is a guarantor of the Company's obligations under the Debentures immediately prior to the Remarketing Settlement Date (collectively, the "Subsidiaries") has been duly organized and is validly existing and in good standing under the laws of its respective jurisdiction of incorporation or organization, is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of property or the conduct of its business requires such qualification (except where the failure to be so qualified and in good standing would not have a Material Adverse Effect), and has all power and authority necessary to own or hold its properties and to conduct the business in which it is engaged. As used herein, "Material Adverse Effect" means a material adverse effect on the condition (financial or 6 otherwise), results of operations, business or prospects of the Company and its subsidiaries, taken as a whole. (g) The authorized and outstanding capital stock of the Company as set forth in the Offering Materials is accurate. All of the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and conform to the description thereof contained in the Offering Materials. (h) The Company owns a majority of the outstanding shares of capital stock of, or membership interests in, as applicable, each of the Subsidiaries, and all of such shares of capital stock or membership interests are duly authorized and validly issued and are fully paid and nonassessable. All of such shares of capital stock or membership interests, as applicable, of each of the Subsidiaries are owned by the Company free and clear of any security interest, claim, lien or encumbrance. Except as described in the Offering Materials, there are no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, shares of the capital stock or membership interests of any of the Subsidiaries. (i) Assuming due authorization, execution and delivery of this Agreement by the Remarketing Agent, this Agreement is a legally valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and to general equitable principles (whether considered in a proceeding in equity or at law). (j) Assuming due authorization, execution and delivery thereof by the Indenture Trustee, the Indenture is a legally valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and to general equitable principles (whether considered in a proceeding in equity or at law). (k) Assuming due authentication by the Indenture Trustee, the New Debentures (or, if the Exchange Offer has not been consummated, the Resettable Rate Debentures, Series A) are duly and validly issued and outstanding and constitute the legally valid and binding obligations of the Company, entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and to general equitable principles (whether considered in a proceeding in equity or at law). (l) Assuming due authorization, execution and delivery thereof by the Guarantee Trustee, the New Guarantee Agreement (or, if the Exchange Offer has not been consummated, the Guarantee Agreement) is a legally valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting 7 creditors' rights generally and to general equitable principles (whether considered in a proceeding in equity or at law). (m) The performance of this Agreement, the Indenture and the New Debentures (or, if the Exchange Offer has not been consummated, the Resettable Rate Debentures, Series A) and, if the Remarketed Securities are Trust Preferred Securities, the Declaration and the New Guarantee Agreement (or, if the Exchange Offer has not been consummated, the Guarantee Agreement) by the Company (the "Company Transactions") does not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries is bound or to which any of the property or assets of the Company or any of the Subsidiaries is subject, nor will such actions result in any violation of the provisions of the charter, by-laws, operating agreement or other organizational documents of the Company or any of the Subsidiaries or any statute, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company, any of the Subsidiaries or any of their properties or assets (except to the extent any such conflict, breach, violation or default does not or will not, as the case may be, have a Material Adverse Effect); and except for such consents, approvals, authorizations, registrations or qualifications as may be required under applicable state securities laws in connection with the initial distribution of the Preferred Securities or the Remarketing by the Remarketing Agent, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the Company Transactions. (n) Neither the Company nor any of the Subsidiaries is in breach or violation of any of the terms or provisions of any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of the Subsidiaries are a party or by which the Company or any of the Subsidiaries are bound or to which any of the property or assets of the Company or any of the Subsidiaries are subject, which breach or violation would have a Material Adverse Effect, nor is the Company or any of the Subsidiaries in violation of the provisions of its charter, by-laws, operating agreement or other organizational documents or any statute or any judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries or any of their properties or assets, which violation would have a Material Adverse Effect. (o) The Remarketed Securities, the Indenture, this Agreement and, if the Remarketed Securities are Trust Preferred Securities, the Declaration, the New Guarantee Agreement (or, if the Exchange Offer has not been consummated, the Guarantee Agreement) and the New Debentures (or, if the Exchange Offer has not been consummated, the Resettable Rate Debentures, Series A) conform or will conform in all material respects to the descriptions thereof contained in the Offering Materials. (p) There are no legal or governmental proceedings pending or, to the Company's knowledge, threatened to which the Company or any of the Subsidiaries is a party or of which any property or assets of the Company or any of the Subsidiaries is the subject which, if determined 8 adversely to the Company or any of the Subsidiaries, could reasonably be expected to have a Material Adverse Effect, otherwise than as set forth in the Offering Materials. (q) If a registration statement is required to be filed in connection with the Remarketing, the conditions for use of Form S-3, as set forth in the General Instructions thereto, have been satisfied. (r) Neither the Company nor any of the Subsidiaries has sustained, since the date of the latest audited financial statements included or incorporated by reference in the Offering Materials, any material losses or interferences with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Offering Materials; and, since such date, there have not been any material changes in the capital stock or long-term debt of the Company or any of the Subsidiaries or any material adverse changes in the condition (financial or otherwise), results of operations, business or prospects of the Company and the Subsidiaries, taken as a whole (a "Material Adverse Change"), or any developments that could reasonably be expected to involve a prospective Material Adverse Change, otherwise than as set forth or contemplated in the Offering Materials. (s) The financial statements (including the related notes) of the Company included or incorporated by reference in the Offering Materials comply as to form in all material respects with the requirements of the Securities Act, present fairly the financial condition and results of operations of the entities purported to be shown thereby, at the dates and for the periods indicated, and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved. (t) The firm of independent public accountants who have certified certain financial statements of the Company, whose report is included or incorporated by reference in the Offering Materials and who have delivered the initial letter referred to in Section 6(l) hereof (the "Independent Public Accountants"), were independent public accountants under Rule 101 of AICPA's Code of Professional Conduct and its interpretations and rulings during the periods covered by the financial statements on which they reported included or incorporated by reference in the Offering Materials. (u) The Company and each of the Subsidiaries has good and marketable title in fee simple to all real property and good title to all personal property owned by each of them, in each case free and clear of all liens, encumbrances and defects except (i) such as are described in the Offering Materials or (ii) such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries; and all real property and buildings held under lease by the Company and each of the Subsidiaries are held by them under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and the Subsidiaries. The Company and each of the Subsidiaries enjoy peaceful and undisturbed possession under all leases to which they are party as lessee, except where the failure to enjoy peaceful and undisturbed possession would not have a 9 Material Adverse Effect. No consent need be obtained from any person with respect to any such lease in connection with the transactions contemplated hereby and in the Offering Materials, except for such as have been obtained or the failure to obtain such consent would not have a Material Adverse Effect. None of the properties or assets, the value of which is reflected in the financial statements included in the Offering Materials, is held under any lease (except for properties or assets held under capital leases and leasehold improvements held under both capital leases and operating leases). The Company and the Subsidiaries maintain such insurance as may be required by law and such other insurance, to such extent and against such hazards and liabilities, as is customarily maintained by companies similarly situated. (v) The Company and the Subsidiaries own or possess adequate rights to use all material patents, patent applications, trademarks, service marks, tradenames, trademark registrations, service mark registrations, copyrights and licenses necessary for the conduct of their businesses, and to the best of the Company's knowledge, the conduct of their businesses will not conflict with, and neither the Company nor any of the Subsidiaries has received any notice of any claim of conflict with, any such rights of others (except in any such case for any conflict that would not have a Material Adverse Effect). (w) The Company and each of the Subsidiaries is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended (or any successor statute), including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company or any of its subsidiaries would have any liability; none of the Company and its subsidiaries has incurred or expects to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Section 412 or 4971 of the Internal Revenue Code of 1986, as amended (or any successor statute), including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company or any of its subsidiaries would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (x) The Company and the Subsidiaries have filed all federal, state and local income and franchise tax returns required to be filed through the date hereof and have paid, or made adequate reserve or provision for the payment of, all taxes shown as due thereon, and the Company has no knowledge of any tax deficiency that has had (or could have) a Material Adverse Effect, except as set forth or contemplated in the Offering Materials. (y) The Company and the Subsidiaries (i) make and keep accurate books and records and (ii) maintain internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's specific authorization, (B) transactions are recorded as necessary to permit preparation of their consolidated financial statements and to maintain accountability for their assets, (C) access to their assets is permitted only in accordance with management's specific authorization and (D) the reported accountability for their assets is compared with existing assets at reasonable intervals. 10 (z) Neither the Company nor any of the Subsidiaries, nor any director, officer, member, manager, agent, employee or other person associated with or acting on behalf of the Company or any of its subsidiaries, has used any corporate funds during the last five years for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977 (or any successor statute); or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (aa) Neither the Company nor any of the Subsidiaries is (i) an "investment company" within the meaning of such term under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and the rules and regulations of the Commission thereunder or (ii) a "holding company" or a "subsidiary company" or an "affiliate" of a holding company within the meaning of the Public Utility Holding Company Act of 1935, as amended (the "PUHC Act"). (bb) Neither the Company nor any of the Subsidiaries has taken, nor will any of them take, directly or indirectly, any action designed to, or that could reasonably be expected to, cause or result in stabilization or manipulation of the price of the Remarketed Securities to facilitate the remarketing of the Remarketed Securities. 3. Representations, Warranties and Agreements of the Company and the Trust. The Company and the Trust, jointly and severally, represent, warrant and agree, unless the Debentures have been distributed to the holders of the Trust Preferred Securities in liquidation of the Trust at the time of making of the following representations, (i) on and as of the Commencement Date, (ii) on and as of each Effective Date, if any, if such Effective Date is not the Commencement Date and (iii) on and as of the Remarketing Date, that: (a) The Trust is validly existing as a statutory business trust in good standing under the Business Trust Act of the State of Delaware (the "Delaware Business Trust Act") with the trust power and authority to own property and conduct its business as described in the Memorandum, and has conducted and will conduct no business other than the transactions contemplated by this Agreement as described in the Offering Materials; the Trust is not a party to or bound by any agreement or instrument other than this Agreement, the Declaration, the Registration Rights Agreement and the purchase agreement relating to the initial distribution of the Preferred Securities (the "Purchase Agreement"); the Trust has no liabilities or obligations other than those arising out of the transactions contemplated by this Agreement, the Registration Rights Agreement, the Declaration and the Purchase Agreement or described in the Offering Materials; and the Trust is not a party to or subject to any action, suit or proceeding of any nature. (b) Assuming due authorization, execution and delivery of the Declaration by the Property Trustee and the Delaware Trustee (each as defined in the Declaration), the Declaration constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally 11 and general equitable principles (whether considered in a proceeding in equity or at law), and will conform in all material respects to the descriptions thereof contained in the Offering Materials. (c) All of the outstanding Remarketed Securities and Common Securities have been duly authorized and are validly issued, fully paid and non- assessable and will conform in all material respects to the descriptions thereof contained in the Offering Materials. (d) Assuming due authorization execution and delivery of this Agreement by the Remarketing Agent, this Agreement is a legally valid and binding agreement of the Trust, enforceable against the Trust in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law). (e) The performance of this Agreement, the Declaration, and the Remarketed Securities by the Trust, and the distribution of the Debentures upon the liquidation of the Trust in the circumstances contemplated by the Declaration and described in the Offering Materials (the "Trust Transactions") will not violate any statute or order, rule or regulation of any court or governmental agency or body having jurisdiction over the Trust or any of its assets; and except for such consents, approvals, authorizations, registrations or qualifications as may be required under applicable state securities laws in connection with the initial distribution of the Preferred Securities or the Remarketing, no consent, approval, authorization or order of or filing or registration with, any such court or governmental agency or body was or is required for the Trust Transactions. (f) The Trust is not an "investment company" within the meaning of such term under the Investment Company Act and the rules and regulations of the Commission thereunder. 4. Fees and Expenses. (a) For the performance of its services as Remarketing Agent hereunder, the Company, in its capacity as the issuer of the Debentures, agrees to pay to the Remarketing Agent a fee, payable on the Remarketing Settlement Date, equal to 3.50% of the liquidation or principal amount of the outstanding Remarketed Securities tendered or deemed tendered for purchase on the related Scheduled Remarketing Date, less such liquidation or principal amount of the Remarketed Securities, if any, tendered or deemed tendered for purchase and not sold in the Remarketing, by wire transfer to an account designated by the Remarketing Agent. The percentage in the prior sentence shall be reduced by .35% for each improvement in credit rating of the Company's unsecured senior debt in effect on the Scheduled Remarketing Date compared to B2, which is the credit rating of Moody's Investors Service Inc. ("Moody's") in effect on such debt on the date of issuance of the Remarketed Securities. For the purposes of the foregoing, the credit rating of the Company's unsecured senior debt shall be considered improved for each rating category (including numerical, "+" or "-" or other indicators) that such rating on the Scheduled Remarketing Date by Moody's or Standard & Poors Ratings Group ("S&P"), whichever is lower, is better than B2 or B or the equivalent of such ratings by Moody's and S&P. (b) The Company, in its capacity as the issuer of the Debentures, agrees to pay: (a) the costs incident to the preparation and printing and, if applicable, filing of the Preliminary Offering 12 Materials and the Offering Materials and any amendments and exhibits thereto; (b) the costs of distributing the Preliminary Offering Materials and the Offering Materials and any amendment or supplement thereto or any document incorporated by reference therein; (c) the fees and expenses of qualifying the Remarketed Securities under the securities laws of the several jurisdictions as provided in Section 5(j) and of preparing, printing and distributing a Blue Sky Memorandum (including related reasonable fees and expenses of counsel to the Remarketing Agent required in connection with "blue sky" functions); (d) the filing fees incident to securing any required review of the National Association of Securities Dealers, Inc. of the terms of sale of the Remarketed Securities; (e) any applicable listing and other fees; (f) all other costs and expenses incident to the performance of the obligations of the Company and the Trust under this Agreement; and (g) the reasonable fees and expenses of counsel to the Remarketing Agent in connection with its duties hereunder. The Trust shall not be liable for any fees and expenses included in this Section 4. 5. Further Agreements of the Company. The Company agrees: (a) To furnish to the Remarketing Agent, (i) copies of the Declaration, the New Guarantee Agreement (or, if the Exchange Offer has not been consummated, the Guarantee Agreement) and the Indenture and any amendment to any thereof and each report or other document mailed or made available to holders of the Remarketed Securities (including annual and quarterly reports to shareholders and all documents mailed or made available to its other security holders) or filed by the Company with the Commission after the end of the fiscal year of the Company preceding the Remarketing, (ii) notice of the purchase of Remarketed Securities by the Company or any subsidiary or affiliate of the Company as soon as the Company shall become aware of such purchase, (iii) notice of the occurrence of any of the events set forth in Section 6(n) or (p), (iv) notice of the giving or receipt of any notice under Section 8 and (v) in connection with the Remarketing, such other information as the Remarketing Agent may reasonably request from time to time, in such form as the Remarketing Agent may reasonably request, including but not limited to, the financial condition of the Company or any subsidiary thereof. (b) To file a registration statement with the Commission if required under the Securities Act in connection with the Remarketing and, in that event, to prepare the Prospectus in a form approved by the Remarketing Agent and to file such Prospectus pursuant to and within the time required by the Rules and Regulations; to advise the Remarketing Agent, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Remarketing Agent with copies thereof; to file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the Remarketing; to advise the Remarketing Agent, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, of the suspension of the qualification of the Remarketed Securities for remarketing in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, 13 in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal; (c) If a registration statement is required to be filed in connection with the Remarketing, to furnish promptly to the Remarketing Agent and to counsel for the Remarketing Agent a signed copy of the Registration Statement as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith; (d) To furnish to the Remarketing Agent, without charge, as many copies of the Offering Materials and any supplements and amendments thereto and, if a registration statement is required to be filed in connection with the Remarketing, as many conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto, as the Remarketing Agent may reasonably request. (e) If a registration statement is required to be filed in connection with the Remarketing, to file promptly with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus that may, in the judgment of the Company or the Remarketing Agent, be required by the Securities Act or requested by the Commission; (f) Prior to filing with the Commission or otherwise making any amendment or supplement to the Offering Materials, the Company shall furnish a copy thereof to the Remarketing Agent and counsel to the Remarketing Agent and will not effect any such amendment or supplement to which the Remarketing Agent shall reasonably object by notice to the Company after a reasonable period to review such amendment or supplement. (g) If, at any time on or after the Commencement Date and prior to the Remarketing Settlement Date, any event shall occur or condition exist as a result of which it is necessary, in the opinion of counsel for the Remarketing Agent or counsel for the Company, to amend or supplement the Offering Materials in order that the Offering Materials will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in light of the circumstances existing at the time it is delivered in the Remarketing, or if it is necessary to amend or supplement the Offering Materials to comply with applicable law, to promptly prepare such amendment or supplement as may be necessary to correct such untrue statement or omission or so that the Offering Materials, as so amended or supplemented, will comply with applicable law and to furnish to the Remarketing Agent such number of copies as it may reasonably request. (h) If a registration statement is filed in connection with the Remarketing, as soon as practicable after the Effective Date of the Registration Statement, to make generally available to the Company's security holders and to deliver to the Remarketing Agent an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158); 14 (i) For a period of five years following the Remarketing Settlement Date, to furnish to the Remarketing Agent upon its request copies of any annual reports, quarterly reports and current reports filed with the Commission on Forms 10-K, 10-Q and 8-K, or such other similar forms as may be designated by the Commission, and such other documents, reports and information as shall be furnished by the Company to the Indenture Trustee, the Property Trustee or the holders of the Remarketed Securities. (j) To use its reasonable best efforts to qualify the Remarketed Securities for sale under the securities or Blue Sky laws of such jurisdictions as the Remarketing Agent reasonably designates and to continue such qualifications in effect so long as reasonably required to complete the distribution of the Remarketed Securities. The Company will also arrange for the determination of the eligibility for investment of the Remarketed Securities under the laws of such jurisdictions as the Remarketing Agent reasonably requests. Notwithstanding the foregoing, the Company shall not be obligated to qualify as a foreign corporation in any jurisdiction in which it is not so qualified or to file a general consent to service of process in any jurisdiction. (k) To take such steps as shall be necessary to ensure that none of the Company, the Trust or any subsidiary of the Company shall become (i) an "investment company" within the meaning of the Investment Company Act and the rules and regulations of the Commission thereunder or (ii) a "holding company" or a "subsidiary company" or an "affiliate" of a holding company within the meaning of the PUHC Act. (l) To take all reasonable steps to satisfy the conditions set forth in Section 6 hereof. 