-----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, Q+sLM9qvog0V7RjKWgIezsAw6hIUbkentRAFvMXvb4o6OVVrzLCpeV7siuHv/QXA IYQJMXWJEoUqLINdDLX9Dg== 0000944209-01-000327.txt : 20010411 0000944209-01-000327.hdr.sgml : 20010411 ACCESSION NUMBER: 0000944209-01-000327 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010410 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: 10-K SEC ACT: SEC FILE NUMBER: 000-19861 FILM NUMBER: 1598582 BUSINESS ADDRESS: STREET 1: 23550 HAWTHORNE BLVD STREET 2: STE 110 CITY: TORRANCE STATE: CA ZIP: 90505 BUSINESS PHONE: 3103731704 MAIL ADDRESS: STREET 1: 23550 HAWTHORNE BLVD STREET 2: BUILDING ONE SUITE 110 CITY: TORRANCE STATE: CA ZIP: 90505 10-K 1 0001.txt FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-19861 IMPERIAL CREDIT INDUSTRIES, INC. (Exact name of registrant as specified in its charter) California 95-4054791 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number)
23550 Hawthorne Boulevard, Building 1, Suite 110, Torrance, California 90505 (Address of principal executive offices) (Zip Code) (310) 373-1704 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered Common Stock, no par value NASDAQ National Market System
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The aggregate market value of the voting stock held by nonaffiliates of the registrant based upon the closing sales price of its Common Stock on March 30, 2001 on the NASDAQ National Market was approximately $30,090,338. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [_] The number of shares of Common Stock outstanding as of March 30, 2001: 32,096,361 DOCUMENTS INCORPORATED BY REFERENCE (not applicable) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- IMPERIAL CREDIT INDUSTRIES, INC. 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Page ---- PART I ITEM 1. BUSINESS...................................................... 3 ITEM 2. PROPERTIES.................................................... 41 ITEM 3. LEGAL PROCEEDINGS............................................. 41 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 42 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS........................................... 43 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.......................... 45 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 46 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.... 85 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 85 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................................... 150 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 150 ITEM 11. EXECUTIVE COMPENSATION........................................ 151 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................... 157 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 158 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................................................... 162
Forward-Looking Statements Certain statements contained herein are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1955, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as "may", "will", "intend", "should", "expect", "anticipate", "estimate", or "continue" or the negatives thereof or other comparable terminology. The Company's actual results could differ materially from those anticipated in such forward-looking statements due to a variety of factors. These factors include but are not limited to, the demand for our products; competitive factors in the businesses in which we compete; adverse changes in the securities markets; inflation and changes in the interest rate environment that reduce margins or the fair value of financial instruments; changes in national, regional or local business conditions or economic environments; government fiscal and monetary policies; legislative or regulatory changes that affect our business; factors inherent to the valuation and pricing of commercial and real estate loans; other factors generally understood to affect the value of commercial and real estate loans; and the other risks detailed in the Company's 8-K dated May 17, 1999 as filed with the 2 Securities and Exchange Commission (the "SEC"); periodic reports on Forms 10- Q, 8-K and 10-K and any amendments with respect thereto filed with the SEC; and other filings made by the Company with the SEC. We wish to caution readers not to place undue reliance on any such forward- looking statements, which speak only as of the date made. We do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. ITEM 1. BUSINESS General Imperial Credit Industries, Inc. ("ICII"or the "Company") primarily conducts its business activities through its commercial banking subsidiary, Southern Pacific Bank ("SPB"). SPB was undercapitalized at December 31, 2000. See Item 1. Business--Regulation and Note 4 of Notes to Consolidated Financial Statements. Our core business is commercial lending to corporate borrowers that include lines of credit, term loans, leases, as well as real estate loans on commercial properties. Business Strategy For an explanation of our current business strategy, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--General." The