6. Conditions to the Remarketing Agent's Obligations. The obligations of the Remarketing Agent hereunder are subject, as of the Commencement Date and at all times on or prior to the Scheduled Remarketing Date, to the accuracy of the representations and warranties on the part of the Company and the Trust herein, to the accuracy of the statements of officers of the Company and of the Trust made pursuant to the provisions hereof, to the performance by the Company and the Trust of their respective obligations hereunder and to the following additional conditions: (a) on each of the Commencement Date and the Scheduled Remarketing Date, the Remarketing Agent shall have received: (i) a certificate, dated such date and signed by an authorized officer of the Trust acceptable to the Remarketing Agent, to the effect that the representations and warranties of the Trust contained in this Agreement are true and correct as of such date and that the Trust has performed all of its obligations to be performed hereunder on or prior to such date; and (ii) a certificate, dated such date and signed by an authorized officer of the Company to the effect that no event described in Section 6(g)(i) or (ii) or subsection 6(j) has occurred as of such date, and to the effect that the representations and warranties of the Company contained in the Agreement are true and correct as of such date and that the 15 Company has performed all of its obligations to be performed hereunder on or prior to such date. The officers signing and delivering such certificate on behalf of the Company and the Trust may rely upon the best of their knowledge as to proceedings threatened; (b) each of the Company and the Trust shall have furnished to the Remarketing Agent on each of the Commencement Date and the Scheduled Remarketing Date, such additional certificates or other documents as are typically delivered in connection with a transaction of this type and which the Remarketing Agent may reasonably request; (c) On the Commencement Date and the Scheduled Remarketing Date, Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, counsel for the Company and the Trust, or such other counsel satisfactory to the Remarketing Agent, shall have furnished to the Remarketing Agent its written opinion, as counsel to the Company and the Trust, addressed to the Remarketing Agent and dated such date, in form and substance reasonably satisfactory to the Remarketing Agent, to the effect that: (i) Each of the Company and the Subsidiaries is validly existing as a corporation or limited liability company, as applicable, and in corporate or limited liability company good standing under the laws of its jurisdiction of incorporation or organization, is qualified to do business and is in corporate or limited liability company, as applicable, good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of property or the conduct of its business requires such qualification (except where the failure to be so qualified and in good standing would not have a Material Adverse Effect), and has corporate or limited liability company power to own its properties and conduct its business; (ii) The Company has corporate power to consummate the transactions contemplated by, this Agreement; (iii) The execution and delivery of this Agreement have been duly authorized by all requisite corporate action of the Company; and this Agreement has been duly executed and delivered by the Company; (iv) Assuming due authorization, execution and delivery by the Indenture Trustee, the Indenture is a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and to general equitable principles (whether considered in a proceeding in equity or at law); (v) Assuming due authentication by the Indenture Trustee, the New Debentures (or, if the Exchange Offer has not been consummated, the Resettable Rate Debentures, Series A) are legal, valid and binding obligations of the Company, entitled to the benefits of the Indenture, enforceable against the Company in accordance with their terms, subject to 16 the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and to general equitable principles (whether considered in a proceeding in equity or at law); (vi) If the Remarketed Securities are Trust Preferred Securities, assuming due authorization, execution and delivery by the Guarantee Trustee, the New Guarantee Agreement (or, if the Exchange Offer has not been consummated, the Guarantee Agreement) is the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and to general equitable principles (whether considered in a proceeding in equity or at law); (vii) All of the outstanding shares of capital stock of, or membership interests in, as applicable, each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and held of record by the Company free and clear of any security interest, claim, lien or encumbrance; and, to our knowledge, there are no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, shares of the capital stock or membership interests of any of the Subsidiaries, except as described in the Offering Materials; (viii) The performance of this Agreement, the Remarketed Securities, the Indenture and the New Debentures (or, if the Exchange Offer has not been consummated, the Resettable Rate Debentures, Series A) and, if the Remarketed Securities are Trust Preferred Securities, the Declaration and the New Guarantee Agreement (or, if the Exchange Offer has not been consummated, the Guarantee Agreement) by the Company and the Trust, as applicable, will not (A) to the to the knowledge of such counsel conflict with or result in a breach or violation of, or constitute a default under, any indenture, mortgage, deed of trust, loan or credit agreement, or any other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or any of its or their property or assets are subject which such breach or violation would have a Material Adverse Effect or (B) result in any violation of the provisions of the charter or bylaws, or operating agreements, as applicable, of the Company or any of the Subsidiaries or any federal or California statute, or any order, rule or regulation of any federal or California court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries or any of their properties or assets; and except for such consents, approvals, authorizations, registrations or qualifications as may be required under applicable state securities laws in connection with the remarketing of the Remarketed Securities by the Remarketing Agent, no consent, approval, authorization or order of, or filing or registration with, any federal or California court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries or any of their properties or assets is required for compliance by the Company with all of the provisions of this Agreement other than, if a registration statement is required to be filed in connection with the Remarketing, under the Securities Act; 17 (ix) The descriptions in the Offering Materials of the Remarketed Securities, the Indenture and this Agreement and, if the Remarketed Securities are Trust Preferred Securities, the Declaration and the New Guarantee Agreement (or, if the Exchange Offer has not been consummated, the Guarantee Agreement) and the New Debentures (or, if the Exchange Offer has not been consummated, the Resettable Rate Debentures, Series A) conform in all material respects to the descriptions thereof; (x) Except as set forth or referred to in the Offering Materials, no legal or governmental proceedings pending or, to the knowledge of such counsel, threatened to which the Company or any of the Subsidiaries is a party or of which any property or assets of the Company or any of the Subsidiaries is the subject which, if determined adversely to the Company or any of the Subsidiaries, could reasonably be expected to have a Material Adverse Effect; (xi) If a registration statement is required to be filed in connection with the Remarketing, no stop order suspending the effectiveness of the Registration Statement has been issued and, to the knowledge of such counsel, no proceeding for that purpose is pending or threatened by the Commission; (xii) If a registration statement is required to be filed in connection with the Remarketing, the Registration Statement, as of its Effective Date, and the Prospectus, as of its date, and any further amendments or supplements thereto, as of their respective dates, made by the Company prior to the Remarketing Date (other than the financial statements and other financial data contained therein, as to which such counsel need express no opinion) complied as to form in all material respects with the requirements of the Securities Act and the Rules and Regulations; the documents incorporated by reference in the Prospectus and any further amendment or supplement to any such incorporated document made by the Company prior to the Scheduled Remarketing Date (other than the financial statements and related schedules therein, as to which such counsel need express no opinion), when they became effective or were filed with the Commission, as the case may be, complied as to form in all material respects with the requirements of the Securities Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder; (xiii) None of the Company, any of the Subsidiaries or the Trust is (A) an "investment company" within the meaning of the Investment Company Act and the rules and regulations thereunder or (B) a "holding company" or a "subsidiary company" or an "affiliate" of a holding company within the meaning of the PUHC Act; (xiv) If no registration statement is required to be filed in connection with the Remarketing, no registration of the Remarketed Securities or, if the Remarketed Securities include Trust Preferred Securities, the New Debentures (or, if the Exchange Offer has not been consummated, the Resettable Rate Debentures, Series A) under the Securities Act, and no qualification of the Indenture or, if the Remarketed Securities are Trust Preferred Securities, the Declaration or the New Guarantee Agreement (or, if the Exchange Offer has not been consummated, the Guarantee Agreement) under the Trust Indenture Act of 1939, 18 as amended, is required for the Remarketing of the Remarketed Securities solely in the manner contemplated by the Offering Materials; In addition, such counsel shall state that it has participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants of the Issuers of the Remarketed Securities, representatives of the Remarketing Agent and representatives of counsel for the Remarketing Agent at which the contents of the Offering Materials and related matters were discussed and, although such counsel has not undertaken to investigate or verify independently, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Offering Materials, on the basis of the foregoing, no information has come to the attention of such counsel that causes such counsel to believe that, (x) if a registration statement was required to be filed in connection with the Remarketing, the Registration Statement, as of the Effective Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or (y) the other Offering Materials contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (except, in each case, as to financial statements, including the notes thereto, included therein, as to which no belief need be expressed), as of the Commencement Date, the Effective Date, if any, (if the Effective Date is not the Commencement Date) and the Remarketing Date. In rendering such opinion, such counsel may state that its opinion is limited to matters governed by the federal laws of the United States of America and the laws of the State of California. (d) If the Remarketed Securities are Trust Preferred Securities, on the Commencement Date and the Scheduled Remarketing Date, Simpson Thacher & Bartlett, or such other counsel satisfactory to the Remarketing Agent, shall have furnished to the Remarketing Agent its written opinion, as special tax counsel for the Company and the Trust, addressed to the Remarketing Agent and dated such date, in form and substance reasonably satisfactory to the Remarketing Agent, to the effect that: (i) The Trust will not be taxable as a corporation for United States federal income tax purposes; (ii) Subject to the qualifications set forth therein, the statements made in the Offering Materials under the caption "Certain United States Federal Income Tax Consequences" accurately describe the material United States federal income tax consequences of the purchase, ownership and disposition of the Remarketed Securities; (e) If the Remarketed Securities include Trust Preferred Securities, on the Commencement Date and the Scheduled Remarketing Date, Richards, Layton & Finger, P.A., Delaware counsel for the Company and the Trust, or such other counsel satisfactory to the Remarketing Agent, shall have furnished to the Remarketing Agent its written opinion, on certain matters of Delaware law relating to the validity of the Securities, addressed to the Remarketing 19 Agent and dated such date, in form and substance reasonably satisfactory to the Remarketing Agent, to the effect that: (i) The Trust is validly existing in good standing as a business trust under the Delaware Trust Act with the business trust power and authority to own property and to conduct its business as described in the Offering Materials and to enter into and perform its obligations under this Agreement, the Remarketed Securities and the Common Securities. (ii) The Common Securities are validly issued and (subject to the terms of the Declaration) fully paid undivided beneficial ownership interests in the assets of the Trust (such counsel may note that the holders of Common Securities will be subject to the withholding provisions of Section 10.4 of the Declaration, will be required to make payment or provide indemnity or security as set forth in the Declaration and will be liable for the debts and obligations of the Trust to the extent provided in Section 9.1(b) of the Declaration); under the Delaware Trust Act and the Declaration the issuance of the Common Securities is not subject to preemptive or other similar rights. (iii) The Remarketed Securities are validly issued and (subject to the terms of the Declaration) fully paid and non-assessable undivided beneficial ownership interests in the Trust, the holders of the Remarketed Securities will be entitled to the benefits of the Declaration (subject to the limitations set forth in clause (v) below) and will be entitled to the same limitation of personal liability under Delaware law as extended to stockholders of private corporations for profit (such counsel may note that the holders of Remarketed Securities are subject to the withholding provisions of Section 10.4 of the Declaration and are required to make payment or provide indemnity or security as set forth in the Declaration). (iv) All necessary trust action has been taken to duly authorize the execution and delivery by the Trust of this Agreement. (v) Assuming the Declaration has been duly authorized by the Company and has been duly executed and delivered by the Company and the Regular Trustees, and assuming due authorization, execution and delivery of the Declaration by the Property Trustee and the Delaware Trustee, the Declaration constitutes a valid and binding obligation of the Company and the Regular Trustees, enforceable against the Company and the Regular Trustees in accordance with its terms, except to the extent that enforcement thereof may be limited by (i) bankruptcy, insolvency, receivership, liquidation, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and remedies, (ii) general principles of equity (regardless of whether considered and applied in a proceeding in equity or at law) and (iii) considerations of public policy and the effect of applicable law relating to fiduciary duties. (vi) The consummation by the Trust of the transactions contemplated by this Agreement and compliance by the Trust with its obligations hereunder will not violate 20 (i) any of the provisions of the Certificate of Trust or the Declaration or (ii) any applicable Delaware law or administrative regulation. (vii) Assuming that the Trust derives no income from or connected with services provided within the State of Delaware and has no assets, activities (other than having a Delaware Trustee as required by the Delaware Trust Act and the filing of documents with the Secretary of State of Delaware) or employees in the State of Delaware, no filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any Delaware court or Delaware governmental authority or agency (other that as may be required under the securities or blue sky laws of the state of Delaware, as to which such counsel need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of this Agreement. In rendering such opinion, such counsel may state that its opinion is limited to matters governed by the federal laws of the United States of America and the laws of the State of Delaware. (f) On the Commencement Date and the Scheduled Remarketing Date, with respect to the letter of the Independent Public Accountants delivered to the Remarketing Agent concurrently with the execution of this Agreement (the "initial letter"), the Company shall have furnished to the Remarketing Agent a letter (as used in this paragraph, the "bring-down letter") of such accountants, addressed to the Remarketing Agent and dated such date (i) confirming that they are independent public accountants within the meaning of the Securities Act and under the guidelines of the American Institute of Certified Public Accountants, (ii) stating, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Offering Materials, as of a date not more than five days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial information and other matters covered by the initial letter and (iii) confirming in all material respects the conclusions and findings set forth in the initial letter. (g) (i) Neither the Company nor any of the Subsidiaries shall have sustained since the date of the latest audited financial statements included or incorporated by reference in the Offering Materials losses or interferences with their businesses, taken as a whole, from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Offering Materials or (ii) since such date there shall not have been any change in the capital stock or long-term debt of the Company or any of the Subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Offering Materials, the effect of which, in any such case described in clause (i) or (ii), is, in the sole judgment of the Remarketing Agent, so material and adverse as to make it impracticable or inadvisable to proceed with the Remarketing on the terms and in the manner contemplated herein and in the Offering Materials. (h) Without the prior written consent of the Remarketing Agent, the Declaration or the Indenture shall not have been amended in any manner, or otherwise contain any provision 21 contained therein as of the date hereof that, in the opinion of the Remarketing Agent, materially changes the nature of the Remarketed Securities or the Remarketing Procedures. (i) Subsequent to the Commencement Date, there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited; (ii) a banking moratorium shall have been declared by federal or state authorities; (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States; or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in the reasonable judgment of the Remarketing Agent, impracticable or inadvisable to proceed with the Remarketing on the terms and in the manner contemplated herein and in the Offering Materials. (j) Subsequent to the Commencement Date, (i) no downgrading shall have occurred in the rating accorded the Remarketed Securities by a "nationally recognized statistical rating organization", as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Securities Act and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Preferred Securities. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Remarketing Agent. 7. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless the Remarketing Agent and each person, if any, who controls the Remarketing Agent within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Remarketed Securities), to which the Remarketing Agent or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in the Preliminary Offering Materials or Offering Materials or in any amendment or supplement thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any act or failure to act or any alleged act or failure to act by the Remarketing Agent in connection with, or relating in any manner to, the Remarketed Securities or the sale of Remarketed Securities contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (i) or (ii) above, provided that the Company shall not be liable under this clause (iii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be 22 taken by such Remarketing Agent through its gross negligence or willful misconduct), and shall reimburse the Remarketing Agent and each such controlling person on a quarterly basis for any legal or other expenses reasonably incurred by the Remarketing Agent or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in the Preliminary Offering Materials or Offering Materials or in any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company or the Trust by or on behalf of the Remarketing Agent specifically for inclusion therein and described in a letter from the Remarketing Agent to the Company. The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to the Remarketing Agent or to any controlling person of the Remarketing Agent. (b) The Remarketing Agent shall indemnify and hold harmless the Company, each of its directors and officers, the Trust and each Trustee, and each person, if any, who controls the Company or the Trust within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company, any such director or officer, the Trust or any such Trustee, or any such controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Offering Materials or the Offering Materials, or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or any Trustee by or on behalf of the Remarketing Agent specifically for inclusion therein and described in a letter from the Remarketing Agent to the Company, and shall reimburse the Company and any such director or officer, the Trust or any such Trustee or any such controlling person on a quarterly basis for any legal or other expenses reasonably incurred by the Company, or any such director or officer, the Trust or any such Trustee or any such controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred. The foregoing indemnity agreement is in addition to any liability which the Remarketing Agent may otherwise have to the Company, or any such director or officer, the Trust or any such Trustee or any such controlling person. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 7, notify the indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 7 except to the extent it has been materially prejudiced by such failure and, provided further, that the failure to notify the indemnifying party pursuant to this Section 7 shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 7. If any such claim or action shall be brought against an indemnified party, and it shall notify the 23 indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 7 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that any indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment thereof has been specifically authorized by the indemnifying party in writing, (ii) such indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party and in the reasonable judgment of such counsel it is advisable for such indemnified party to employ separate counsel or (iii) the indemnifying party has failed to assume the defense of such action and employ counsel reasonably satisfactory to the indemnified party, in which case, if such indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all such indemnified parties, which firm shall be designated in writing by the Remarketing Agent, if the indemnified parties under this Section 7 consist of the Remarketing Agent or any of its controlling persons, or by the Company, if the indemnified parties under this Section 7 consist of the Company. any of its directors, officers, the Trust or any Trustee or their respective controlling persons. No indemnifying party shall be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with its written consent or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 7 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 7(a) or 7(b) in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company and the Trust on the one hand and the Remarketing Agent on the other from such offering or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Trust on the one hand and the Remarketing Agent on the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Trust on the one hand and the Remarketing Agent on the other with respect to such offering shall be deemed to be 24 in the same proportion as the total liquidation or principal amount of the Remarketed Securities minus the fee paid to the Remarketing Agent pursuant to Section 4(a) of this Agreement, on the one hand, and the total fees received by the Remarketing Agent pursuant to Section 4(a), on the other hand, bear to the total liquidation or principal amount of the Remarketed Securities. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company and the Trust, on the one hand, or the Remarketing Agent, on the other hand, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Trust and the Remarketing Agent agree that it would not be just and equitable if contributions pursuant to this Section 7(d) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 7(d) shall be deemed to include, for purposes of this Section 7(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7(d), the Remarketing Agent shall not be required to contribute any amount in excess of the amount by which the fees received by it under Section 4 exceed the amount of any damages which the Remarketing Agent has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11 of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 8. Resignation and Removal of Remarketing Agent. The Remarketing Agent may resign and be discharged from its duties and obligations hereunder, and the Company may remove the Remarketing Agent, by giving 60 days' prior written notice, in the case of a resignation, to the Company, the Depositary, the Property Trustee and the Indenture Trustee and, in the case of a removal, such removed Remarketing Agent, the Depositary, the Property Trustee and the Indenture Trustee; provided, however, that (i) the Company may not remove the Remarketing Agent unless (A) the Remarketing Agent becomes involved as debtor in a bankruptcy, insolvency or similar proceeding, (B) the Remarketing Agent shall not be among the 15 underwriters with the largest volume underwritten in dollars, on a lead or co-managed basis, of U.S. domestic debt securities during the twelve-month period ended as of the last calendar quarter preceding the Remarketing Date or (C) the Remarketing Agent shall be subject to one or more legal restrictions preventing the performance of its obligations hereunder and (ii) no such resignation nor any such removal shall become effective until the Company shall have appointed at least one nationally recognized broker-dealer as successor Remarketing Agent and such successor Remarketing Agent shall have entered into a remarketing agreement with the Company in which it shall have agreed to conduct the Remarketing in accordance with the Remarketing Procedures. In such case, the Company will use its commercially reasonable efforts to appoint a successor Remarketing Agent and enter into such a remarketing agreement with such person as soon as reasonably practicable; provided, however, that the Company shall not be required to enter into a remarketing agreement with a successor Remarketing Agent that is on terms substantially dissimilar with the terms hereof and in any event on terms less favorable than those set forth herein. The provisions of Sections 4 and 7 shall survive the resignation or removal of the Remarketing Agent pursuant to this Agreement. 25 9. Dealing in the Remarketed Securities. The Remarketing Agent is not obligated to purchase any Remarketed Securities that would otherwise remain unsold in a Remarketing. The Remarketing Agent may exercise any vote or join in any action which any beneficial owner of Remarketed Securities may be entitled to exercise or take pursuant to the Declaration or the Indenture with like effect as if it did not act in any capacity hereunder. The Remarketing Agent, in its individual capacity, either as principal or agent, may also engage in or have an interest in any financial or other transaction with the Company as freely as if it did not act in any capacity hereunder. 10. Remarketing Agent's Performance; Duty of Care. The duties and obligations of the Remarketing Agent shall be determined solely by the express provisions of this Agreement and the Declaration and the Indenture. No implied covenants or obligations of or against the Remarketing Agent shall be read into this Agreement, the Declaration or the Indenture. In the absence of bad faith on the part of the Remarketing Agent, the Remarketing Agent may conclusively rely upon any document furnished to it, which purports to conform to the requirements of this Agreement, the Declaration or the Indenture as to the truth of the statements expressed in any of such documents. The Remarketing Agent shall be protected in acting upon any document or communication reasonably believed by it to have been signed, presented or made by the proper party or parties. The Remarketing Agent, acting under this Agreement, shall incur no liability to the Company or to any holder of Remarketed Securities in its individual capacity or as Remarketing Agent for any action or failure to act, on its part in connection with a Remarketing or otherwise, except if such liability is judicially determined to have resulted from the gross negligence or willful misconduct on its part. 11. Termination. This Agreement shall terminate as to the Remarketing Agent on the effective date of the resignation or removal of the Remarketing Agent pursuant to Section 8. In addition, the obligations of the Remarketing Agent hereunder may be terminated by it by notice given to the Company or the Trust prior to 10:00 A.M., New York City time, on the Remarketing Date if, prior to that time, any of the events described in Sections 6(e), (f), (m), (n), (o) or (p) shall have occurred or if the Remarketing Agent shall decline to perform its obligations under this Agreement for any reason permitted hereunder. 12. Notices, etc. All statements, requests, notices and agreements hereunder shall be in writing, and: (a) if to the Remarketing Agent, shall be delivered or sent by mail, telex or facsimile transmission to Lehman Brothers Inc., Three World Financial Center, New York, New York 10285, Attention: Syndicate Department (Fax: 212-528- 8822), with a copy to Latham & Watkins, 633 W. Fifth Street, Los Angeles, California, Attention: Bryant B. Edwards (Fax: 213-891-8763); (b) if to the Company or the Trust, shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Offering Materials, Attention: H. Wayne Snavely (Fax: 310-373-9955), with a copy to Freshman, Marantz, Orlanski, Cooper & 26 Klein, 9100 Wilshire Boulevard, Beverly Hills, California 90212, Attention: Thomas J. Poletti (Fax: 310-274-8357). Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Company shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Remarketing Agent. 13. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon the Remarketing Agent, the Company, the Trust and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (A) the representations, warranties, indemnities and agreements of the Company and the Trust contained in this Agreement shall also be deemed to be for the benefit of the person or persons, if any, who control the Remarketing Agent within the meaning of Section 15 of the Securities Act and (B) the indemnity agreement of the Remarketing Agent contained in Section 7(b) of this Agreement shall be deemed to be for the benefit of directors of the Company and the Trustees and any person controlling the Company or the Trust within the meaning of Section 15 of the Securities Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 13, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 14. Survival. The respective indemnities, representations, warranties and agreements of the Company, the Trust and the Remarketing Agent contained in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall survive the Remarketing and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them. 15. Definition of "Business Day" and "Subsidiary." For purposes of this Agreement, "business day" means any day on which the New York Stock Exchange, Inc. is open for trading. 16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. 17. Counterparts. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument. 18. Headings. The 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. [Signature page follows] 27 If the foregoing correctly sets forth the agreement between the Company, the Trust and the Remarketing Agent, please indicate your acceptance in the space provided for that purpose below. Very truly yours, Imperial Credit Industries, Inc. By: /s/ H. Wayne Snavely -------------------------------- Name: H. Wayne Snavely Title: Chairman Imperial Credit Capital Trust I By: /s/ Kevin E. Villani -------------------------------- Name: Kevin E. Villani Title: Regular Trustee Accepted: Lehman Brothers Inc. By: /s/ David J. Kim -------------------------------- Name: David J. Kim Title: Senior Vice President EX-4.6 7 FORM OF GUARANTEE AGREEMENT EXHIBIT 4.6 - ------------------------------------------------------------------------------- GUARANTEE AGREEMENT IMPERIAL CREDIT CAPITAL TRUST I DATED AS OF , 1997 ------ - ------------------------------------------------------------------------------- CROSS REFERENCE TABLE*
Section of Trust Indenture Act of Section of 1939, as amended Agreement - ---------------- ---------- 310(a).................................................................4.1(a) 310(b)............................................................2.8; 4.1(c) 310(c)...........................................................Inapplicable 311(a).................................................................2.2(b) 311(b).................................................................2.2(b) 311(c)...........................................................Inapplicable 312(a)............................................................2.2(a);.2.9 312(b)............................................................2.2(b);.2.9 312(c)....................................................................2.9 313(a)....................................................................2.3 313(b)....................................................................2.3 313(c)....................................................................2.3 313(d)....................................................................2.3 314(a)....................................................................2.4 314(b)...........................................................Inapplicable 314(c)....................................................................2.5 314(d)...........................................................Inapplicable 314(e)....................................................................2.5 314(f)...........................................................Inapplicable 315(a).........................................................3.1(d); 3.2(a) 315(b).................................................................2.7(a) 315(c).................................................................3.1(c) 315(d).................................................................3.1(d) 316(a)............................................................2.6; 5.4(a) 316(b)....................................................................5.3 316(c)...........................................................Inapplicable 317(a)...................................................................2.10 317(b)...........................................................Inapplicable 318(a).................................................................2.1(b)
- ------------------ /*/ This Cross-Reference Table does not constitute part of the Agreement and shall not have any bearing upon the interpretation of any of its terms or provisions. TABLE OF CONTENTS -----------------
Page ---- ARTICLE 1 INTERPRETATION AND DEFINITIONS.................................. 1 SECTION 1.1 Interpretation and Definitions....................................... 1 ARTICLE 2 TRUST INDENTURE ACT....................................... 5 SECTION 2.1 Trust Indenture Act; Application..................................... 5 SECTION 2.2 Lists of Holders of Securities....................................... 5 SECTION 2.3 Reports by Guarantee Trustee......................................... 6 SECTION 2.4 Periodic Reports to Guarantee Trustee................................ 6 SECTION 2.5 Evidence of Compliance with Conditions Precedent..................... 6 SECTION 2.6 Guarantee Event of Default; Waiver................................... 6 SECTION 2.7 Guarantee Event of Default; Notice................................... 6 SECTION 2.8 Conflicting Interests................................................ 6 SECTION 2.9 Disclosure of Information............................................ 7 SECTION 2.10 Guarantee Trustee May File Proofs of Claim........................... 7 ARTICLE 3 POWERS, DUTIES AND RIGHTS OF GUARANTEE TRUSTEE........................................ 7 SECTION 3.1 Powers and Duties of Guarantee Trustee............................... 7 SECTION 3.2 Certain Rights of Guarantee Trustee.................................. 9 SECTION 3.3 Not Responsible for Recitals or Issuance of Guarantee................ 11 ARTICLE 4 GUARANTEE TRUSTEE........................................ 11 SECTION 4.1 Guarantee Trustee; Eligibility....................................... 11 SECTION 4.2 Appointment, Removal and Resignation of Guarantee Trustee............ 11 ARTICLE 5 GUARANTEE............................................ 12 SECTION 5.1 Guarantee............................................................ 12
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Page ---- SECTION 5.2 Waiver of Notice and Demand.......................................... 12 SECTION 5.3 Obligations Not Affected............................................. 13 SECTION 5.4 Rights of Holders.................................................... 14 SECTION 5.5 Guarantee of Payment................................................. 14 SECTION 5.6 Subrogation.......................................................... 14 SECTION 5.7 Independent Obligations.............................................. 15 ARTICLE 6 LIMITATION OF TRANSACTIONS; SUBORDINATION............................ 15 SECTION 6.1 Limitation of Transactions........................................... 15 SECTION 6.2 Ranking.............................................................. 15 ARTICLE 7 TERMINATION........................................... 16 SECTION 7.1 Termination.......................................................... 16 ARTICLE 8 INDEMNIFICATION......................................... 16 SECTION 8.1 Exculpation.......................................................... 16 SECTION 8.2 Indemnification...................................................... 16 ARTICLE 9 MISCELLANEOUS.......................................... 17 SECTION 9.1 Successors and Assigns............................................... 17 SECTION 9.2 Amendments........................................................... 17 SECTION 9.3 Notices.............................................................. 17 SECTION 9.4 Benefit.............................................................. 18 SECTION 9.5 Governing Law........................................................ 18
-ii- GUARANTEE AGREEMENT This GUARANTEE AGREEMENT (the "Guarantee"), dated as of ______, 1997, is executed and delivered by Imperial Credit Industries, Inc., a California corporation (the "Guarantor"), and Chase Trust Company of California, as trustee (the "Guarantee Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Securities (as defined herein) of Imperial Credit Capital Trust I, a Delaware statutory business trust (the "Trust"). W I T N E S S E T H : -------------------- WHEREAS, pursuant to the Declaration (as defined herein), the Trust issued on June 9, 1997 $70,000,000 aggregate liquidation amount of remarketable preferred securities, having a liquidation amount of $1,000 per security and designated the Remarketed Par Securities, Series A, of the Trust (the "Series A Securities") and exchanged certain of such Series A Securities for the Trust's Remarketed Par Securities, Series B (the "Series B Securities"), the terms of which are identical to those of the Series A Securities except for certain restrictions on transferability, pursuant to an exchange offer consummated on the date hereof, (the Series A Securities together with the Series B Securities, the "Preferred Securities"), and $2,165,000 aggregate liquidation amount of common securities, having an aggregate liquidation amount of $1,000 per security and designated the Common Securities of the Trust (the "Common Securities" and, together with the Preferred Securities, the "Securities"); WHEREAS, as incentive for the Holders to purchase the Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Guarantee, to pay to the Holders of the Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein; and that if a Trust Enforcement Event (as defined herein) has occurred and is continuing, the rights of holders of the Common Securities to receive payments under the Common Securities Guarantee are subordinated to the rights of Holders of Preferred Securities to receive Guarantee Payments under this Guarantee. NOW, THEREFORE, in consideration of the purchase by each Holder of Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Guarantee for the benefit of the Holders. ARTICLE 1 INTERPRETATION AND DEFINITIONS SECTION 1.1 Interpretation and Definitions. In this Guarantee, ------------------------------ unless the context otherwise requires: (a) capitalized terms used in this Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Guarantee has the same meaning throughout; (c) all references to "the Guarantee" or "this Guarantee" are to this Guarantee as modified, supplemented or amended from time to time; 2 (d) all references in this Guarantee to Articles, Sections and Recitals are to Articles, Sections and Recitals of this Guarantee, unless otherwise specified; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Guarantee unless otherwise defined in this Guarantee or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa and a reference to any masculine form of a term shall include the feminine form of a term, as applicable. (g) the following terms have the following meanings: "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act of 1933, as amended, or any successor rule thereunder. "Business Day" has the meaning specified in the Indenture. "Common Securities" has the meaning specified in the Recitals hereto. "Corporate Trust Office" means the office of the Guarantee Trustee at which the corporate trust business of the Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Guarantee is located at 101 California Street, Suite #2725, San Francisco, CA 94111. "Covered Person" means a Holder or beneficial owner of Securities. "Debentures" means the series of debentures to be issued by the Guarantor, designated the Resettable Rate Debentures held by the Property Trustee (as defined in the Declaration) of the Trust. "Declaration" means the Amended and Restated Declaration of Trust, dated as of June 9, 1997, as amended, modified or supplemented from time to time, among the trustees of the Trust named therein, the Guarantor, as sponsor, and the holders, from time to time, of undivided beneficial ownership interests in the assets of the Trust. "Guarantee Event of Default" means a default by the Guarantor on any of its payment or other obligations under this Guarantee. "Guarantee Payments" means the following payments or distributions, without duplication, with respect to the Securities, to the extent not paid by or on behalf of he Trust: (i) any accumulated and unpaid Distributions (as defined in the Declaration) that are required to be paid on such Securities to the extent the Trust has sufficient funds available therefor at the time, (ii) the redemption price, including all accumulated and unpaid Distributions to the date of redemption, with respect to any Securities called for redemption by the Trust, to the extent the Trust shall have sufficient funds available therefor at the time or (iii) upon a voluntary or 3 involuntary dissolution, winding-up or termination of the Trust (other than in connection with the distribution of Debentures to the Holders in exchange for Securities as provided in the Declaration), the lesser of (a) the aggregate of the liquidation amount and all accumulated and unpaid Distributions on the Securities to the date of payment, and (b) the amount of assets of the Trust remaining available for distribution to Holders in liquidation of the Trust (in either case, the "Liquidation Distribution"). "Guarantee Trustee" means Chase Trust Company of California, until a Successor Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Guarantee and thereafter means each such Successor Guarantee Trustee. "Holder" means a Person in whose name a certificate representing a Security is registered, such Person being a beneficial owner within the meaning of the Delaware Business Trust Act. "Indemnified Person" means the Guarantee Trustee, any Affiliate of the Guarantee Trustee, and any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Guarantee Trustee. "Indenture" means the Indenture, dated as of June 9, 1997, among the Guarantor (the "Company") and Chase Trust Company of California, as trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued to the Property Trustee (as defined in the Declaration) of the Trust. "Majority in Liquidation Amount" means, except as provided in the terms of the Preferred Securities or by the Trust Indenture Act, Holder(s) of outstanding Securities, voting together as a single class, or, as the context may require, Holders of outstanding Preferred Securities or Holders of outstanding Common Securities, voting separately as a class, who are the record owners of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "Officers' Certificate" means, with respect to any Person, a certificate signed on behalf of such Person by two Authorized Officers (as defined in the Declaration) of such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Guarantee shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer on behalf of such Person in rendering the Officers' Certificate; 4 (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer on behalf of such Person to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer acting on behalf of such Person, such condition or covenant has been complied with. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Preferred Securities" has the meaning specified in the Recitals hereto. "Redemption Price" has the meaning specified in the Declaration. "Remarketing" means the operation of the procedures for remarketing specified in Section 7.5 of the Declaration. "Remarketing Settlement Date" means the Scheduled Remarketing Settlement Date (as defined in the Declaration) on which purchases and sales of Preferred Securities pursuant to a Remarketing are consummated. "Responsible Officer" means, with respect to the Guarantee Trustee, any officer within the Corporate Trust Office of the Guarantee Trustee, including any vice president, any assistant vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer or other officer of the Corporate Trust Office of the Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject."Securities" has the meaning specified in the Recitals hereto. "Successor Guarantee Trustee" means a successor Guarantee Trustee possessing the qualifications to act as Guarantee Trustee under Section 4.1. "Trust Enforcement Event" in respect of the Securities means an Indenture Event of Default (as defined in the Indenture) has occurred and is continuing in respect of the Debentures. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. 5 ARTICLE 2 TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application. (a) This Guarantee is -------------------------------- subject to the provisions of the Trust Indenture Act that are required to be part of this Guarantee and shall, to the extent applicable, be governed by such provisions. (b) If and to the extent that any provision of this Guarantee limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 2.2 Lists of Holders of Securities. (a) The Guarantor shall ------------------------------ provide the Guarantee Trustee (i), except while the Preferred Securities are represented by one or more Global Securities, at least one Business Day prior to the date for payment of Distributions, a list, in such form as the Guarantee Trustee may reasonably require, of the names and addresses of the Holders of the Securities ("List of Holders") as of the record date relating to the payment of such Distributions, and (ii) at any other time, within 30 days of receipt by the Guarantor of a written request from the Guarantee Trustee for a List of Holders as of a date no more than 15 days before such List of Holders is given to the Guarantee Trustee; provided that the Guarantor shall not be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Guarantee Trustee by the Guarantor. The Guarantee Trustee shall preserve, in as current a form as is reasonably practicable, all information contained in Lists of Holders given to it, provided that the Guarantee Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Guarantee Trustee shall comply with its obligations under Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act. SECTION 2.3 Reports by Guarantee Trustee. Within 60 days after May ---------------------------- 15 of each year (commencing with the year of the first anniversary of the issuance of the Securities), the Guarantee Trustee shall provide to the Holders of the Securities such reports as are required by Section 313 of the Trust Indenture Act (if any) in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Guarantee Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4 Periodic Reports to Guarantee Trustee. The Guarantor ------------------------------------- shall provide to the Guarantee Trustee such documents, reports and information as required by Section 314(a) (if any) of the Trust Indenture Act and the compliance certificate required by Section 314(a) of the Trust Indenture Act in the form, in the manner and at the times required by Section 314(a) of the Trust Indenture Act. SECTION 2.5 Evidence of Compliance with Conditions Precedent. The ------------------------------------------------ Guarantor shall provide to the Guarantee Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Guarantee that relate to any of the matters set 6 forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6 Guarantee Event of Default; Waiver. The Holders of a ---------------------------------- Majority in Liquidation Amount of the Securities may, by vote or written consent, on behalf of the Holders of all of the Securities, waive any past Guarantee Event of Default and its consequences. Upon such waiver, any such Guarantee Event of Default shall cease to exist, and any Guarantee Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Guarantee, but no such waiver shall extend to any subsequent or other default or Guarantee Event of Default or impair any right consequent thereon. SECTION 2.7 Guarantee Event of Default; Notice. (a) The Guarantee ---------------------------------- Trustee shall, within 90 days after the occurrence of a Guarantee Event of Default, transmit by mail, first class postage prepaid, to the Holders of the Securities, notices of all Guarantee Events of Default actually known to a Responsible Officer of the Guarantee Trustee, unless such defaults have been cured before the giving of such notice; provided, that the Guarantee Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Securities. (b) The Guarantee Trustee shall not be deemed to have knowledge of any Guarantee Event of Default unless the Guarantee Trustee shall have received written notice thereof or a Responsible Officer of the Guarantee Trustee charged with the administration of the Declaration shall have obtained actual knowledge thereof. SECTION 2.8 Conflicting Interests. The Declaration shall be deemed --------------------- to be specifically described in this Guarantee for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. SECTION 2.9 Disclosure of Information. The disclosure of information ------------------------- as to the names and addresses of the Holders of the Securities in accordance with Section 312 of the Trust Indenture Act, regardless of the source from which such information was derived, shall not be deemed to be a violation of any existing law, or any law hereafter enacted which does not specifically refer to Section 312 of the Trust Indenture Act, nor shall the Guarantee Trustee be held accountable by reason of mailing any material pursuant to a request made under Section 312(b) of the Trust Indenture Act. SECTION 2.10 Guarantee Trustee May File Proofs of Claim. Upon the ------------------------------------------ occurrence of a Guarantee Event of Default, the Guarantee Trustee is hereby authorized to (a) recover judgment, in its own name and as trustee of an express trust, against the Guarantor for the whole amount of any Guarantee Payments remaining unpaid and (b) file such proofs of claim and other papers or documents as may be necessary or advisable in order to have its claims and those of the Holders of the Securities allowed in any judicial proceedings relative to the Guarantor, its creditors or its property. 