Company's operations are divided into several operating segments segregated by product line. See "Imperial Credit Industries, Inc., Notes to Consolidated Financial Statements", Note 2--Operating Activities for a description of each of our business segments. We group our core business segments into four broad categories. Business Finance Lending Coast Business Credit Imperial Warehouse Finance, Inc. Loan Participation and Investment Group The Lewis Horwitz Organization Imperial Business Credit, Inc. Multifamily and Commercial Mortgage Lending Income Property Lending Division Asset Management Activities Imperial Credit Asset Management, Inc. Imperial Credit Commercial Asset Management Corporation Investment Banking and Brokerage Services Imperial Capital Group, LLC We also segregate certain business segments as: Other Core Operations Equity Interests, and De-emphasized/Discontinued/Exited Businesses 3 Business Finance Lending Coast Business Credit General Coast Business Credit ("CBC") is the asset-based and cash stream lending division of our principal subsidiary, SPB, that makes revolving lines of credit and term loans available to growth companies in equipment leasing, aircraft transportation, manufacturing, distribution, technology, service, telecommunications and retail industries. CBC is headquartered in Los Angeles, California, and conducts its lending throughout the United States. In addition to the Los Angeles office, CBC has 16 loan production and satellite offices located in the following cities at December 31, 2000: Atlanta Chicago Minneapolis San Francisco Baltimore* Cleveland New York City Santa Clara Boston Irvine Phoenix* Seattle* Charlotte* Kansas City* Portland* Stamford*
- -------- * Satellite office CBC's Loan Portfolio CBC's principal business is asset-based and cash stream lending to middle market businesses with annual revenues ranging from approximately $10 million to $100 million. Typically, revolving lines of credit are secured by accounts receivable and inventory. Term loans are usually secured by real property, equipment or other fixed assets. CBC's primary niche is the high-technology sector, which includes businesses involved in computer hardware and software, telecommunications, internet services, industrial automation and office equipment. These customers provide CBC with opportunities for long-term relationships in industries with above average growth prospects. Over the past two years CBC diversified its originations from traditional asset-based loans to include cash stream loans, aircraft financing, term loans, and participations purchased. SPB has recently decided to refocus the majority of CBC's future originations in the traditional asset-based and cash stream lending area. Most of CBC's asset-based and cash stream loans are originated on a formula basis. CBC typically advances up to 80% of eligible accounts receivable, 25-75% of inventory value (raw material and finished goods), a maximum of 80% of the liquidation value of equipment and 70% of the FMV of real estate. The only exceptions to these general rules occur when there is a recurring cash stream with a diversified base of customers and/or subscribers which lends itself to a collections multiple limited by an earnings before interest, taxes, depreciation, and amortization ("EBITDA") multiplier of two to four and 80% of the appraised value of the subscriber base or licenses outstanding. CBC intends to put less emphasis on telecommunications and transportation (including Aircraft and Aviation lending) in 2001, and as a result, expects CBC's portfolio to become more diversified. CBC's lending to technology and software companies, semiconductor companies, electronic equipment manufacturers, computer peripheral manufacturers, and wireless device companies will be focused in its traditional asset-based lending product. CBC expects to focus more effort on business services, distribution, retail, consumer products, rental equipment, vending, and general manufacturing during 2001. 4 Set forth below is a table showing CBC's outstanding loan and commitment balances by industry at December 31, 2000 and 1999:
At December 31, 2000 At December 31, 1999 ------------------------------------- ------------------------------------- Outstanding % of Commitment % of Outstanding % of Commitment % of Balance Total Balance Total Balance Total Balance Total ----------- ------ ---------- ------ ----------- ------ ---------- ------ (Dollars in thousands) Aircraft and related loans.................. $131,351 17.45% $ 179,099 12.89% $ 60,760 8.12% $ 84,150 6.05% Public utilities........ 99,321 13.19 215,535 15.51 154,905 20.71 287,230 20.63 Equipment leasing....... 75,616 10.04 98,800 7.11 43,341 5.79 82,900 5.96 Transportion equipment.. 45,080 5.99 67,915 4.89 22,075 2.95 26,250 1.89 Wholesale trade--durable goods.................. 43,436 5.77 75,800 5.45 57,075 7.63 100,600 7.23 Electronic and electrical equipment manufacturing.......... 33,007 4.38 73,500 5.29 44,045 5.89 94,793 6.81 Paper products, printing, publishing... 31,050 4.12 65,000 4.68 -- -- -- -- Retail stores........... 