7 ARTICLE 3 POWERS, DUTIES AND RIGHTS OF GUARANTEE TRUSTEE SECTION 3.1 Powers and Duties of Guarantee Trustee. -------------------------------------- (a) This Guarantee shall be held by the Guarantee Trustee on behalf of the Trust for the benefit of the Holders of the Securities, and the Guarantee Trustee shall not transfer this Guarantee to any Person except a Holder of Securities exercising his or her rights pursuant to Section 5.4(b) or to a Successor Guarantee Trustee on acceptance by such Successor Guarantee Trustee of its appointment to act as Successor Guarantee Trustee. The right, title and interest of the Guarantee Trustee in and to this Guarantee shall automatically vest in any Successor Guarantee Trustee, and such vesting and succession of title shall be effective whether or not conveyance documents have been executed and delivered pursuant to the appointment of such Successor Guarantee Trustee. (b) If a Guarantee Event of Default actually known to a Responsible Officer of the Guarantee Trustee has occurred and is continuing, the Guarantee Trustee shall enforce this Guarantee for the benefit of the Holders of the Securities. (c) The Guarantee Trustee, before the occurrence of any Guarantee Event of Default and after the curing of all Guarantee Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Guarantee, and no implied covenants shall be read into this Guarantee against the Guarantee Trustee. In case a Guarantee Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) and is actually known to a Responsible Officer of the Guarantee Trustee, the Guarantee Trustee shall exercise such of the rights and powers vested in it by this Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Guarantee shall be construed to relieve the Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of any Guarantee Event of Default and after the curing or waiving of all such Guarantee Events of Default that may have occurred: (A) the duties and obligations of the Guarantee Trustee shall be determined solely by the express provisions of this Guarantee, and the Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Guarantee, and no 8 implied covenants or obligations shall be read into this Guarantee against the Guarantee Trustee; and (B) in the absence of bad faith on the part of the Guarantee Trustee, the Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Guarantee Trustee and conforming to the requirements of this Guarantee; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Guarantee Trustee, the Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Guarantee; (ii) the Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Guarantee Trustee, unless it shall be proved that the Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in Liquidation Amount of the Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee, or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee; and (iv) no provision of this Guarantee shall require the Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if the Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Guarantee or if the Guarantee Trustee shall have reasonable grounds for believing that an indemnity, reasonably satisfactory to the Guarantee Trustee, against such risk or liability is not reasonably assured to it under the terms of this Guarantee. SECTION 3.2 Certain Rights of Guarantee Trustee. (a) Subject to the ----------------------------------- provisions of Section 3.1: (i) The Guarantee Trustee may conclusively rely, and shall be fully protected in acting or refraining from acting upon, any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; 9 (ii) Any direction or act of the Guarantor contemplated by this Guarantee shall be sufficiently evidenced by an Officers' Certificate; (iii) Whenever, in the administration of this Guarantee, the Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Guarantor; (iv) The Guarantee Trustee shall have no duty to see to any recording, filing or registration or any instrument (or any rerecording, refiling or re-registration thereof); (v) The Guarantee Trustee may consult with counsel, and the advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. Such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees. The Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Guarantee from any court of competent jurisdiction; (vi) The Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Guarantee Trustee such security and indemnity, reasonably satisfactory to the Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Guarantee Trustee; provided, that nothing contained in this Section 3.2(a)(vi) shall be taken to relieve the Guarantee Trustee, upon the occurrence of a Guarantee Event of Default, of its obligation to exercise the rights and powers vested in it by this Guarantee; (vii) The Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (viii) The Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Guarantee Trustee shall not be 10 responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (ix) Any action taken by the Guarantee Trustee or its agents hereunder shall bind the Holders, and the signature of the Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action. No third party shall be required to inquire as to the authority of the Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Guarantee, both of which shall be conclusively evidenced by the Guarantee Trustee's or its agent's taking such action; and (x) Whenever in the administration of this Guarantee the Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Guarantee Trustee (i) may request written instructions from the Holders of a Majority in Liquidation Amount of the Securities, (ii) may refrain from enforcing such remedy or right or taking such other action until such written instructions are received, and (iii) shall be protected in conclusively relying on or acting in accordance with such written instructions. (b) No provision of this Guarantee shall be deemed to impose any duty or obligation on the Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Guarantee Trustee shall be construed to be a duty. SECTION 3.3 Not Responsible for Recitals or Issuance of Guarantee. ----------------------------------------------------- The recitals contained in this Guarantee shall be taken as the statements of the Guarantor, and the Guarantee Trustee does not assume any responsibility for their correctness. The Guarantee Trustee makes no representations as to the validity or sufficiency of this Guarantee. ARTICLE 4 GUARANTEE TRUSTEE SECTION 4.1 Guarantee Trustee; Eligibility. ------------------------------ (a) There shall be at all times a Guarantee Trustee which shall: (i) not be an Affiliate of the Guarantor; and (ii) be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of 11 Columbia, or a corporation or other Person permitted by the Securities and Exchange Commission to act as an institutional trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000), and subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 4.1(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c). (c) If the Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 4.2 Appointment, Removal and Resignation of Guarantee ------------------------------------------------- Trustee. (a) Subject to Section 4.2(b), the Guarantee Trustee may be appointed or removed with or without cause at any time by the Guarantor. (b) The Guarantee Trustee shall not be removed in accordance with Section 4.2(a) until a Successor Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Guarantee Trustee and delivered to the Guarantor. (c) The Guarantee Trustee appointed to office shall hold such office until a Successor Guarantee Trustee shall have been appointed or until its removal or resignation. The Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee Trustee. (d) If no Successor Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within 30 days after delivery to the Guarantor of an instrument of removal or resignation, the removed or resigning Guarantee Trustee may petition any court of competent jurisdiction for appointment of a Successor Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Guarantee Trustee. 12 (e) No Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Guarantee Trustee. (f) Upon termination of this Guarantee or removal or resignation of the Guarantee Trustee pursuant to this Section 4.2, the Guarantor shall pay to the Guarantee Trustee all amounts owing for fees and reimbursement of expenses which have accrued to the date of such termination, removal or resignation. ARTICLE 5 GUARANTEE SECTION 5.1 Guarantee. --------- The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Trust), as and when due, regardless of any defense, right of set-off or counterclaim that the Trust may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Trust to pay such amounts to the Holders. SECTION 5.2 Waiver of Notice and Demand. --------------------------- The Guarantor hereby waives notice of acceptance of this Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Trust or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 5.3 Obligations Not Affected. ------------------------ The obligations, covenants, agreements and duties of the Guarantor under this Guarantee shall be absolute and unconditional and shall remain in full force and effect until the entire liquidation amount of all outstanding Securities shall have been paid and such obligation shall in no way be affected or impaired by reason of the happening from time to time of any event, including without limitation, the following, whether or not with notice to, or the consent of, the Guarantor: (a) The release or waiver, by operation of law or otherwise, of the performance or observance by the Trust of any express or implied agreement, covenant, term or condition relating to the Securities to be performed or observed by the Trust; 13 (b) The extension of time for the payment by the Trust of all or any portion of the Distributions, Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with the Securities (other than an extension of time for payment of Distributions, Redemption Price, Liquidation Distribution or other sum payable that results from the extension of any interest payment period on the Debentures or any change to the maturity date of the Debentures permitted by the Indenture); (c) Any failure, omission, delay or lack of diligence on the part of the Property Trustee or the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Property Trustee or the Holders pursuant to the terms of the Securities, or any action on the part of the Trust granting indulgence or extension of any kind; (d) The voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Trust or any of the assets of the Trust; (e) Any invalidity of, or defect or deficiency in, the Securities; (f) The settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) Any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 5.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Guarantee Trustee or the Holders to give notice to, or obtain consent of the Guarantor or any other Person with respect to the happening of any of the foregoing. No setoff, counterclaim, reduction or diminution of any obligation, or any defense of any kind or nature that the Guarantor has or may have against any Holder shall be available hereunder to the Guarantor against such Holder to reduce the payments to it under this Guarantee. SECTION 5.4 Rights of Holders. ----------------- (a) The Holders of at least a Majority in Liquidation Amount of the Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of this Guarantee or to direct the exercise of any trust or power conferred upon the Guarantee Trustee under this Guarantee. 14 (b) If the Guarantee Trustee fails to enforce this Guarantee, then any Holder of Securities may, subject to the subordination provisions of Section 6.2, institute a legal proceeding directly against the Guarantor to enforce the Guarantee Trustee's rights under this Guarantee without first instituting a legal proceeding against the Trust, the Guarantee Trustee or any other person or entity. In addition, if the Guarantor has failed to make a Guarantee Payment, a Holder of Securities may, subject to the subordination provisions of Section 6.2, directly institute a proceeding against the Guarantor for enforcement of the Guarantee for such payment to the Holder of the Securities of the principal of or interest on the Debentures on or after the respective due dates specified in the Debentures, and the amount of the payment will be based on the Holder's pro rata share of the amount due and owing on all of the Securities. The Guarantor hereby waives any right or remedy to require that any action on this Guarantee be brought first against the Trust or any other person or entity before proceeding directly against the Guarantor. SECTION 5.5 Guarantee of Payment. -------------------- This Guarantee creates a guarantee of payment and not of collection. SECTION 5.6 Subrogation. ----------- The Guarantor shall be subrogated to all (if any) rights of the Holders of Securities against the Trust in respect of any amounts paid to such Holders by the Guarantor under this Guarantee; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee, if at the time of any such payment, any amounts are due and unpaid under this Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Guarantee Trustee for the benefit of the Holders. SECTION 5.7 Independent Obligations. ----------------------- The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Trust with respect to the Securities, and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Guarantee notwithstanding the occurrence of any event referred to in subsections 5.3(a) through 5.3(g), inclusive, hereof. 15 ARTICLE 6 LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.1 Limitation of Transactions. -------------------------- So long as any Securities remain outstanding, if there shall have occurred a Guarantee Event of Default or a Trust Enforcement Event, then the Guarantor shall not, and shall not permit any subsidiary of the Guarantor, to (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, the Guarantor's capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities that rank junior to the Debentures or make any guarantee payments with respect to any guarantee by the Guarantor of the debt securities of any subsidiary of the Guarantor if such guarantee ranks junior to the Debentures (other than (a) dividends or distributions in common stock of the Guarantor, (b) payments under this Guarantee and (c) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, and (d) purchases of common stock related to the issuance of common stock or rights under any of the Company's benefit plans). SECTION 6.2 Ranking. ------- Until the Remarketing Settlement Date, the obligations of the Guarantor under this Guarantee and the Debentures will be a general unsecured obligation of the Guarantor and will rank on a parity with all of the Indebtedness (as defined in the Indenture) of the Company, if any, that is not subordinated to the Guarantee and senior to any Indebtedness of the Guarantor that is subordinated to the Guarantee. Thereafter, the obligations of the Guarantor under this Guarantee and the Debentures will be subordinate and junior in right of payment to all Senior Debt (as defined in the Indenture) of the Guarantor. If a Trust Enforcement Event has occurred and is continuing under the Declaration, the rights of the holders of the Common Securities to receive Guarantee Payments hereunder shall be subordinated to the rights of the Holders of the Preferred Securities to receive Guarantee Payments under this Guarantee. ARTICLE 7 TERMINATION SECTION 7.1 Termination. ----------- This Guarantee shall terminate upon (i) full payment of the Redemption Price of all Securities, (ii) upon the distribution of the Debentures to the Holders of all the Securities or (iii) upon full payment of the amounts payable in accordance with the Declaration upon 16 liquidation of the Trust. Notwithstanding the foregoing, this Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of Securities must restore payment of any sums paid under the Securities or under this Guarantee. ARTICLE 8 INDEMNIFICATION SECTION 8.1 Exculpation. ----------- (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage, liability, expense or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance with this Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Guarantor and upon such information, opinions, reports or statements presented to the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Guarantor, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Securities might properly be paid. SECTION 8.2 Indemnification. --------------- The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 8.2 shall survive the termination of this Guarantee. 17 ARTICLE 9 MISCELLANEOUS SECTION 9.1 Successors and Assigns. ---------------------- All guarantees and agreements contained in this Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Securities then outstanding. SECTION 9.2 Amendments. ---------- Except with respect to any changes that do not adversely affect the rights of the Holders (in which case no consent of the Holders will be required), this Guarantee may only be amended with the prior approval of the Holders of at least a Majority in Liquidation Amount of the Securities. The provisions of Section 12.2 of the Declaration with respect to meetings of, and action by written consent of, the Holders of the Securities apply to the giving of such approval. SECTION 9.3 Notices. ------- All notices provided for in this Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered by hand, telecopied or mailed by registered or certified mail, as follows: (a) If given to the Guarantee Trustee, at the Guarantee Trustee's mailing address set forth below (or such other address as the Guarantee Trustee may give notice of to the Guarantor and the Holders of the Securities): Chase Trust Company of California 101 California Street, Suite #2725 San Francisco, CA 94111 Attention: Corporate Trust Fax: (415) 693-8850 (b) If given to the Guarantor, at the Guarantor's mailing addresses set forth below (or such other address as the Guarantor may give notice of to the Guarantee Trustee and the Holders of the Securities): 18 Imperial Credit Industries,Inc. 23550 Hawthorne Boulevard Building One Suite 110 Torrance, CA 90505 Attn: H. Wayne Snavely Fax: (310) 373-9955 (c) If given to any Holder of Securities, at the address set forth on the books and records of the Trust. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid, except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 9.4 Benefit. ------- This Guarantee is solely for the benefit of the Holders of the Securities and, subject to Section 3.1(a), is not separately transferable from the Securities. SECTION 9.5 Governing Law. ------------- THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF. 19 IN WITNESS WHEREOF, this Guarantee is executed as of the day and year first above written. IMPERIAL CREDIT INDUSTRIES, INC., as Guarantor By: -------------------------------- Name: Title: CHASE TRUST COMPANY OF CALIFORNIA, as Guarantee Trustee By: -------------------------------- Name: Title: EX-5.1 8 OPINION OF RICHARDS, LAYTON & FINGER, P.A. EXHIBIT 5.1 [LETTERHEAD OF RICHARDS, LAYTON & FINGER] July 3, 1997 Imperial Credit Capital Trust I c/o Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard, Bldg. 1, Suite 110 Torrance, CA 90505 Re: Imperial Credit Capital Trust I ------------------------------- Ladies and Gentlemen: We have acted as special Delaware counsel for Imperial Credit Industries, Inc., a California corporation (the "Company"), and Imperial Credit Capital Trust I, a Delaware business trust (the "Trust"), in connection with the matters set forth herein. At your request, this opinion is being furnished to you. For purposes of giving the opinions hereinafter set forth, our examination of documents has been limited to the examination of originals or copies of the following: (a) The Certificate of Trust of the Trust, dated as of May 28, 1997 (the "Certificate"), as filed in the office of the Secretary of State of the State of Delaware (the "Secretary of State") on May 28, 1997; (b) The Declaration of Trust of the Trust, dated as of May 28, 1997, between the Company and the trustees of the Trust named therein; (c) The Registration Statement (the "Registration Statement") on Form S-4, including a preliminary prospectus (the "Prospectus"), relating to an offer to Imperial Credit Capital Trust I c/o Imperial Credit Industries, Inc. July 3, 1997 Page 2 exchange (the "Exchange Offer") up to $70,000,000 aggregate liquidation amount of its New Par Securities, Series B ("New Par Securities"), for a like liquidation amount of its Old Par Securities, Series A ("Old Par Securities"), as filed by the Company, certain of its subsidiaries and the Trust with the Securities and Exchange Commission on June 27, 1997; (d) The Amended and Restated Declaration of Trust, dated as of June 9, 1997 among the Company and the trustees named therein, and the holders, from time to time, of undivided beneficial interests in the assets of the Trust (the "Declaration") filed as an exhibit to the Registration Statement; and (e) A Certificate of Good Standing for the Trust, dated July 3, 1997, obtained from the Secretary of State. Initially capitalized terms used herein and not otherwise defined are used as defined in the Trust Agreement. For purposes of this opinion, we have not reviewed any documents other than the documents listed above, and we have assumed that there exists no provision in any document that we have not reviewed that bears upon or is inconsistent with the opinions stated herein. We have conducted no independent factual investigation of our own but rather have relied solely upon the foregoing documents, the statements and information set forth therein and the additional matters recited or assumed herein, all of which we have assumed to be true, complete and accurate in all material respects. With respect to all documents examined by us, we have assumed (i) the authenticity of all documents submitted to us as authentic originals, (ii) the conformity with the originals of all documents submitted to us as copies or forms, and (iii) the genuineness of all signatures. For purposes of this opinion, we have assumed (i) that the Declaration constitutes the entire agreement among the parties thereto with respect to the subject matter thereof, including with respect to the creation, operation and termination of the Trust, and that the Declaration and Certificate are in full force and effect and have not been amended, (ii) except to the extent provided in paragraph 1 below, the due creation or due organization or due formation, as the case may be, and valid existence in good standing of each party to the documents examined by us under the laws of the jurisdiction governing its creation, organization or formation, (iii) the legal capacity of natural persons who are parties to the documents examined by us, (iv) that each of the Imperial Credit Capital Trust I c/o Imperial Credit Industries, Inc. July 3, 1997 Page 3 parties to the documents examined by us has the power and authority to execute and deliver, and to perform its obligations under, such documents, (v) the due authorization, execution and delivery by all parties thereto of all documents examined by us, (vi) the receipt by each Person to whom a New Par Security is to be issued by the Trust (collectively, the "New Par Security Holders") of a New Par Security Certificate for such New Par Security and the acceptance by the Trust of the outstanding Old Par Security validly tendered for such New Par Security pursuant to the Exchange Offer, all in accordance with the Declaration and the Prospectus, and (vii) that the New Par Securities are issued and sold to the New Par Security Holders in accordance with the Declaration and the Prospectus. We have not participated in the preparation of the Prospectus and assume no responsibility for its contents. This opinion is limited to the laws of the State of Delaware (excluding the securities laws of the State of Delaware), and we have not considered and express no opinion on the laws of any other jurisdiction, including federal laws and rules and regulations relating thereto. Our opinions are rendered only with respect to Delaware laws and rules, regulations and orders thereunder which are currently in effect. Based upon the foregoing, and upon our examination of such questions of law and statutes of the State of Delaware as we have considered necessary or appropriate, and subject to the assumptions, qualifications, limitations and exceptions set forth herein, we are of the opinion that: 1. The Trust has been duly created and is validly existing in good standing as a business trust under the Delaware Business Trust Act, 12 Del. C. (S) 3801, ------- et seq. - -- --- 2. The New Par Securities to be issued to the New Par Security Holders have been duly authorized by the Declaration and will be duly and validly issued and, subject to the qualifications set forth in paragraph 3 below, fully paid and nonassessable undivided beneficial interests in the assets of the Trust. 