27,468 3.65 39,775 2.86 44,861 6.00 85,500 6.14 Primary metals.......... 20,691 2.75 34,903 2.51 -- -- -- -- Mining.................. 20,332 2.70 25,000 1.80 -- -- -- -- Health services......... 20,004 2.66 25,000 1.80 16,665 2.23 20,000 1.44 Fabricated metal products............... 18,878 2.51 29,900 2.15 36,357 4.86 48,000 3.45 Industrial & commercial equipment.............. 18,456 2.45 70,868 5.10 23,133 3.09 54,867 3.94 Rubber, plastics, leather, stone, clay glass.................. 18,157 2.41 34,850 2.51 -- -- -- -- Computer software....... 16,480 2.19 43,925 3.16 31,318 4.19 44,000 3.16 Management services..... 15,084 2.00 30,000 2.16 16,110 2.15 41,500 2.98 Computer systems design................. 10,835 1.44 30,000 2.16 22,131 2.96 43,000 3.09 Wholesale trade-- nondurable goods....... 7,276 0.97 14,000 1.01 18,559 2.48 42,000 3.02 Food product manufacturing.......... 6,136 0.82 20,000 1.44 20,326 2.72 42,500 3.05 Other................... 94,225 12.51 215,867 15.52 136,461 18.23 294,678 21.16 -------- ------ ---------- ------ -------- ------ ---------- ------ Total................. $752,883 100.00% $1,389,737 100.00% $748,122 100.00% $1,391,968 100.00% ======== ====== ========== ====== ======== ====== ========== ======
Set forth below is a summary of CBC's loan portfolio at December 31, 2000, 1999 and 1998:
At December 31, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- (Dollars in thousands) Commitments............................ $1,389,737 $1,391,968 $1,050,426 Outstanding loans...................... 752,883 748,122 633,299 Outstanding loans to technology companies (1)......................... 250,273 293,521 208,800 Outstanding unfunded commitments....... 636,854 643,846 417,127 Average outstanding balance per customer.............................. 4,903 4,310 3,700 Average commitment per customer........ 9,020 8,019 6,137 Weighted average yield................. 11.82% 13.17% 13.09%
- -------- (1) Technology companies primarily include long distance resellers, paging companies, semiconductor manufacturers, software developers, wireless communications companies, and computer business services. Loan Products and Originations CBC's loans typically have maturities of one to three years, providing borrowers with greater flexibility to manage their borrowing needs. These loans have a renewal provision for an additional extension year at the end of 5 the contract term and annual renewals thereafter unless terminated by either party (usually requiring 90 days written notice prior to the end of the term). Loans are categorized based on the type of collateral securing the loan. Accounts Receivable Loans. These loans are revolving lines of credit that are secured by accounts receivable from their customers. Each borrower's customers normally make their payments to a blocked account, lockbox or directly to CBC. CBC deposits the payments daily and applies the funds to the borrower's loan balances. CBC typically lends up to 80% of the principal balance of accounts receivable that meet its eligibility requirements. However, advance rates vary depending on the borrower's dilution, concentrations, and historical performance with CBC. CBC's internal auditors conduct quarterly examinations of the collateral and financial condition of each borrower. Inventory Loans. These loans are typically revolving lines of credit secured by eligible inventory that is restricted to raw materials and finished goods. Inventory loans are generally made in conjunction with accounts receivable loans to qualifying borrowers. Borrowers are required to provide CBC with monthly inventory designations and these reports are compared to each borrower's financial statements for accuracy. CBC typically advances loan proceeds in amounts ranging from 25% to 75% of the eligible inventory value, with the percentage advanced determined based on the characteristics of the inventory and the expected orderly liquidation of the inventory based on an appraisal by a qualified appraisal firm with experience in that industry. Term Loans. CBC also originates term loans secured by real property, equipment or other fixed assets. These loans typically have three-to-five year amortization periods, but are due and payable upon termination of the master loan and security agreement. A small percentage of term loans are stand-alone and do not include a revolving facility. These loans are usually related to larger equipment financing arrangements, such as large aircraft. Participation Loans. Participation loans consist of both term loans and revolving lines of credit which CBC and other lenders (banks or other asset- based lenders) jointly lend to borrowers under one loan agreement. Cash Stream Loans. CBC also originates loans based on a multiple of recurring cash streams. Such loans are typically made to companies that generate a consistent stream of recurring collections. These companies include internet service providers, alarm companies, furniture rental companies, and other companies where regular, consistent payments are made for providing a particular product or service. Cash stream loans are generally limited to no more than four times the borrowers EBITDA. CBC also obtains an independent appraisal of the customer base providing the cash stream to determine the underlying value of the relationships generating the future cash streams. Cash stream loans are also subject to lending limits relative to the appraised value of the borrower's customer base, enterprise value, or subscriber base. Set forth below is a table showing the principal amount of CBC's outstanding loans and the percentage of CBC's portfolio of each loan type at December 31, 2000, 1999 and 1998:
December 31, 2000 December 31, 1999 December 31, 1998 ----------------- ----------------- ----------------- Outstanding % of Outstanding % of Outstanding % of Balance Total Balance Total Balance Total ----------- ----- ----------- ----- ----------- ----- (Dollars in thousands) Accounts receivable/cash stream loans........... $383.5 50.9% $411.2 55.0% $520.4 82.2% Inventory loans......... 42.8 5.7 61.4 8.2 94.5 14.9 Term loans.............. 196.1 26.0 162.9 21.8 N/A N/A Participation loans purchased.............. 174.2 23.1 152.2 20.3 50.0 7.9 Participation loans sold................... (43.7) (5.7) (39.6) (5.3) (31.6) (5.0) ------ ----- ------ ----- ------ ----- Total................. $752.9 100.0% $748.1 100.0% $633.3 100.0% ====== ===== ====== ===== ====== =====
6 Underwriting Before a credit line proposal letter is approved and a line of credit is established, CBC conducts a due diligence review of the prospective client that includes all or part of the following: . An audit of the company's records which include verification of its accounts receivable and inventory, along with reviews of its financial statements, management information systems, accounts payable and reporting capability . Independent appraisals of inventory, equipment or real estate . Background checks on the principals and investors of the company . Extensive research on the prospective client, its industry, suppliers, competitors and products . Detailed analysis of the prospective client's audited or reviewed financial statements including ratio analysis, trend analysis, comparison to budget projections, interim results and multi-year analysis . Uniform Commercial Code searches and filings, and . Legal documentation review by outside attorneys. For high technology borrowers, particular emphasis is placed on understanding the underlying value of the technology itself, including the value of the borrower's intangible assets. When necessary, filings at the patent and trademark office are made on copyrights, patents, trade names or other intangibles. Outside experts are sometimes consulted to assess the viability and value of intangibles. The underwriting process begins after a proposal letter is issued. At that time, CBC requires the prospective borrower to provide a deposit for the due diligence and audit. If the prospective borrower is providing inventory, equipment or real estate as collateral for the loan, then CBC will order appraisals for the various types of collateral. CBC's auditing staff conducts an audit generally consisting of a due diligence review of the prospective borrower's accounting and financial records, including a statistical review of accounts receivable and charge off history. CBC auditors then submit their reports and work papers to CBC's credit committee along with the other due diligence being conducted by the underwriting department and appraisals by an outside appraisal firm. When CBC decides to approve a credit line, an appropriate credit limit is established under the revolving credit line. CBC analyzes the prospective borrower's customer base to assure compliance with CBC's policies. These policies generally limit CBC's overall exposure to borrowers, especially with respect to privately held or non-investment grade borrowers. When deemed necessary for credit approval, CBC may obtain guarantees or other types of security from a client or its affiliates and may also obtain subordination and intercreditor agreements from the borrower's other lenders. Although CBC's underwriting guidelines specify a review of the factors described above, CBC does not rely on a rigid scoring system to approve prospective borrowers. Decisions to enter into a relationship with a prospective client are made on a case-by-case basis. Credit Monitoring and Controls Each CBC credit is assigned to an individual account executive who monitors each borrower's credit, collateral and advances. CBC account executives monitor borrowers' accounts receivable using three reports. The first is an accounts receivable aging analysis report prepared monthly by the loan processor and reviewed by the account executive. This report includes details pertaining to account concentrations and aging trends. The second is an accounts receivable activity summary prepared weekly by the loan processor and reviewed by the account executive, summarizing borrowings, repayments and pledged collateral. The third is a daily report prepared by the borrower and reviewed by the account executive to determine credit availability for a particular day. If liquidation is required for a borrower to repay an outstanding loan, then CBC attempts to effect a consensual possession of the collateral property and joint collection of accounts receivable. In certain instances, court action may be required to ensure collection of receivables and to obtain possession of pledged assets. 