3. The New Par Security Holders, as beneficial owners of the Trust, will be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. We note that the New Par Security Holders may be obligated, pursuant to the Declaration, to (i) provide indemnity and security in connection with requests or directions to the Property Trustee under the Declaration to exercise its rights and remedies under the Declaration, (ii) provide indemnity and security in Imperial Credit Capital Trust I c/o Imperial Credit Industries, Inc. July 3, 1997 Page 4 connection with and pay taxes or governmental charges arising from transfers of New Par Securities and the issuance of replacement New Par Security Certificates, and (iii) undertake as a party litigant to pay costs in any suit for the enforcement of any right or remedy under the Declaration or against the Property Trustee under the Declaration, to the extent provided in the Declaration. We consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement. In addition, we hereby consent to the use of our name under the heading "Legal Matters" in the Prospectus. In giving the foregoing consents, we do not thereby admit that we come within the category of Persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. We also consent to the reliance by Freshman, Marantz, Orlanski, Cooper & Klein and Simpson Thacher & Bartlett as to matters of Delaware law in connection with opinions to be rendered by it them pursuant to the Exchange Offer. Except as stated above, without our prior written consent, this opinion may not be furnished or quoted to, or relied upon by, any other Person for any purpose. Very truly yours, /s/ Richards, Layton & Finger WF/sem EX-5.2 9 OPINION OF FRESHMAN, MARANTZ EXHIBIT 5.2 [LETTERHEAD OF FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN] July 3, 1997 Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard Building One, Suite 110 Torrance, California 90505 Ladies and Gentlemen: We have acted as counsel to Imperial Credit Industries, Inc., a California corporation (the "Company"), Auto Marketing Network, Inc., a Florida corporation, Imperial Business Credit, Inc., a California corporation, Imperial Credit Advisors, Inc., a California corporation and Franchise Mortgage Acceptance Company LLC, a California limited liability company (collectively referred to herein as the "Subsidiary Guarantors") in connection with the preparation and filing with the Securities and Exchange Commission (the "Commission") of the Registration Statement on Form S-4, filed with the Commission today (as amended, the "Registration Statement"), of the Company, Imperial Credit Capital Trust I, a Delaware statutory business trust (the "Trust") and the Subsidiary Guarantors for registration under the Securities Act of 1933, as amended, of $70,000,000 aggregate liquidation amount of the Company's Resettable Rate Debentures, Series B (the "New Debentures") and the Subsidiary Guarantors' guarantees in connection therewith (the "Guarantees"), each issuable in connection with the exchange offer of New Debentures for the Company's Resettable Rate Debentures, Series A (the "Old Debentures"). In so acting, we have examined originals or copies, certified or otherwise identified to our satisfaction, of the Registration Statement, the Indenture, dated as of June 9, 1997 (the "Indenture"), among the Company, the Trust, the Subsidiary Guarantors and the Chase Trust Company of California, as trustee (the "Trustee"), pursuant to which the New Debentures will be issued, the form of the New Debentures included as Exhibit 4.3 to the Registration Statement and such corporate records, agreements, documents and other instruments, and such certificates or comparable documents of public officials and of officers and representatives of the Company, the Trust and the Subsidiary Guarantors, and have made such inquiries of such officers and representatives, as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth. 1 In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such latter documents. As to all questions of fact material to this opinion that have not been independently established, we have relied upon certificates or comparable documents of officers and representatives of the Company, the Trust and the Subsidiary Guarantors. Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that: 1. The New Debentures have been duly authorized by the Company and, when executed on behalf of the Company, authenticated by the Trustee and delivered in accordance with the terms of the Indenture and as contemplated by the Registration Statement, will constitute the legal, valid and binding obligations of the Company, enforceable against it in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). 2. (a) The Guarantees of the Subsidiary Guarantors, have been duly authorized by each of the Subsidiary Guarantors and, when executed and delivered by each of the Subsidiary Guarantors in accordance with the terms of the Indenture and as contemplated by the Registration Statement, will constitute valid and binding obligations of each of the Subsidiary Guarantors, enforceable against each entity in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditor's rights and remedies generally and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). The opinions expressed herein are limited to the laws of the State of California and the federal laws of the United States, and we express no opinion as to the effect on the matters covered by this letter of the laws of any other jurisdiction. The opinions expressed herein are rendered solely for your benefit in connection with the transactions described herein. Those opinions may not be used or relied upon by any other person, nor may this letter or any copies thereof be furnished to a third party, filed with a governmental agency, quoted, cited or otherwise referred to without our Prior written consent, except that we hereby consent to the use of this opinion as an exhibit to the Registration 2 Statement. We further consent to the reference to our name under the caption "Legal Matters" in the prospectus which is a part of the Registration Statement. Very truly yours, /s/ Freshman, Marantz, Orlanski, Cooper & Klein FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN 3 EX-8.1 10 OPINION OF SIMPSON THACHER & BARTLETT EXHIBIT 8.1 [LETTERHEAD OF SIMPSON THACHER & BARTLETT] July 3, 1997 Re: Offer to Exchange Remarketed Par Securities, Series B for the Outstanding Remarketed Par Securities, Series A --------------------------------------- Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard Building One, Suite 110 Torrance, California 90505 Imperial Credit Capital Trust I c/o Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard Building One, Suite 110 Torrance, California 90505 Ladies and Gentlemen: We have acted as special tax counsel ("Tax Counsel") to Imperial Credit Industries, Inc., a California corporation (the "Company"), and Imperial Credit Capital Trust I, a statutory business trust organized under the Business Trust Act of the State of Delaware (the "Trust"), in connection with the preparation and filing by the Company and the Trust with the Securities and Exchange Commission of a Registration Statement on Form S-4 (as amended, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), registering the exchange (referred to collectively herein as the "Exchange") of: (i) up to $70,000,000 aggregate liquidation amount of SIMPSON THACHER & BARTLETT -2- July 3, 1997 Remarketed Par Securities, Series B (the "New Par Securities"), which will have been registered under the Securities Act pursuant to the Registration Statement, for a like liquidation amount of the Trust's outstanding Remarketed Par Securities, Series A (the "Old Par Securities"); (ii) all of the Company's outstanding Resettable Rate Debentures, Series A (the "Old Debentures") for a like aggregate principal amount of Resettable Rate Debentures, Series B (the "New Debentures") which will have been registered under the Securities Act pursuant to the Registration Statement; (iii) the Company's guarantee (which is set forth in the Guarantee Agreement, dated June 9, 1997, between the Company and Chase Trust Company of California, as trustee) of the payment of distributions and payments upon liquidation or redemption of the Old Par Securities (the "Old Guarantee") for a like guarantee (which will be set forth in the new Guarantee Agreement between the Company and Chase Trust Company of California, as trustee) of the New Par Securities (the "New Guarantee") which will have been registered under the Securities Act pursuant to the Registration Statement; and (iv) Auto Marketing Network, Inc., Imperial Business Credit, Inc., Imperial Credit Advisors, Inc. and Franchise Mortgage Acceptance Company LLC guarantees of the Old Debentures (the "Old Subsidiary Guarantees") for like guarantees of the New Debentures (the "New Subsidiary Guarantees") which will have been registered under the Securities Act pursuant to the Registration Statement. All capitalized terms used in this opinion letter and not otherwise defined herein shall have the meaning ascribed to such terms in the Registration Statement. SIMPSON THACHER & BARTLETT -3- July 3, 1997 In delivering this opinion letter, we have reviewed and relied upon: (i) the Registration Statement; (ii) the Indenture, dated June 9, 1997 between the Company and Chase Trust Company of California, as trustee (the "Indenture"); (iii) forms of the Old Debentures and the New Debentures; (iv) the Amended and Restated Declaration, dated June 9, 1997 between the Company, as Sponsor, Chase Trust Company of California, as the Initial Property Trustee, Chase Manhattan Bank Delaware, as the initial Delaware Trustee and the Regular Trustees named therein (the "Declaration"); (v) the Old Guarantee and a form of the New Guarantee; and (vi) forms of the Old Par Securities, the New Par Securities and the Trust's common securities (the "Common Securities"). In addition, we have relied upon certain other statements and representations contained in the Company's letter of representation dated June 9, 1997. We also have examined and relied upon originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and the Trust and such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination of such material, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to original documents of all copies of documents submitted to us. In addition, we also have assumed that (i) the transactions related to the original issuance of the Old Debentures, the Old Par Securities and the Common Securities were consummated in accordance with the terms of the documents and forms of documents SIMPSON THACHER & BARTLETT -4- July 3, 1997 described herein and (ii) the Exchange will be consummated in accordance with the terms of such documents and forms of such documents. On the basis of the foregoing and assuming that the Trust was formed and will be maintained in compliance with the terms of the Declaration, we hereby confirm (i) our opinion set forth in the Registration Statement under the caption "Certain United States Federal Income Tax Consequences" and (ii) that, subject to the qualifications set forth therein, the discussion set forth in the Registration Statement under such caption is an accurate summary of the United States federal income tax matters described therein. We express no opinion with respect to the transactions referred to herein or in the Registration Statement other than as expressly set forth herein. Moreover, we note that there is no authority directly on point dealing with securities such as the Trust Securities or transactions of the type described herein and that our opinion is not binding on the Internal Revenue Service or the courts, either of which could take a contrary position. Nevertheless, we believe that if challenged, the opinions we express herein would be sustained by a court with jurisdiction in a properly presented case. Our opinion is based upon the Code, the Treasury regulations promulgated thereunder and other relevant authorities and law, all as in effect on the date hereof. Consequently, future changes in the law may cause the tax treatment of the transactions referred to herein to be materially different from that described above. We are admitted to practice law only in the State of New York and the opinions we express herein are limited solely to matters governed by the federal law of the United States. SIMPSON THACHER & BARTLETT -5- July 3, 1997 We hereby consent to the use of this opinion for filing as Exhibit 8.1 to the Registration Statement and the use of our name in the Registration Statement under the captions "Certain United States Federal Income Tax Consequences" and "Legal Matters". Very truly yours, /s/ Simpson Thacher & Bartlett SIMPSON THACHER & BARTLETT EX-21.1 11 SUBSIDIARIES OF IMPERIAL CREDIT INDUSTRIES, INC. EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Southern Pacific Thrift and Loan, a California corporation. Imperial Business Credit, Inc., a California corporation. Imperial Credit Advisors, Inc., a California corporation. Franchise Mortgage Acceptance Company LLC, a California limited liability company. Auto Marketing Network, Inc., a Florida corporation. Each of the aforementioned subsidiaries do business under its respective name. EX-23.1(A) 12 CONSENT OF KPMG PEAT MARWICK LLP RE: ICI, INC. EXHIBIT 23.1A CONSENT OF INDEPENDENT AUDITORS The Board of Directors Imperial Credit Industries, Inc.: We consent to the use of our report included herein and to the references to our firm under the headings "Summary Historical and Pro Forma Consolidated Financial and Other Data," "Selected Consolidated Financial Data," and "Experts" in the Registration Statement. Our report contains an explanatory paragraph regarding the adoption of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights." KPMG Peat Marwick LLP Los Angeles, California July 2, 1997 EX-23.1(B) 13 CONSENT OF KPMG PEAT MARWICK LLP RE: FMAC LLC EXHIBIT 23.1B CONSENT OF INDEPENDENT AUDITORS The Board of Managers Franchise Mortgage Acceptance Company LLC: We consent to the inclusion of our report dated January 29, 1997, with respect to the balance sheets of Franchise Mortgage Acceptance Company LLC as of December 31, 1996 and 1995, and the related statements of operations, changes in members' equity, and cash flows for the year ended December 31, 1996 and for the period from June 30, 1995 (inception) through December 31, 1995, which report appears in the Form S-4 of Imperial Credit Industries, Inc. KPMG Peat Marwick LLP Los Angeles, California July 2, 1997 EX-25.1 14 STATEMENT OF ELIGIBILITY OF TRUSTEE _____________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________ FORM T-l STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ___________________________ CHASE TRUST COMPANY OF CALIFORNIA (formerly Chemical Trust Company of California) (Exact name of trustee as specified in its charter) CALIFORNIA 94-2926573 (State of incorporation I.R.S. employer if not a national bank) identification No.) 101 California Street, Suite #2725 San Francisco, California 94111 (Address of principal executive offices) (Zip Code) ___________________________ IMPERIAL CREDIT CAPITAL TRUST I (Exact name of obligor as specified in its charter) CALIFORNIA (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 23550 Hawthorne Boulevard, Building 1, Suite 110 Torrance, California 90505 (Address of principal executive offices) (Zip Code) ___________________________ Remarketed Par Securities, Series A and Series B (Title of the indenture securities) ___________________________________ GENERAL ITEM 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Superintendent of Banks of the State of California, 235 Montgomery Street, San Francisco, California 94104-2980. Board of Governors of the Federal Reserve System, Washington, D.C. 20551 (b) Whether it is authorized to exercise corporate trust powers. Yes. ITEM 2. AFFILIATIONS WITH THE OBLIGOR. If the obligor is an affiliate of the trustee, describe each such affiliation. None. ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES a) Title of the securities outstanding under each such other indenture. $20,174,000 9 3/4% Senior Notes due January 15, 2004 issued under Indenture dated as of January 31, 1994. $200,000,000 9 7/8% Series B Senior Notes due 2007 issued under Indenture dated as of January 23, 1997. b) A brief statement of the facts relied upon as a basis for the claim that no conflicting interest within the meaning of Section 310 (b) (1) of the Act arises as a result of the trusteeship under any such other indenture, including a statement as to how the indenture securities will rank as compared with the securities issued under such other indenture. The Trustee is not deemed to have a conflicting interest within the meaning of Section 310 (b) (1) of the Act because the indenture securities referenced in (a) above (the "Prior Securities") are not in default and the indenture to be qualified and the indenture entered into in connection with the Prior Securities are wholly unsecured and rank equally. ITEM 16. LIST OF EXHIBITS List below all exhibits filed as a part of this Statement of Eligibility. 1. A copy of the Articles of Incorporation of the Trustee as now in effect, including the Restated Articles of Incorporation dated December 23, 1986 and the Certificates of Amendment dated March 26, 1992 and March 26, 1997 (see Exhibit 1 to Form T-1 filed in connection with Registration Statement No. 33- 55136, which is incorporated by reference). 2 2. A copy of the Certificate of Authority of the Trustee to Commence Business (See Exhibit 2 to Form T-1 filed in connection with Registration Statement No. 33-55136, which is incorporated by reference). 3. Authorization to exercise corporate trust powers (Contained in Exhibit 2). 4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form T-1 filed in connection with Registration Statement No. 33-55136, which is incorporated by reference). 5. Not applicable. 6. The consent of the Trustee required by Section 21(b) of the Act (See Exhibit 6 to Form T-1 filed in connection with Registration Statement No. 33-55136, which is incorporated by reference). 7. A copy of the latest report of condition of the Trustee, published pursuant to law or the requirements of its supervising or examining authority. 8. Not applicable. 9. Not applicable. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, Chase Trust Company of California, a corporation organized and existing under the laws of the State of California, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Los Angeles and State of California, on the ___ day of June, 1997. CHASE TRUST COMPANY OF CALIFORNIA By /s/ Hans H Helley ------------------------ HANS H HELLEY Assistant Vice President 3 EXHIBIT 7. REPORT OF CONDITION OF THE TRUSTEE. - -------------------------------------------------------------------------------- TRUST COMPANY CONSOLIDATED REPORT OF CONDITION OF CHEMICAL TRUST COMPANY OF CALIFORNIA ------------------------------------ (Legal Title) LOCATED AT SAN FRANCISCO SAN FRANCISCO CA 94111 ---------------------------------------------------------------- (City) (County) (State) (Zip) AS OF CLOSE OF BUSINESS ON MARCH 31, 1997 BANK NO. 1476 --------------- ---- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ASSETS DOLLAR AMOUNT IN THOUSANDS 1. Cash and due from banks 11,768 2. U.S. Treasury securities 10,025 3. Obligations of other U.S. Government agencies and corporations 4. Obligations of States and political subdivisions 5. Other securities (including $ corporate stock ---------------- (a) Loans (b) Less: Reserve for possible loan losses (c) Loans (Net) 7. Bank Premises, furniture and fixtures and other assets representing bank premises (including $ -0- capital leases) 120 ------- 8. Real estate owned other than bank premises 9. Investments in subsidiaries not consolidated 10. Other assets (complete schedule on reverse) (including $ intangibles) 851 ----------- 11. TOTAL ASSETS 22,764 LIABILITIES 12. Liabilities For borrowed money 13. Mortgage indebtedness (including $ capital leases) ---------------- 14. Other liabilities (complete on schedule on reverse 2,941 15. TOTAL LIABILITIES 2,941 ====== 16. Capital notes and debentures SHAREHOLDERS EQUITY 17. Preferred stock-- (Number shares outstanding ) Amount $ ---------------- 18. Common stock-- 10 (Number shares authorized 100) Amount $ 100 --- (Number shares outstanding 100) Amount $ 100 --- 19. Surplus Amount $ 9,990 20. TOTAL CONTRIBUTED CAPITAL 10,000 21. Retained earnings and other capital reserves 9,823 22. TOTAL SHAREHOLDERS EQUITY 19,823 23. TOTAL LIABILITIES AND CAPITAL ACCOUNTS 22,764 ======
4 MEMORANDA 1. Assets deposited with State Treasurer to qualify for exercise of fiduciary powers (market value) 630 - -------------------------------------------------------------------------------- The undersigned, Francis J. Farrell, VP & Manager and C. Scott Boone, Senior -------------------------------------------------------------- (Name and Title) (Name and Title) Vice President - -------------- of the above named trust company, each declares, for himself alone and not for the other: I have a personal knowledge of the matters contained in this report (including the reverse side hereof), and I believe that each statement in said report is true. Each of the undersigned, for himself alone and not for the other, certifies under penalty of perjury that the foregoing is true and correct. Executed on 4/22/97, at San Francisco, California ------- ------------- (Date) (City) /s/ Francis J. Farrell /s/ C. Scott Boone ---------------------- ------------------ (Signature) (Signature) SCHEDULE OF OTHER ASSETS Accounts Receivable $326 Deferred Taxes 396 Other 129 ---- Total (same as Item 10) $851 SCHEDULE OF OTHER LIABILITIES Accrued Income Taxes $1,738 Accrued Expenses & A/P 47 Accrued Pension & Benefits 771 Accrued Incentive Expense 23 All Other Liabilities 362 ------ Total (same as Item 14) $2,941
5 EX-25.2 15 STATEMENT OF ELIGIBILITY EXHIBIT 25.2 _____________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________ FORM T-l STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ___________________________ CHASE TRUST COMPANY OF CALIFORNIA (formerly Chemical Trust Company of California) (Exact name of trustee as specified in its charter) CALIFORNIA 94-2926573 (State of incorporation I.R.S. employer if not a national bank) identification No.) 101 California Street, Suite #2725 San Francisco, California 94111 (Address of principal executive offices) (Zip Code) ___________________________ IMPERIAL CREDIT INDUSTRIES, INC. (Exact name of obligor as specified in its charter) CALIFORNIA 95-40544791 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 23550 Hawthorne Boulevard, Building 1, Suite 110 Torrance, California 90505 (Address of principal executive offices) (Zip Code) ___________________________ Resettable Rate Debentures, Series A and Series B (Title of the indenture securities) ___________________________________ GENERAL ITEM 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Superintendent of Banks of the State of California, 235 Montgomery Street, San Francisco, California 94104-2980. Board of Governors of the Federal Reserve System, Washington, D.C. 20551 (b) Whether it is authorized to exercise corporate trust powers. Yes. ITEM 2. AFFILIATIONS WITH THE OBLIGOR. If the obligor is an affiliate of the trustee, describe each such affiliation. None. ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES a) Title of the securities outstanding under each such other indenture. $20,174,000 9 3/4% Senior Notes due January 15, 2004 issued under Indenture dated as of January 31, 1994. $200,000,000 9 7/8% Series B Senior Notes due 2007 issued under Indenture dated as of January 23, 1997. b) A brief statement of the facts relied upon as a basis for the claim that no conflicting interest within the meaning of Section 310 (b) (1) of the Act arises as a result of the trusteeship under any such other indenture, including a statement as to how the indenture securities will rank as compared with the securities issued under such other indenture. The Trustee is not deemed to have a conflicting interest within the meaning of Section 310 (b) (1) of the Act because the indenture securities referenced in (a) above (the "Prior Securities") are not in default and the indenture to be qualified and the indenture entered into in connection with the Prior Securities are wholly unsecured and rank equally. ITEM 16. LIST OF EXHIBITS List below all exhibits filed as a part of this Statement of Eligibility. 1. A copy of the Articles of Incorporation of the Trustee as now in effect, including the Restated Articles of Incorporation dated December 23, 1986 and the Certificates of Amendment dated March 26, 1992 and March 26, 1997 (see Exhibit 1 to Form T-1 filed in connection with Registration Statement No. 33- 55136, which is incorporated by reference). 2 2. A copy of the Certificate of Authority of the Trustee to Commence Business (See Exhibit 2 to Form T-1 filed in connection with Registration Statement No. 33-55136, which is incorporated by reference). 3. Authorization to exercise corporate trust powers (Contained in Exhibit 2). 4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form T-1 filed in connection with Registration Statement No. 33-55136, which is incorporated by reference). 5. Not applicable. 6. The consent of the Trustee required by Section 21(b) of the Act (See Exhibit 6 to Form T-1 filed in connection with Registration Statement No. 33-55136, which is incorporated by reference). 7. A copy of the latest report of condition of the Trustee, published pursuant to law or the requirements of its supervising or examining authority. 8. Not applicable. 9. Not applicable. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, Chase Trust Company of California, a corporation organized and existing under the laws of the State of California, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Los Angeles and State of California, on the ___ day of June, 1997. CHASE TRUST COMPANY OF CALIFORNIA By /s/ Hans H Helley ------------------------ HANS H HELLEY Assistant Vice President 3 EXHIBIT 7. REPORT OF CONDITION OF THE TRUSTEE. - -------------------------------------------------------------------------------- TRUST COMPANY CONSOLIDATED REPORT OF CONDITION OF CHEMICAL TRUST COMPANY OF CALIFORNIA ------------------------------------ (Legal Title) LOCATED AT SAN FRANCISCO SAN FRANCISCO CA 94111 ---------------------------------------------------------------- (City) (County) (State) (Zip) AS OF CLOSE OF BUSINESS ON MARCH 31, 1997 BANK NO. 1476 -------------- ---- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ASSETS DOLLAR AMOUNT IN THOUSANDS 1. Cash and due from banks 11,768 2. U.S. Treasury securities 10,025 3. Obligations of other U.S. Government agencies and corporations 4. Obligations of States and political subdivisions 5. Other securities (including $ corporate stock ---------------- (a) Loans (b) Less: Reserve for possible loan losses (c) Loans (Net) 7. Bank Premises, furniture and fixtures and other assets representing bank premises (including $ -0- capital leases) 120 ------- 8. Real estate owned other than bank premises 9. Investments in subsidiaries not consolidated 10. Other assets (complete schedule on reverse) (including $ intangibles) 851 ------------- 11. TOTAL ASSETS 22,764 LIABILITIES 12. Liabilities For borrowed money 13. Mortgage indebtedness (including $ capital leases) ---------------- 14. Other liabilities (complete on schedule on reverse 2,941 15. TOTAL LIABILITIES 2,941 ====== 16. Capital notes and debentures SHAREHOLDERS EQUITY 17. Preferred stock-- (Number shares outstanding ) Amount $ ---------------- 18. Common stock-- 10 (Number shares authorized 100) Amount $ 100 --- (Number shares outstanding 100) Amount $ 100 --- 19. Surplus Amount $ 9,990 20. TOTAL CONTRIBUTED CAPITAL 10,000 21. Retained earnings and other capital reserves 9,823 22. TOTAL SHAREHOLDERS EQUITY 19,823 23. TOTAL LIABILITIES AND CAPITAL ACCOUNTS 22,764 ======
4 MEMORANDA 1. Assets deposited with State Treasurer to qualify for exercise of fiduciary powers (market value) 630 - -------------------------------------------------------------------------------- The undersigned, Francis J. Farrell, VP & Manager and C. Scott Boone, Senior -------------------------------------------------------------- (Name and Title) (Name and Title) Vice President - -------------- of the above named trust company, each declares, for himself alone and not for the other: I have a personal knowledge of the matters contained in this report (including the reverse side hereof), and I believe that each statement in said report is true. Each of the undersigned, for himself alone and not for the other, certifies under penalty of perjury that the foregoing is true and correct. Executed on 4/22/97, at San Francisco, California ------- ------------- (Date) (City) /s/ Francis J. Farrell /s/ C. Scott Boone ---------------------- ------------------ (Signature) (Signature) SCHEDULE OF OTHER ASSETS Accounts Receivable $326 Deferred Taxes 396 Other 129 ---- Total (same as Item 10) $851 SCHEDULE OF OTHER LIABILITIES Accrued Income Taxes $1,738 Accrued Expenses & A/P 47 Accrued Pension & Benefits 771 Accrued Incentive Expense 23 All Other Liabilities 362 ------ Total (same as Item 14) $2,941
5 EX-25.3 16 STATEMENT OF ELIGIBILITY EXHIBIT 25.3 _____________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________ FORM T-l STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ___________________________ CHASE TRUST COMPANY OF CALIFORNIA (formerly Chemical Trust Company of California) (Exact name of trustee as specified in its charter) CALIFORNIA 94-2926573 (State of incorporation I.R.S. employer if not a national bank) identification No.) 101 California Street, Suite #2725 San Francisco, California 94111 (Address of principal executive offices) (Zip Code) ___________________________ IMPERIAL CREDIT INDUSTRIES, INC. (Exact name of obligor as specified in its charter) DELAWARE 95-4054791 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 23550 Hawthorne Boulevard, Building 1, Suite 110 Torrance, California 90505 (Address of principal executive offices) (Zip Code) ___________________________ Guarantee (Title of the indenture securities) ___________________________________ GENERAL ITEM 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Superintendent of Banks of the State of California, 235 Montgomery Street, San Francisco, California 94104-2980. Board of Governors of the Federal Reserve System, Washington, D.C. 20551 (b) Whether it is authorized to exercise corporate trust powers. Yes. ITEM 2. AFFILIATIONS WITH THE OBLIGOR. If the obligor is an affiliate of the trustee, describe each such affiliation. None. ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES a) Title of the securities outstanding under each such other indenture. $20,174,000 9 3/4% Senior Notes due January 15, 2004 issued under Indenture dated as of January 31, 1994. $200,000,000 9 7/8% Series B Senior Notes due 2007 issued under Indenture dated as of January 23, 1997. b) A brief statement of the facts relied upon as a basis for the claim that no conflicting interest within the meaning of Section 310 (b) (1) of the Act arises as a result of the trusteeship under any such other indenture, including a statement as to how the indenture securities will rank as compared with the securities issued under such other indenture. The Trustee is not deemed to have a conflicting interest within the meaning of Section 310 (b) (1) of the Act because the indenture securities referenced in (a) above (the "Prior Securities") are not in default and the indenture to be qualified and the indenture entered into in connection with the Prior Securities are wholly unsecured and rank equally. ITEM 16. LIST OF EXHIBITS List below all exhibits filed as a part of this Statement of Eligibility. 1. A copy of the Articles of Incorporation of the Trustee as now in effect, including the Restated Articles of Incorporation dated December 23, 1986 and the Certificates of Amendment dated March 26, 1992 and March 26, 1997 (see Exhibit 1 to Form T-1 filed in connection with Registration Statement No. 33- 55136, which is incorporated by reference). 2 2. A copy of the Certificate of Authority of the Trustee to Commence Business (See Exhibit 2 to Form T-1 filed in connection with Registration Statement No. 33-55136, which is incorporated by reference). 3. Authorization to exercise corporate trust powers (Contained in Exhibit 2). 4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form T-1 filed in connection with Registration Statement No. 33-55136, which is incorporated by reference). 5. Not applicable. 6. The consent of the Trustee required by Section 21(b) of the Act (See Exhibit 6 to Form T-1 filed in connection with Registration Statement No. 33-55136, which is incorporated by reference). 7. A copy of the latest report of condition of the Trustee, published pursuant to law or the requirements of its supervising or examining authority. 8. Not applicable. 9. Not applicable. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, Chase Trust Company of California, a corporation organized and existing under the laws of the State of California, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Los Angeles and State of California, on the ___ day of June, 1997. CHASE TRUST COMPANY OF CALIFORNIA By /s/ Hans H Helley ------------------------ HANS H HELLEY Assistant Vice President 3 EXHIBIT 7. REPORT OF CONDITION OF THE TRUSTEE. - -------------------------------------------------------------------------------- TRUST COMPANY CONSOLIDATED REPORT OF CONDITION OF CHEMICAL TRUST COMPANY OF CALIFORNIA ------------------------------------ (Legal Title) LOCATED AT SAN FRANCISCO SAN FRANCISCO CA 94111 ---------------------------------------------------------------- (City) (County) (State) (Zip) AS OF CLOSE OF BUSINESS ON MARCH 31, 1997 BANK NO. 1476 -------------- ---- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ASSETS DOLLAR AMOUNT IN THOUSANDS 1. Cash and due from banks 11,768 2. U.S. Treasury securities 10,025 3. Obligations of other U.S. Government agencies and corporations 4. Obligations of States and political subdivisions 5. Other securities (including $ corporate stock ---------------- (a) Loans (b) Less: Reserve for possible loan losses (c) Loans (Net) 7. Bank Premises, furniture and fixtures and other assets representing bank premises (including $ -0- capital leases) 120 ------- 8. Real estate owned other than bank premises 9. Investments in subsidiaries not consolidated 10. Other assets (complete schedule on reverse) (including $ intangibles) 851 ----------- 11. TOTAL ASSETS 22,764 LIABILITIES 12. Liabilities For borrowed money 13. Mortgage indebtedness (including $ capital leases) ---------------- 14. Other liabilities (complete on schedule on reverse 2,941 15. TOTAL LIABILITIES 2,941 ====== 16. Capital notes and debentures SHAREHOLDERS EQUITY 17. Preferred stock-- (Number shares outstanding ) Amount $ ---------------- 18. Common stock-- 10 (Number shares authorized 100) Amount $ 100 --- (Number shares outstanding 100) Amount $ 100 --- 19. Surplus Amount $ 9,990 20. TOTAL CONTRIBUTED CAPITAL 10,000 21. Retained earnings and other capital reserves 9,823 22. TOTAL SHAREHOLDERS EQUITY 19,823 23. TOTAL LIABILITIES AND CAPITAL ACCOUNTS 22,764 ======
4 MEMORANDA 1. Assets deposited with State Treasurer to qualify for exercise of fiduciary powers (market value) 630 - -------------------------------------------------------------------------------- The undersigned, Francis J. Farrell, VP & Manager and C. Scott Boone, Senior -------------------------------------------------------------- (Name and Title) (Name and Title) Vice President - -------------- of the above named trust company, each declares, for himself alone and not for the other: I have a personal knowledge of the matters contained in this report (including the reverse side hereof), and I believe that each statement in said report is true. Each of the undersigned, for himself alone and not for the other, certifies under penalty of perjury that the foregoing is true and correct. Executed on 4/22/97, at San Francisco, California ------- ------------- (Date) (City) /s/ Francis J. Farrell /s/ C. Scott Boone ---------------------- ------------------ (Signature) (Signature) SCHEDULE OF OTHER ASSETS Accounts Receivable $326 Deferred Taxes 396 Other 129 ---- Total (same as Item 10) $851 SCHEDULE OF OTHER LIABILITIES Accrued Income Taxes $1,738 Accrued Expenses & A/P 47 Accrued Pension & Benefits 771 Accrued Incentive Expense 23 All Other Liabilities 362 ------ Total (same as Item 14) $2,941
5 EX-99.1 17 FORM OF LETTER OF TRANSMITTAL EXHIBIT 99.1 LETTER OF TRANSMITTAL TO EXCHANGE ALL OUTSTANDING REMARKETED PAR SECURITIES, SERIES A FOR REMARKETED PAR SECURITIES, SERIES B WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES AND EXCHANGE ACT OF 1933 OF IMPERIAL CREDIT CAPITAL TRUST I PURSUANT TO THE PROSPECTUS DATED _________ ___, 1997 - ------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _____________ ____, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF REMARKETED PAR SECURITIES, SERIES A (THE "OLD SECURITIES") MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. - ------------------------------------------------------------------------------- DELIVERY TO: THE CHASE TRUST COMPANY OF CALIFORNIA, EXCHANGE AGENT By Hand/Overnight Courier/By Mail: By Facsimile: c/o The Chase Manhattan Bank (212) 638-7380 Attn: Mr. Carlos Estevez 55 Water Street Confirm by Telephone: Second Floor, Room #234 (212) 638-0828 New York, New York 10041 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN AND THE PROSPECTUS (AS DEFINED) SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. By execution hereof, the undersigned acknowledges receipt of the Prospectus, dated ________ ___, 1997 (as the same may be amended from time to time, the "Prospectus") of Imperial Credit Capital Trust I, a Delaware statutory business trust (the "Trust"), and this Letter of Transmittal and instructions hereto (the "Letter of Transmittal"), which together constitute the Trust's offer to the holders of the Old Securities (the "Holders") to exchange (the "Exchange Offer") all of their outstanding Old Securities for an aggregate liquidation amount of up to $70,000,000 of the Trust's Remarketed Par Securities, Series B (the "New Securities") which have been registered under the Securities Act of 1933, as amended, upon the terms and subject to the conditions set forth in the Prospectus. For each Old Security accepted for exchange, the Holder of such Old Security will receive a New Security having a liquidation amount equal to that of the surrendered Old Security. The New Securities will bear interest from the most recent date to which interest has been paid on the Old Securities or, if no interest has been paid on the Old Securities, June 9, 1997. Accordingly, registered holders of New Securities on the relevant record date for the first interest payment date following the consummation of the Exchange Offer will receive interest accruing from the most recent date to which interest 1 has been paid or, if no interest has been paid, from June 9, 1997. Old Securities accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer. Holders whose Old Securities are accepted for exchange will not receive any payment in respect of accrued interest on such Old Securities otherwise payable on any interest payment date the record date for which occurs on or after consummation of the Exchange Offer. This Letter of Transmittal is to be completed by a Holder of Old Securities, either if certificates are to be forwarded herewith, or if a tender of certificates for Old Securities, if available, is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in "The Exchange Offer--Book-Entry Transfer" section of the Prospectus. Holders of Old Securities whose certificates are not immediately available, or who are unable to deliver their certificates or confirmation of the book-entry tender of their Old Securities into the Exchange Agent's account at the Book- Entry Transfer Facility (a "Book-Entry Confirmation") and all other documents required by this Letter of Transmittal to the Exchange Agent on or prior to the Expiration Date, must tender their Old Securities according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. See Instruction 1. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. The undersigned has completed the appropriate boxes below and has signed this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Trust the aggregate liquidation amount of Old Securities indicated below. Subject to, and effective upon, the acceptance for exchange of the Old Securities tendered hereby, the undersigned hereby sells, assigns and transfers to, or to the order of, the Trust all right, title and interest in and to such Old Securities as are being tendered hereby. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Old Securities tendered hereby and that the Trust will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim when the same are accepted by the Trust. The undersigned hereby further represents that any New Securities acquired in exchange for Old Securities tendered hereby will have been acquired in the ordinary course of business of the person receiving such New Securities, whether or not such person is the undersigned, that neither the Holder of such Old Securities nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Securities and that neither the Holder of such Old Securities nor any such other person is an "affiliate," as defined in Rule 405 under the Securities Act of 1933, as amended (the "Act"), of the Registrants. The undersigned also acknowledges that this Exchange Offer is being made in reliance on interpretations by the staff of the Securities and Exchange Commission (the "SEC"), as set forth in no-action letters issued to third parties, that the New Securities issued pursuant to the Exchange Offer in exchange for the Old Securities may be offered for resale, resold and otherwise transferred by Holders thereof (other than any such Holder which is an "affiliate" of the Registrants within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Securities are acquired in the ordinary course of such Holders' business and such Holders have no arrangement with any person to participate in a distribution of such New Securities. However, the SEC has not considered the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the SEC would make a similar determination with respect to the Exchange Offer as in other circumstances. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Securities and has no arrangement or understanding to participate in a distribution of New Securities. If any Holder is an affiliate of a Registrant, is engaged in or intends to engage in, or has any arrangement or understanding with any person 2 to participate in, a distribution of the New Securities to be acquired pursuant to the Exchange Offer, such Holder (i) could not rely on the applicable interpretations of the staff of the SEC and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. If the undersigned is a broker-dealer that will receive New Securities for its own account pursuant to the Exchange Offer, it represents that the Old Securities to be exchanged for the New Securities were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such New Securities; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned will, upon request, execute and deliver any additional documents deemed by the Trust to be necessary or desirable to complete the sale, assignment and transfer of the Old Securities tendered hereby. All authority conferred or agreed to be conferred in this Letter of Transmittal and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer--Withdrawal Rights" section of the Prospectus. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" below, please deliver the New Securities (and, if applicable, substitute certificates representing Old Securities for any Old Securities not exchanged) in the name of the undersigned or, in the case of a book-entry delivery of Old Securities, please credit the account indicated below maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated in the box entitled "Special Delivery Instructions" below, please send the New Securities (and, if applicable, substitute certificates representing Old Securities for any Old Securities not exchanged) to the undersigned at the address shown below in the box entitled "Description of Old Securities." PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX BELOW. This Letter of Transmittal is to be used by Holders if (i) certificates representing Old Securities are to be physically delivered to the Exchange Agent herewith by Holders, (ii) tender of Old Securities is to be made by book entry transfer to the Exchange Agent's account at The Depository Trust Company ("DTC") pursuant to the procedures set forth in the Prospectus under the caption "The Exchange Offer Procedures for Tendering Old Securities--Book-Entry Transfer" by any financial institution that is a participant in DTC and whose name appears on a security position listing as the owner of Old Securities (both Holders and such DTC participants, acting on behalf of Holders, are referred to herein as "Acting Holders"), unless an Agent's Message (as defined below) is delivered in connection with such book-entry transfer, or (iii) tender of Old Securities is to be made according to the guaranteed delivery procedures set forth in the Prospectus under the caption "Procedures for Tendering Old Securities Guaranteed Delivery Procedures." DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. [_] CHECK HERE IF TENDERED OLD SECURITIES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution: --------------------------------------------- Account Number with DTC: --------------------------------------------------- Transaction Code Number. --------------------------------------------------- If Holders desire to exchange Old Securities pursuant to the Exchange Offer and (i) certificates representing such Old Securities are not immediately available, (ii) time will not permit this Letter of Transmittal, certificates representing such Old Securities or other required documents to reach the Depositary on or prior to 5:00 p.m., New York City time, on the Expiration Date, or (iii) the procedures for book-entry transfer (including delivery of an Agent's Message) cannot be 3 completed prior to the Expiration Date, such Holders may effect a tender and a delivery of such Old Securities in accordance with the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer Guaranteed Delivery Procedures." See Instruction 1 below. [_] CHECK HERE IF TENDERED OLD SECURITIES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name of Registered Holder(s): ---------------------------------------------- Window Ticket No. (if any): ------------------------------------------------ Date of Execution of Notice of Guaranteed Delivery: ------------------------ Name of Eligible Institution that Guaranteed Delivery: --------------------- If Delivered by Book-Entry Transfer: Account Number with DTC: ---------------------------------------------- Transaction Code Number: ---------------------------------------------- [_] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: ---------------------------------------------------------------------- Address: ------------------------------------------------------------------- If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Securities. If the undersigned is a broker-dealer that will receive New Securities for its own account in exchange for Old Securities that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such New Securities; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD SECURITIES" BELOW AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED THE OLD SECURITIES AS SET FORTH IN SUCH BOX BELOW. List below the Old Securities to which this Letter of Transmittal relates. If the space provided below is inadequate, list the certificate numbers and liquidation amounts on a separately executed schedule and affix the schedule to this Letter of Transmittal. Tenders of Old Securities will be accepted only in liquidation amounts equal to $1,000 or integral multiples thereof. 4
DESCRIPTION OF OLD SECURITIES - ------------------------------------------------------------------------------- AGGREGATE LIQUIDATION NAME(S) AND ADDRESS(ES) LIQUIDATION AMOUNT OF OF HOLDER(S) (PLEASE CERTIFICATE AMOUNT OLD SECURITIES FILL IN, IF BLANK) NUMBER(S)* REPRESENTED** TENDERED - ------------------------------------------------------------------------------- ----------- ------------- -------------- ----------- ------------- -------------- ----------- ------------- -------------- ----------- ------------- -------------- ----------- ------------- -------------- ----------- ------------- -------------- ----------- ------------- -------------- - ------------------------------------------------------------------------------- TOTAL LIQUIDATION AMOUNT OF OLD SECURITIES ------------- --------------
- -------------------------------------------------------------------------------- * NEED TO BE COMPLETED BY HOLDERS TENDERING BY BOOK-ENTRY TRANSFER (SEE BELOW). ** UNLESS OTHERWISE INDICATED IN THIS COLUMN, A HOLDER WILL BE DEEMED TO HAVE TENDERED ALL OF THE OLD SECURITIES REPRESENTED BY THE OLD SECURITIES INDICATED IN COLUMN 2. SEE INSTRUCTION 2. - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- PLEASE SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS) IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR OLD SECURITIES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. IF A HOLDER IS TENDERING ANY OLD SECURITIES, THIS LETTER MUST BE SIGNED BY THE REGISTERED HOLDER(S) AS THE NAME(S) APPEAR(S) ON THE CERTIFICATE(S) FOR THE OLD SECURITIES OR BY ANY PERSON(S) AUTHORIZED TO BECOME A REGISTERED HOLDER(S) BY ENDORSEMENTS AND DOCUMENTS TRANSMITTED HEREWITH. IF SIGNATURE IS BY A TRUSTEE, EXECUTOR, ADMINISTRATOR, GUARDIAN, OFFICER OR OTHER PERSON ACTING IN A FIDUCIARY OR REPRESENTATIVE CAPACITY, PLEASE SET FORTH FULL TITLE. SEE INSTRUCTION 3. X ------------------------------------------------------------------------------- X ------------------------------------------------------------------------------- (SIGNATURE(S) OF HOLDER(S) OR AUTHORIZED SIGNATORY) DATE: ---------------------, ------ NAME(S): ------------------------------------------------------------------------ ------------------------------------------------------------------------ (PLEASE PRINT) CAPACITY: ----------------------------------------------------------------------- ADDRESS: ------------------------------------------------------------------------ ------------------------------------------------------------------------ (INCLUDING ZIP CODE) AREA CODE AND TELEPHONE NO.: ---------------------------------------------------- PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN SIGNATURE GUARANTEE (SEE INSTRUCTION 3) CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION - -------------------------------------------------------------------------------- (NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURES) - -------------------------------------------------------------------------------- (ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NUMBER - -------------------------------------------------------------------------------- (INCLUDING AREA CODE) OF FIRM) - -------------------------------------------------------------------------------- (AUTHORIZED SIGNATURE) - -------------------------------------------------------------------------------- (PRINTED NAME) - -------------------------------------------------------------------------------- (TITLE) DATE: ---------------------, ------ - -------------------------------------------------------------------------------- 6