7 CBC monitors cash stream loans in five ways. The first way is monitoring of the recurring monthly collections deposited into a lock box that is swept daily. At the end of each month the borrowings are adjusted upward or downward based on the amount of recurring collections received in the prior month (and usually adjusted for a 3-12 month moving average). The second loan limit that is monitored is a covenant which creates an event of default if collections in a given month fall below approximately 20% of the projected collections of the prior period's collections. Another monitoring tool is the EBITDA covenant that restricts the amount of debt that can be borrowed on the basis of a cap on Debt/EBITDA. As EBITDA increases or decreases in a given time frame, the amount of allowable CBC debt also may be limited or increased. The Debt / EBITDA covenant is also usually based on a 3-12 month moving average and usually provides a cap at approximately two to four times EBITDA. The fourth metric that is used to monitor cash stream loans is the requirement for the borrower periodically to re-appraise the subscriber base or revenue stream that underlies the recurring collections. CBC's loans generally require the loan amount not to exceed 80% of the appraised value of the revenue stream from the subscriber base or rental contracts or monthly fees calculated on the basis of an orderly liquidation value. Finally, the fifth method for monitoring cash stream loans is maintaining up-to-the-minute data about comparable sales of other companies, subscribers, or routes that are similar to those of our borrowers. Current comparable sales data allows CBC to value its borrowers' assets on an ongoing basis. Pricing and Funding CBC typically charges its customers prime plus 1% to 3% (exclusive of loan fees) on the outstanding balance of their loans depending upon the credit quality of the borrower. In addition, CBC attempts to be flexible in the structuring of its revolving credit lines and to provide prompt service in order to gain an advantage over its competitors. When competing against more traditional lenders, CBC competes less on price and more on flexibility and speed of funding. CBC strives to fund its initial loan advance within four to five weeks of receiving the required information and completing its due diligence review. CBC also charges fees for prepayments, letter of credit facilities, loan originations and renewals, and may charge other special fees. Asset Quality The amounts of non-performing assets attributable to CBC's business at December 31, 2000, 1999 and 1998 were $31.8 million, $22.2 million and $1.1 million, respectively. The amount of net charge-offs relating to CBC's loans for 2000, 1999 and 1998 were $88.9 million, $17.4 million and $67,000, respectively. The increase in CBC's non-accrual loans and charge-offs for the year ended December 31, 2000 resulted from a problem asset work-out strategy deployed by CBC's previous management, compounded by a slowing economy. During the course of the previous two years, CBC's management made the decision to advance unsecured funds to problem borrowers in an attempt to rehabilitate the borrower. This strategy resulted in significant unsecured overadvances to CBC's borrowers. The increases in charge-offs and provision for loan losses related to these credits combined with an economic slowdown in the technology and telecommunications industries have been a significant cause of CBC's recent poor financial performance. Additionally, the deterioration of collateral value and the beginning of a general economic turndown in the telecommunications and technology sectors have resulted in increased non- performing assets and charge-offs. See Item 7. "Management's Discussion and Analysis--Asset Quality," for more information about CBC's non-performing assets and non-accrual loans. SPB has made significant changes to CBC's operating structure, credit underwriting, and credit administration functions to ensure the CBC loan portfolio is more stringently managed. The additional changes to CBC's underwriting, credit administration, and workout strategies include: . All new credits must include the approval of SPB's chief credit officer, . CBC's over-advance approval authority has been terminated, 8 . All covenant waivers or amendments require the approval of SPB's Chief Credit Officer, . All customer covenant violations must be reported to SPB's Chief Credit Officer within 24 hours of discovery, . A new risk monitoring system for CBC has been introduced based on a review of several risk-rating factors, . Quarterly meetings will take place between field audit, portfolio administration, and SPB's Risk Management Department to review all CBC accounts, . Customer risk ratings will be updated regularly, . Under new management from SPB, CBC has been more proactive in identifying potential problem credits, . Industry papers will be prepared and updated annually for all syndicated national credit categories with $100 million or above of credit exposure, and . Credit guidelines will be reviewed semi-annually for technology and telecommunications--based lending, which together account for a significant portion of CBC's loan portfolio. Marketing CBC obtains business through referrals from: . banks . existing borrowers . investment banks . venture capitalists . other finance companies . mezzanine funds . accounting firms . independent brokers . management consultants . other affiliates of our company