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 2, 3 AND 4) (SEE INSTRUCTIONS 2, 3 AND 4) - ------------------------------------------------------- -------------------------------------------------------- To be completed ONLY if certificates for Old To be completed ONLY if certificates for Old Securities not exchanged and/or New Securities are to Securities not exchanged and/or New Securities are to be issued in the name of and sent to someone other than be sent to someone other than the person or persons the person or persons whose signature(s) appear(s) on whose signature(s) appear(s) on this Letter above or to this Letter of Transmittal above, or if Old Securities such person or persons at an address other than shown delivered by book-entry transfer which are not accepted in the box entitled "Description of Old Securities" on for exchange are to be returned by credit to an account this Letter above. maintained at the Book-Entry Transfer Facility other than the account indicated above. Issue: New Securities and/or Old Securities to: Deliver: New Securities and/or Old Securities to: Name: Name: -------------------------------------------------- -------------------------------------------------- (PLEASE PRINT) (PLEASE PRINT) Address: Address: ----------------------------------------------- ----------------------------------------------- (PLEASE PRINT) (PLEASE PRINT) - ------------------------------------------------------- ------------------------------------------------------- ZIP CODE ZIP CODE - ------------------------------------------------------- ------------------------------------------------------- TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER (SEE SUBSTITUTE FORM W-9 HEREIN) (SEE SUBSTITUTE FORM W-9 HEREIN) Credit unpurchased Old Securities by book-entry transfer to the DTC account set forth below: - ------------------------------------------------------- (DTC Account Number) Name of Account Party: - ------------------------------------------------------- PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN SIGNATURE GUARANTEE (SEE INSTRUCTION 3) Certain Signatures Must be Guaranteed by an Eligible Institution - ------------------------------------------------------- (NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURES) - ------------------------------------------------------- (ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NUMBER - -------------------------------------------------- (INCLUDING AREA CODE) OF FIRM) - ------------------------------------------------------- (AUTHORIZED SIGNATURE) - ------------------------------------------------------- (PRINTED NAME) - ------------------------------------------------------- (TITLE) Date: ----------------, -----
7 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD SECURITIES; GUARANTEED DELIVERY PROCEDURES. This Letter of Transmittal is to be completed by Holders of Old Securities either if certificates are to be forwarded herewith or if tenders are to be made pursuant to the procedures for delivery by book-entry transfer set forth in "The Exchange Offer--Book-Entry Transfer" section of the Prospectus. Certificates for all physically tendered Old Securities, or Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed Letter of Transmittal (or manually signed facsimile hereof) and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at the address set forth herein on or prior to the Expiration Date, or the tendering Holder must comply with the guaranteed delivery procedures set forth below. Old Securities tendered hereby must be in denominations of liquidation amount of $1,000 and any integral multiple thereof. Holders whose certificates for Old Securities are not immediately available or who cannot deliver their certificates and all other required documents to the Exchange Agent on or prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer on a timely basis, may tender their Old Securities pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to such procedures, (i) such tender must be made through an Eligible Institution (as defined in Instruction 3), (ii) on or prior to the Expiration Date, the Exchange Agent must receive from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form provided by the Company (by telegram, telex, facsimile transmission, mail or hand delivery), setting forth the name and address of the Holder of Old Securities and the amount of Old Securities tendered stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Old Securities, or a Book-Entry Confirmation, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent, and (iii) the certificates for all physically tendered Old Securities, in proper form for transfer, or Book-Entry Confirmation, as the case may be, and all other documents required by this Letter of Transmittal, are deposited by the Eligible Institution within three NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OLD SECURITIES AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE TENDERING HOLDERS, BUT THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF OLD SECURITIES ARE SENT BY MAIL, IT IS SUGGESTED THAT THE MAILING BE REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. See "The Exchange Offer" section of the Prospectus. 2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER). If less than all of the Old Securities evidenced by a submitted certificate are to be tendered, the tendering Holder(s) should fill in the aggregate liquidation amount of Old Securities to be tendered in the box above entitled "Description of Old Securities--Liquidation Amount Tendered." A reissued certificate representing the balance of non-tendered Old Securities will be sent to such tendering Holder, unless otherwise provided in the appropriate box of this Letter of Transmittal, promptly after the Expiration Date. All of the Old Securities delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. 3. SIGNATURES ON THIS LETTER OF TRANSMITTAL, BOND POWERS AND ENDORSEMENTS, GUARANTEE OF SIGNATURES. 8 If this Letter of Transmittal is signed by the registered Holder of the Old Securities tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates without any change whatsoever. If any tendered Old Securities are owned of record by two or more joint owners, all of such owners must sign this Letter of Transmittal. If any tendered Old Securities are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this letter as there are different registrations of certificates. When this Letter of Transmittal is signed by the registered Holder or Holders of the Old Securities specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, the New Securities are to be issued, or any untendered Old Securities are to be reissued, to a person other than the registered Holder, then endorsements of any certificates transmitted hereby or separate bond powers are required. Signatures on such certificate(s) must be guaranteed by an institution that is a member of the Securities Transfer Agents Medallion Program (STAMP), the Stock Exchange Medallion Program (SEMP) or the New York Stock Exchange Medallion Signature Program (MSP) (an "Eligible Institution"). IF THIS LETTER IS SIGNED BY A PERSON OTHER THAN THE REGISTERED HOLDER OR HOLDERS OF ANY CERTIFICATE(S) SPECIFIED HEREIN, SUCH CERTIFICATE(S) MUST BE ENDORSED AND ACCOMPANIED BY APPROPRIATE BOND POWERS, IN EITHER CASE SIGNED EXACTLY AS THE NAME OR NAMES OF THE REGISTERED HOLDER OR HOLDERS APPEAR(S) ON THE CERTIFICATES AND SIGNATURES ON SUCH CERTIFICATE(S) MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION. If this Letter of Transmittal or any certificates or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. NO SIGNATURE GUARANTEE IS REQUIRED, PROVIDED THE OLD SECURITIES ARE TENDERED: (i) BY A REGISTERED HOLDER OF OLD SECURITIES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A SECURITY POSITION LISTING AS THE HOLDER OF SUCH OLD SECURITIES) WHO HAS NOT COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS ON THIS LETTER, OR (ii) FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION. 4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering Holders of Old Securities should indicate in the applicable box the name and address to which New Securities issued pursuant to the Exchange Offer and/or substitute certificates evidencing Old Securities not exchanged are to be issued or sent, if different from the name or address of the person signing this Letter of Transmittal. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. Holders tendering Old Securities by book-entry transfer may request that Old Securities not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such Holder may designate hereon. If no such instructions are given, such Old Securities not exchanged will be returned to the name and address of the person signing this Letter. 5. TAX IDENTIFICATION NUMBER. Federal income tax law generally requires that a tendering Holder whose Old Securities are accepted for exchange must provide the Company (as payor) with such Holder's correct Taxpayer Identification Number ("TIN") on the Substitute Form W-9 attached hereto, which, in the case of a tendering Holder who is an individual, is his or her social security number. If the Company is not provided with the current TIN or an adequate basis for an exemption, such tendering Holder may be 9 subject to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery to such tendering Holder of New Securities may be subject to backup withholding in an amount equal to 31% of all reportable payments made after the exchange. If withholding results in an overpayment of taxes, a refund may be obtained. Exempt Holders of Old Securities (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. See the enclosed Guidelines of Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for additional instructions. To prevent backup withholding, each tendering Holder of Old Securities must provide its correct TIN by completing the Substitute Form W-9 attached hereto, certifying that the TIN provided is correct (or that such Holder is awaiting a TIN) and that (i) the Holder is exempt from backup withholding, or (ii) the Holder has not been notified by the Internal Revenue Service that such Holder is subject to backup withholding as a result of a failure to report all interest or dividends or (iii) the Internal Revenue Service has notified the Holder that such Holder is no longer subject to backup withholding. If the tendering Holder of Old Securities is a nonresident alien or foreign entity not subject to backup withholding, such Holder must give the Company a completed Form W-8, Certificate of Foreign Status. These forms may be obtained from the Exchange Agent. If the Old Securities are in more than one name or are not in the name of the actual owner, such Holder should consult the W-9 Guidelines for information on which TIN to report. If such Holder does not have a TIN, such Holder should consult the W-9 Guidelines for instructions on applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note: Checking this box and writing "applied for" on the form means that such Holder has already applied for a TIN or that such Holder intends to apply for one in the near future. If such Holder does not provide its TIN to the Company within 60 days, backup withholding will begin and will continue until such Holder furnishes its TIN to the Company. 6. TRANSFER TAXES. The Company will pay all transfer taxes, if any, applicable to the transfer of Old Securities to it or to its order pursuant to the Exchange Offer. If, however, New Securities and/or substitute Old Securities not exchanged are to be delivered to, or are to be registered or issued in the name of, any person other than the registered Holder of Old Securities tendered hereby, or if tendered Old Securities are registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is imposed for any reason other than the transfer of Old Securities to the Company or to its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed directly to such tendering Holder. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the Old Securities specified in this Letter of Transmittal. 7. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive satisfaction of any or all conditions enumerated in the Prospectus. 8. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering Holders of Old Securities, by execution of this Letter of Transmittal, shall waive any right to receive notice of the acceptance of their Old Securities for exchange. Neither the Company, the Exchange Agent nor any other person is obligated to give notice of any defect or irregularity with respect to any tender of Old Securities nor shall any of them incur any liability for failure to give any such notice. 10 9. MUTILATED, LOST, STOLEN OR DESTROYED OLD SECURITIES. Any Holder whose Old Securities have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent, at the address and telephone number indicated above. 11. DEFINITIONS. Capitalized terms used in this letter of transmittal and not otherwise defined have the meanings given in the Prospectus. 11 TO BE COMPLETED BY ALL TENDERING HOLDERS (SEE INSTRUCTION 5) - -------------------------------------------------------------------------------- SUBSTITUTE FORM W-9 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN) PART 1--PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND CERTIFY -------------------------------- BY SIGNING AND DATING BELOW. SOCIAL SECURITY NUMBER OR -------------------------------- EMPLOYER IDENTIFICATION NUMBER PART 2--CERTIFICATION--UNDER PENALTIES OF PERJURY, I CERTIFY THAT: (1) THE NUMBER SHOWN ON THIS FORM IS MY CORRECT TAXPAYER IDENTIFICATION NUMBER (OR I AM WAITING FOR A NUMBER TO BE ISSUED TO ME) AND (2) I AM NOT SUBJECT TO BACKUP WITHHOLDING EITHER BECAUSE I HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF FAILURE TO REPORT ALL INTEREST OR DIVIDENDS, OR THE IRS HAS NOTIFIED ME THAT I AM NO LONGER SUBJECT TO BACKUP WITHHOLDING. PART 3-- AWAITING TIN [_] CERTIFICATE INSTRUCTIONS--YOU MUST CROSS OUT ITEM (2) IN PART 2 ABOVE IF YOU HAVE BEEN NOTIFIED BY THE IRS THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING BECAUSE OF UNDER-REPORTING INTEREST OR DIVIDENDS ON YOUR TAX RETURN. HOWEVER, IF AFTER BEING NOTIFIED BY THE IRS THAT YOU WERE SUBJECT TO BACKUP WITHHOLDING YOU RECEIVED ANOTHER NOTIFICATION FROM THE IRS STATING THAT YOU ARE NO LONGER SUBJECT TO BACKUP WITHHOLDING, DO NOT CROSS OUT ITEM (2). SIGNATURE DATE ----------------------------------- -------------------------- - -------------------------------------------------------------------------------- YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9 - -------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I CERTIFY UNDER PENALTIES OF PERJURY THAT A TAXPAYER IDENTIFICATION NUMBER HAS NOT BEEN ISSUED TO ME, AND EITHER (a) I HAVE MAILED OR DELIVERED AN APPLICATION TO RECEIVE A TAXPAYER IDENTIFICATION NUMBER TO THE APPROPRIATE INTERNAL REVENUE SERVICE CENTER OR SOCIAL SECURITY ADMINISTRATION OFFICE OR (b) I INTEND TO MAIL OR DELIVER AN APPLICATION IN THE NEAR FUTURE. I UNDERSTAND THAT IF I DO NOT PROVIDE A TAXPAYER IDENTIFICATION NUMBER WITHIN 60 DAYS, 31 PERCENT OF ALL REPORTABLE PAYMENTS MADE TO ME THEREAFTER WILL BE WITHHELD UNTIL I PROVIDE A NUMBER. --------------------------------------- ---------------, --------- SIGNATURE DATE - -------------------------------------------------------------------------------- 12 THE DEPOSITARY FOR THE EXCHANGE OFFER IS: THE CHASE TRUST COMPANY OF CALIFORNIA By Hand/Overnight Courier/By Mail: By Facsimile: c/o The Chase Manhattan Bank (212) 638-7380 Attn: Mr. Carlos Estevez 55 Water Street Confirm by Telephone: Second Floor, Room #234 (212) 638-0828 New York, New York 10041 THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS: D.F. KING & CO., INC. 77 Water Street 20th Floor New York, New York 10005 (800) 669-5550 13 EX-99.2 18 FORM OF NOTICE OF GUARANTEED DELIVERY EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY FOR THE OFFER TO EXCHANGE ALL OF ITS OUTSTANDING REMARKETED PAR SECURITIES, SERIES A FOR ITS REMARKETED PAR SECURITIES, SERIES B WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES AND EXCHANGE ACT OF 1933 BY IMPERIAL CREDIT CAPITAL TRUST I As set forth in the Prospectus dated ___________, 1997 (as the same may be amended from time to time, the "Prospectus"), of Imperial Credit Capital Trust I (the "Trust") under the caption "The Exchange Offer--Procedures for Tendering Old Securities and--Guaranteed Delivery Procedures," and in the accompanying Letter of Transmittal (the "Letter of Transmittal") and Instruction 1 thereto, this form, or one substantially equivalent hereto, must be used to accept the Company's offer (the "Exchange Offer") to exchange all of its outstanding Remarketed Par Securities Series A (the "Old Securities") for a like liquidation amount of the Trust's Remarketed Par Securities, Series B (the "New Securities") which have been registered under the Securities Act of 1933, as amended, pursuant to the Exchange Offer. If certificates for the Old Securities are not immediately available or if the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Exchange Agent prior to the Expiration Date. Such form may be delivered or transmitted by telegram, facsimile transmission, mail or hand delivery to Chase Trust Company of California (the "Exchange Agent"). This form may be delivered by an Eligible Institution by mail, facsimile or hand delivery to the Exchange Agent as set forth below. All capitalized terms used herein but not defined shall have the meanings ascribed to them in the Prospectus. - -------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _______________, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERED OLD SECURITIES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. - -------------------------------------------------------------------------------- THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS: THE CHASE TRUST COMPANY OF CALIFORNIA By Hand/Overnight Courier/By Mail: By Facsimile: c/o The Chase Manhattan Bank (212) 638-7380 Attn: Mr. Carlos Estevez 55 Water Street Confirm by Telephone: Second Floor, Room #234 (212) 638-0828 New York, New York 10041 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on the Letter of Transmittal is required to be guaranteed by an Eligible Institution under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. 1 Ladies and Gentlemen: The undersigned hereby tenders to the Trust upon the terms and subject to the conditions set forth in the Prospectus and Letter of Transmittal, receipt of which is hereby acknowledged, the liquidation amount of Old Securities set forth below pursuant to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer--Procedures for Tendering Old Securities and--Guaranteed Delivery Procedures." The undersigned understands that tenders of Old Securities will be accepted only in liquidation amounts equal to $1,000 or integral multiples thereof. The undersigned understands that tenders of Old Securities pursuant to the Exchange Offer may only be withdrawn prior to the Expiration Date and in accordance with the procedures set forth in the Prospectus under the caption "The Exchange Offer--Withdrawal Rights." All authority herein conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death or incapacity of the undersigned and every obligation of the undersigned under this Notice of Guaranteed Delivery shall be binding upon the heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives of the undersigned. PLEASE SIGN AND COMPLETE Signature(s) of Registered Owner(s) or Address: Authorized Signatory: --------------------------- ----------------- ----------------------------------- - -------------------------------------- ----------------------------------- - -------------------------------------- Area Code and Telephone No.: Name(s) of Registered Holder(s): ------- ------ ----------------------------------- - -------------------------------------- Total Liquidation Amount Represented - -------------------------------------- by Book-Entry Old Note Liquidation Amount of Old Securities Certificate(s): Tendered*: -------------------- ---------------------------- ----------------------------------- - -------------------------------------- If Old Securities will be delivered Certificate No(s). of Old Securities by book-entry transfer at The (if available): Depository Trust Company, please provide the account number: - -------------------------------------- - -------------------------------------- - -------------------------------------- DTC Account No.: ------------------- Date: --------------------------------- * Must be in denominations of liquidation amount of $1,000 and any integral multiple thereof. 2 - -------------------------------------------------------------------------------- This Notice of Guaranteed Delivery must be signed by the registered holder(s) of Old Securities exactly as their name(s) appear on certificates for Old Securities or on a security position listing as the owner of Old Securities, or by person(s) authorized to become registered holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must provide the following information. PLEASE PRINT NAME(S) AND ADDRESS(ES) Name(s): ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- Capacity: ---------------------------------------------------------------- Address(es): ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- DO NOT SEND CERTIFICATES FOR OLD SECURITIES WITH THIS FORM. CERTIFICATES FOR OLD SECURITIES SHOULD BE SENT TO THE EXCHANGE AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank company having an office or a correspondent in the United States hereby (i) represents that each holder of Old Securities on whose behalf this tender is being made "own(s)" the Old Securities tendered hereby within the meaning of Rule 14e-14 under the Securities Exchange Act of 1934, as amended, (ii) represents that such tender of Old Securities complies with such Rule 14e-14, and (iii) guarantees that, within three (3) New York Stock Exchange trading days from the date of this Notice of Guaranteed Delivery, a properly completed and duly executed Letter of Transmittal (or facsimile thereof), together with certificates representing the Old Securities tendered hereby in proper form or transfer (or confirmation of the book-entry of such Old Securities into the Depositary's account at a Book-Entry Facility, pursuant to the procedure for book-entry set forth in the Prospectus under the caption "The Exchange Offer-- Procedures for Tendering Old Securities and--Book-Entry Transfer," and required documents will be deposited by the undersigned with the Depositary. Name of Authorized Signature Firm: Address: Name: Title: Area Code and Telephone No.: Date: - -------------------------------------------------------------------------------- 3 EX-99.3 19 FORM OF EXCHANGE AGENT AGREEMENT EXHIBIT 99.3 EXCHANGE AGENT DEPOSITORY AGREEMENT Dated: Chase Trust Company of California 101 California Street, Suite #2725 San Francisco, CA 94111 Attn: Hank Helley, Assistant Vice President Gentlemen: Imperial Credit Capital Trust I (the "Purchaser") is offering to exchange upon the terms and subject to the conditions set forth in that certain Exchange Offer "the Offer", all of its outstanding Remarketed Par Securities, Series A (the "Securities") for Remarketed Par Securities, Series B Exchange Date (the "Exchange Date"). The Offer will expire at 5:00 P.M., New York City time, on (date), unless such date is extended by the Purchaser (the "Exchange Offer Expiration Date"). The Purchaser hereby agrees with you as follows: 1) Subject to the terms and conditions of this Agreement, you will act as Depository in connection with the Offer, and in such capacity are authorized and directed to accept tenders of Securities. 2) (a) Tenders of Securities may be made only as set forth in the Exchange Offer and Securities shall be considered validly tendered to you only if: (i) you receive prior to the Exchange Offer Expiration Date (x) certificates for such Securities, (or a Confirmation (as defined in paragraph (b) below) relating to such Securities) or an Agent's Message (as defined in paragraph (b) below) relating thereto; or (ii) you receive (x) a Notice of Guaranteed Delivery (as defined in paragraph (b) below) relating to such Securities from an Eligible Institution (as defined in paragraph (b) below) prior to the Exchange Offer Expiration Date and (y) certificates for such Securities (or a Confirmation relating to such Securities) or an Agent's Message relating thereto at or prior to 5:00 P.M., New York City time, on the third New York Stock Exchange, Inc. (the "NYSE") trading day after the date of execution of such Notice of Guaranteed Delivery; and (iii) in the case of either clause (i) or (ii) above, a final determination of the adequacy of the items received, as provided in Section 4 hereof, has been made by Purchaser. (b) For the purpose of this Agreement: (i) a "Confirmation" shall be a confirmation of book-entry transfer of Securities into your account at The Depository Trust Company (hereinafter referred to as the "Book-Entry Transfer Facility") to be established and maintained by you in accordance with Section 3 hereof; (ii) a "Notice of Guaranteed Delivery" shall be a notice of guaranteed delivery substantially in the form attached as Exhibit C hereto or a telegram, telex, facsimile transmission or letter substantially in such form, or if sent by a Book-Entry Transfer Facility, a message transmitted through electronic means in accordance with the usual procedures of such Book-Entry Transfer Facility and the Depository, substantially in such form; provided, however, that if such notice is sent by a Book-Entry Transfer Facility through electronic means, it must state that such Book-Entry Transfer Facility has received an express acknowledgment from the participant on whose behalf such notice is given that such participant has received and agrees to become bound by the form of such notice; (iii) an "Eligible Institution" shall be a member firm of a national securities exchange registered with the Securities and Exchange Commission or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States; and (iv) an "Agent's Message" shall be a message transmitted through electronic means by a Book-Entry Transfer Facility, in accordance with the normal procedures of such Book-Entry Transfer Facility and the Depository, to and received by the Depository and forming part of a Confirmation, which states that such Book-Entry Transfer Facility has received an express acknowledgment from the participant in such Book-Entry Transfer Facility tendering the Securities which are the subject of such Confirmation that such participant has received and agrees to be bound by the terms of the Letter of Transmittal, and that the Purchaser may enforce such agreement against such participant. The term Agent's Message shall also include any hard copy printout evidencing such message generated by a computer terminal maintained at the Depository's office. 2 (c) We acknowledge that in connection with the Offer you may enter into agreements or arrangements with a Book-Entry Transfer Facility which, among other things, provide that (i) delivery of an Agent's Message will satisfy the terms of the Offer with respect to the Letter of Transmittal, (ii) such agreements or arrangements are enforceable against the Purchaser by such Book- Entry Transfer Facility or participants therein and (iii) you, as Depository, are authorized to enter into such agreements or arrangements on behalf of the Purchaser. Without limiting any other provision of this Agreement, you are expressly authorized to enter into any such agreements or arrangements on behalf of the Purchaser and to make any necessary representations or warranties in connection thereunder, and any such agreement or arrangement shall be enforceable against the Purchaser. 3) You shall take steps to establish and, subject to such establishments, maintain an account at the Book-Entry Transfer Facility for book-entry transfers of Securities, as set forth in the Exchange Exchange Offer, and you shall comply with the provisions of Rule 17Ad-14 under the Securities Exchange Act of 1934, as amended. 4) (a) You are authorized and directed to examine any certificate representing Securities, Notice of Guaranteed Delivery Agent's Message or and any other document required received by you to determine whether you believe any tender may be defective. In the event you conclude that any Notice of Guaranteed Delivery, Agent's Message or other document has been improperly completed, executed or transmitted, any of the certificates for Securities is not in proper form for transfer (as required by the aforesaid instructions) or if some other irregularity in connection with the tender of Securities exists, you are authorized subject to Section 4(b) hereof to advise the tendering securityholder, or transmitting Book-Entry Transfer Facility, as the case may be, of the existence of the irregularity, but you are not authorized to accept any tender not in accordance with the terms and subject to the conditions set forth in the Offer, or any other tender which you deem to be defective, unless you shall have received from the Purchaser the tender was made by means of a Confirmation containing an Agent's Message, a written notice, duly dated and signed by an authorized officer of the Purchaser, indicating that any defect or irregularity in such tender has been cured or waived and that such tender has been accepted by the Purchaser. (b) Promptly upon your concluding that any tender is defective, you shall, after consultation with and on the written instructions of the Purchaser, use reasonable efforts in accordance with your regular procedures to notify the person tendering such Securities, or Book-Entry Transfer Facility transmitting the Agent's Message, as the case may be, of such determination and, when necessary, return the certificates involved to such person in the manner described in Section 11 hereof. The Purchaser shall have full discretion to determine whether any tender is complete and proper and shall have the absolute right to reject any or all tenders of any particular Securities determined by it not to be in proper form and to determine whether the acceptance of or payment for such tenders may, in the opinion of counsel for the Purchaser, be unlawful; it being specifically agreed that you shall have neither discretion nor responsibility with 3 respect to these determinations. To the extent permitted by applicable law, the Purchaser also reserves the absolute right to waive any of the conditions of the Offer or any defect or irregularity in the tender of any particular Securities. The interpretation by the Purchaser of the terms and conditions of the Exchange Offer, the Consent and Letter of Transmittal and the instructions thereto, a Notice of Guaranteed Delivery or Consent and an Agent's Message (including without limitation the determination of whether any tender is complete and proper) shall be final and binding. (c) You agree to maintain accurate records as to all Securities tendered and received prior to or on the Exchange Offer Expiration Date. 5) You are authorized and directed to return to any person tendering Securities, in the manner described in Section 11 hereof, any certificates representing Securities tendered by such person but duly withdrawn pursuant to the Exchange Offer. To be effective, a written, telegraphic, telex or facsimile transmission notice of withdrawal must be received by you within the time period specified for withdrawal in the Exchange Offer at your address set forth on the back page of the Exchange Offer. Any notice of withdrawal must specify the name of the person having deposited the Securities to be withdrawn, the amount of Securities to be withdrawn and, if the certificates representing such Securities have been delivered or otherwise identified to you, the name of the registered holder(s) of such Securities as set forth in such certificates. If the certificates have been delivered to you, then prior to the release of such certificates the tendering securityholder must also submit the serial numbers shown on the particular certificates evidencing such Securities and the signature on the notice of withdrawal must be guaranteed by an Eligible Institution. You are authorized and directed to examine any notice of withdrawal to determine whether you believe any such notice may be defective. In the event you conclude that any such notice is defective you shall, after consultation with and on the instructions of the Purchaser, use reasonable efforts in accordance with your regular procedures to notify the person delivering such notice of such determination. All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by the Purchaser in its sole discretion, whose determination shall be final and binding. Any Securities so withdrawn shall no longer be considered to be properly tendered unless such Securities are re-tendered prior to the Expiration Date pursuant to the Exchange Offer. 6) Subject to Sections 18 and 25 hereof, any amendment to or extension of the Offer, as the Purchaser shall from time to time determine, shall be effective upon notice to you from the Purchaser given prior to the time the Offer would otherwise have expired, and shall be promptly confirmed by the Purchaser in writing; provided that you may rely on and shall be authorized and protected in acting or failing to act upon any such notice even if such notice is not confirmed in writing or such confirmation conflicts with such notice. If at any time the Offer shall be terminated as permitted by the terms thereof, the Purchaser shall promptly notify you of such termination. 4 7) At 5:00 P. M. New York City time, or as promptly as practicable thereafter on each business day, or more frequently if reasonably requested as to major tally figures, you shall advise each of the parties named below by facsimile transmission or telephone as to, based upon your preliminary review (and at all times subject to final determination by Purchaser), as of the close of business on the preceding business day or the most recent practicable time prior to such request, as the case may be: (i) the number of Securities duly tendered on such day; (ii) the number of Securities duly tendered represented by certificates physically held by you on such day; (iii) the number of Securities represented by Notices of Guaranteed Delivery on such day; (iv) the number of Securities withdrawn on such day; and (v) the cumulative totals of Securities in categories (i) through (iv) above through 3:00 P. M., New York City time, on such day: (a) Mr. Irv Gubman, General Counsel, Imperial Credit Industries Phone: 310-791-8040 Fax: 310-791-8230 (b) Mr. David Parsons, Senior Vice President, Lehman Brothers Phone: 212-528-7581 Fax: 212-528-6154 You shall also furnish to each of the above-named persons a written report confirming the above information which has been communicated orally on the day following such oral communication. You shall furnish to the Dealer-Manager (as defined in the Exchange Offer), the Information Agent (as defined in the Exchange Offer) and the Purchaser, such reasonable information, to the extent such information has been furnished to you, on the tendering securityholders as may be requested from time to time. You shall furnish to the Purchaser, upon request, master lists of Securities tendered for purchase, including an A-to-Z list of the tendering securityholders. You are also authorized and directed to provide the persons listed above or any other persons approved by the Purchaser with such other information relating to the Securities, Exchange Offer, Agent's Messages, or Notices of Guaranteed Delivery as the Purchaser may reasonably request from time to time. 8) Notices of Guaranteed Delivery, Agent's Messages, telegrams, telexes, facsimile transmissions, notices and letters submitted to you pursuant to the Offer shall be stamped by you to indicate the date and time of the receipt thereof and these documents, or copies thereof, shall be preserved by you for a reasonable time not to exceed one year or the term of this Agreement, whichever is longer, and thereafter shall be delivered by you to the Purchaser. Thereafter, any inquiries relating to or requests for any of the foregoing shall be directed solely to the Purchaser and not the Depository. 9) At such time as you shall be notified by the Purchaser, you shall request the transfer agent for the Securities to effect the transfer of all Securities purchased 5 pursuant to the Offer and to issue certificates for such Securities so transferred or to cancel them, in accordance with written instructions from the Purchaser, and upon your receipt thereof notify the Purchaser. The Purchaser shall be responsible to arrange for delivery, if any, of the certificates. 10. (a) On or before January 31st of the year following the year in which the Purchaser accepts Securities for payment, you will prepare and mail to each tendering securityholder whose Securities were accepted, other than securityholders who demonstrate their status as nonresident aliens in accordance with United States Treasury Regulations ("Foreign Securityholders"), a Form 1099-B reporting the purchase of Securities as of the date such Securities are accepted for payment. You will also prepare and file copies of such Forms 1099- B by magnetic tape with the Internal Revenue Service in accordance with Treasury Regulations on or before February 28th of the year following the year in which the Securities are accepted for payment. 11) If, pursuant to the terms and conditions of the Offer, the Purchaser has notified you that it does not accept certain of the Securities tendered or purported to be tendered or a securityholder withdraws any tendered Securities, you shall promptly return the deposited certificates for such Securities, together with any other documents received, to the person who deposited the same, without expense to such person. Certificates for such unpurchased Securities shall be forwarded by you, at your option, by: (i) first class mail (ii) registered mail or (iii) by overnight courier or delivery. If any such Securities were tendered or purported to be tendered by means of a Confirmation containing an Agent's Message, you shall notify the Book-Entry Transfer Facility of the Purchaser's decision not to accept the Securities. 12) You shall take all reasonable action with respect to the Offer as may from time to time be requested by the Purchaser, the Dealer-Manager or the Information Agent. You are authorized to cooperate with and furnish information to the Dealer-Manager, the Information Agent, any of their representatives or any other organization (or its representatives) designated from time to time by the Purchaser, in any manner reasonably requested by any of them in connection with the Offer and tenders thereunder. 13) Any instructions given to you orally, as permitted by any provision of this Agreement, shall be confirmed in writing by the Purchaser, the Dealer- Manager or the Information Agent, as the case may be, as soon as practicable. You shall not be liable or responsible and shall be fully authorized and protected for acting, or failing to act, in accordance with any oral instructions which do not conform with the written confirmation received in accordance with this Section. 14) Whether or not any Securities are tendered or the Offer is consummated, for your services as Depository hereunder we shall pay to you compensation in accordance with the fee schedule attached as Schedule 1 hereto, together with reimbursement for out-of-pocket expenses, including reasonable fees and disbursements of your counsel. 6 15) In the event any question or dispute arises with respect to the proper interpretation of this Agreement or your duties hereunder or the rights of the Purchaser or of any securityholders surrendering certificates for Securities pursuant to the Offer, you shall not be required to act and shall not be held liable or responsible for your refusal to act until the question or dispute has been judicially settled (and you may, if you in your sole discretion deem it advisable, but shall not be obligated to, file a suit in interpleader or for a declaratory judgment for such purpose) by final judgment rendered by a court of competent jurisdiction, binding on all securityholders and parties interested in the matter which is no longer subject to review or appeal, or settled by a written document in form and substance satisfactory to you and executed by the Purchaser and each such securityholder and party. In addition, you may require for such purpose, but shall not be obligated to require, the execution of such written settlement by all the securityholders and all other parties that may have an interest in the settlement. 16) As Depository hereunder you: (a) shall have no duties or obligations other than those specifically set forth herein or in Exhibits A, B, and C hereto, or as may subsequently be agreed to in writing by you and the Purchaser; (b) shall have no obligation to make payment for any tendered Securities unless the Purchaser shall have provided the necessary federal or other immediately available funds to pay in full amounts due and payable with respect thereto; (c) shall be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value, or genuineness of any certificates or the Securities represented thereby deposited with you or tendered through an Agent's Message hereunder and will not be required to and will make no representations as to or be responsible for the validity, sufficiency, value, or genuineness of the Offer; (d) shall not be obligated to take any legal action hereunder; if, however, you determine to take any legal action hereunder, and, where the taking of such action might in your judgment subject or expose you to any expense or liability, you shall not be required to act unless you shall have been furnished with an indemnity satisfactory to you; (e) may rely on and shall be authorized and protected in acting or failing to act upon any certificate, instrument, opinion, notice, letter, telegram, telex, facsimile transmission, Agent's Message or other document or security delivered to you and believed by you to be genuine and to have been signed by the proper party or parties; (f) may rely on and shall be authorized and protected in acting upon the written, telephonic, electronic and oral instructions, with respect to any matter relating to your actions as Depository covered by this Agreement (or supplementing or qualifying any such actions) of officers of the Purchaser; 7 (g) may consult counsel satisfactory to you, and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered, or omitted by you hereunder in good faith and in accordance with the advice of such counsel; (h) shall not be called upon at any time to advise any person tendering or considering tendering pursuant to the Offer as to the wisdom of making such tender or as to the market value of any security tendered thereunder; (i) may perform any of your duties hereunder either directly or by or through agents or attorneys and you shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with reasonable care by you hereunder; (j) shall not be liable or responsible for any recital or statement contained in the Offer or any other documents relating thereto; (k) shall not be liable or responsible for any failure of the Purchaser to comply with any of their respective obligations relating to the Offer, including without limitation obligations under applicable securities laws; (l) are not authorized, and shall have no obligation, to pay any brokers, dealers, or soliciting fees to any person, including without limitation the Dealer-Manager or Information Agent; and (m) shall not be liable or responsible for any delay, failure, malfunction, interruption or error in the transmission or receipt of communications or messages through electronic means to or from a Book-Entry Transfer Facility, or for the actions of any other person in connection with any such message or communication. 17) The Purchaser covenants to indemnify and hold you and your officers, directors, employees, agents, contractors, subsidiaries and affiliates harmless from and against any loss, liability, damage or expense (including without limitation any loss, liability, damage or expense incurred for submitting for transfer Securities tendered without a signature guarantee pursuant to the Letter of Transmittal, or in connection with any communication or message transmitted or purported to be transmitted through electronic means to or from a Book-Entry Transfer Facility, and the fees and expenses of counsel) incurred (a) without gross negligence or bad faith or (b) as a result of your acting upon the instructions of the Purchaser, Dealer-Manager or Information Agent, arising out of or in connection with the Offer, this Agreement or the administration of your duties hereunder, including without limitation the costs and expenses of defending and appealing against any action, proceeding, suit or claim in the premises. In no case shall the Purchaser be liable under this indemnity with respect to any action, proceeding, suit or claim against you unless the Purchaser shall be notified by you, by letter or by telex or facsimile transmission confirmed by letter, of the written assertion of any action, proceeding, suit or claim made or commenced against you, promptly after 8 you shall have been served with the summons or other first legal process or have received the first written insertion giving information as to the nature and basis of the action, proceeding, suit or claim, but failure so to notify the Purchaser shall not release the Purchaser of any liability which it may otherwise have on account of this Agreement. The Purchaser shall be entitled to participate at its own expense in the defense of any such action, proceeding, suit or claim. Anything in this agreement to the contrary notwithstanding, in no event shall you be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if you have been advised of the likelihood of such loss or damage and regardless of the form of action. 18) Unless terminated earlier by the parties hereto, this Agreement shall terminate upon (a) Purchaser's termination or withdrawal of the Offer, (b) if Purchaser does not terminate or withdraw the Offer, the date which is three (3) months after the later of (i) your sending of checks to tendering securityholders in accordance with Section 9(a) hereof and (ii) your delivery of certificates to the Purchaser in accordance with Section 9(b) hereof or (c) if not terminated or withdrawn earlier, the date which is twelve (12) months after the date of this Agreement. Upon any termination of this Agreement, you shall promptly deliver to the Purchaser any certificates, funds or property then held by you as Depository under this Agreement, and after such time any party entitled to such certificates, funds or property shall look solely to the Purchaser and not the Depository therefor, and all liability of the Depository with respect thereto shall cease, provided, however, that the Depository, before being required to make such delivery to the Purchaser, may at the expense of the Purchaser cause to be published in a newspaper of general circulation in the City of New York, or mail to each person who has tendered Securities but not received payment, or both, notice that such certificates, funds or property remain unclaimed and that after a date specified therein, which shall not be less than 30 days from the date of publication or mailing, any unclaimed balance of such certificates, funds or property will be delivered to the Purchaser. Sections 14, 16 and 17 hereof shall survive any termination of this Agreement. 19) In the event that any claim of inconsistency between this Agreement and the terms of the Offer arise, as they may from time to time be amended, the terms of the Offer shall control, except with respect to the duties, liabilities and rights, including without limitation compensation and indemnification, of you as Depository, which shall be controlled by the terms of this Agreement. 20) If any provision of this Agreement shall be held illegal, invalid, or unenforceable by any court, this Agreement shall be construed and enforced as if such provision had not been contained herein and shall be deemed an Agreement among us to the full extent permitted by applicable law. 21) Purchaser represents and warrants that (a) it is duly incorporated, validly existing and in good standing under the laws of the State of California, (b) the making and consummation of the Offer and the execution, delivery and performance of all transactions contemplated thereby (including without limitation this Agreement) have 9 been duly authorized by all necessary corporate action and will not result in a breach of or constitute a default under the certificate of incorporation or bylaws of the Purchaser or any indenture, agreement or instrument to which it is a party or is bound, (c) this Agreement has been duly executed and delivered by the Purchaser and constitutes the legal, valid, binding and enforceable obligation of the Purchaser, (d) the Offer will comply in all material respects with all applicable requirements of law and (e) to the best of its knowledge, there is no litigation pending or threatened as of the date hereof in connection with the Offer. 22) Set forth in Schedule 2 hereto is a list of the names and specimen signatures of the persons authorized to act for the Purchaser under this Agreement. The Secretary of the Purchaser shall, from time to time, certify to you the names and signatures of any other persons authorized to act for the Purchaser under this Agreement. 23) Except as expressly set forth elsewhere in this Agreement, all notices, instructions and communication under this Agreement shall be in writing, shall be effective upon receipt and shall be addressed, if to the Purchaser, to its address set forth beneath their signatures to this Agreement, or, if to the Depository, to Chase Trust Company of California, Suite #2725, 101 California Street, San Francisco, CA 94111, Attention: Corporate Trust, or to such other address as a party hereto shall notify the other parties. 24) This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflict of laws rules or principles, and shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto; provided that this Agreement may not be assigned by any party without the prior written consent of all other parties. 25) No provision of this Agreement may be amended, modified or waived, except in a writing signed by all of the parties hereto. Please acknowledge receipt of this Letter, the Exchange Offer, the Consent and Letter of Transmittal, and the Notice of Guaranteed Delivery, and confirm the arrangements herein provided by signing and returning the enclosed copy hereof, whereupon this Agreement and your acceptance of the terms and conditions herein provided shall constitute a binding Agreement among us. Very truly yours, Imperial Credit Capital Trust I, Purchaser By:_______________________________ Name: Mr. Irv Gubman Title: Regular Trustee 10 Address for notices: -------------------- Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard Building 1, Suite #210 Torrance, CA 90505 Accepted as of the date above first written: CHEMICAL TRUST COMPANY OF CALIFORNIA as DEPOSITORY By: _______________________________ Name: Hans Helley Title: Assistant Vice President 11 CHEMICAL TRUST COMPANY OF CALIFORNIA Exhibit A Exchange Offer Exhibit B Notice of Guaranteed Delivery Schedule 1 Schedule of Fees as Depository Schedule 2 Specimen Signatures of the Purchaser 12 SCHEDULE 1 Schedule of Fees as Depository 13 SCHEDULE 2 (Company's Letterhead) Name Position Specimen Signatures - ---- -------- ------------------- 14 -----END PRIVACY-ENHANCED MESSAGE-----