CBC's marketing officers call on CBC's referral sources to identify and receive introductions to potential clients. CBC also identifies potential clients from database searches. CBC's marketing efforts also include in-house telemarketing, magazine and newspaper advertising, attendance at and sponsorship of seminars and trade shows, banner ads and internet advertising. CBC pays its marketing personnel competitive base salaries and commissions based on funded transactions. Commissions can be a significant portion of the total compensation paid to CBC's marketing personnel. CBC believes that this will motivate and reward the creation of new business and the retention of existing business. CBC's marketing personnel do not have credit decision authority. Imperial Warehouse Finance, Inc. General Imperial Warehouse Finance, Inc. ("IWF") is a wholly owned subsidiary of SPB which provides nationwide short-term repurchase lines of credit to mortgage lenders ("Sellers"), who are in search of a reliable Warehouse Lender. IWF's repurchase lines of credit provide Sellers with the ability to do same day closings and sell such residential mortgage loans in the secondary market. IWF's Loan Portfolio IWF has entered into a participation agreement with SPB pursuant to which SPB funds 100% of IWF's warehouse loans to Sellers. IWF generates revenues by charging an interest rate based on Prime plus a percentage, along with a transaction fee for each loan purchased. 9 The following table sets forth certain information regarding IWF's warehouse lines at December 31, 2000, 1999 and 1998:
At December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- (Dollars in thousands) Commitments.................................... $154,855 $300,415 $401,500 Outstanding warehouse lines.................... 50,639 78,068 181,001 Outstanding unfunded commitments............... 104,216 222,347 220,499 Average outstanding balance per customer....... 1,160 940 1,602 Average commitment per customer................ 3,520 3,617 3,554 Weighted average yield......................... 9.72% 8.28% 9.94%
IWF's outstanding balances to customers by geographic location were as follows at December 31, 2000, 1999 and 1998:
At December 31, ------------------------------------------------------ 2000 1999 1998 ----------------- ----------------- ------------------ % of % of % of Loans in Loans in Loans in Amount Portfolio Amount Portfolio Amount Portfolio ------- --------- ------- --------- -------- --------- (Dollars in thousands) New York............. $ 4,774 9.35% $24,720 31.66% $ 41,177 22.75% Maryland............. 8,790 17.22 22,188 28.42 26,865 14.84 California........... 22,978 45.03 6,140 7.86 241 0.13 Michigan............. 89 0.17 4,780 6.12 40,854 22.57 Florida.............. 8,641 16.93 3,369 4.32 25,844 14.28 New Jersey........... 217 0.43 2,915 3.73 14,700 8.12 Indiana.............. -- -- 128 0.16 10,757 5.94 Other................ 5,150 10.87 13,828 17.73 20,563 11.37 ------- ------ ------- ------ -------- ------ Total.............. $50,639 100.00% $78,068 100.00% $181,001 100.00% ======= ====== ======= ====== ======== ======
As a result of the relocation in the fourth quarter of 1999, none of the employees of IWF made the move from New Jersey to California. We believe that as a result of the personal contacts that IWF's former employees had with the existing client base, a substantial number of customers have paid off their warehouse lines and moved their relationships to the new employers of our former IWF employees. However, several positive changes have transpired during the fourth quarter of 2000 which will reflect on IWF's production and performance in 2001. In the fourth quarter of 2000, we changed the management team of IWF, who has restructured the company's contractual documentation, underwriting guidelines, sellers requirements and daily operational procedures, with the intent of minimizing its risk exposure. IWF has terminated several business relationships that were unable to comply with the new requirements. Since the change in management, IWF has added $38.6 million in new commitments and $16.3 million in new outstanding balances through December 31, 2000 from new business relationships under more stringent underwriting guidelines. Loan Products and Originations Under our new Master Repurchase Agreement, IWF purchases first and/or second trust deed mortgage loans secured by real estate properties from approved Sellers that are later sold to the approved secondary marketing investors. Underwriting During the fourth quarter of 2000, we implemented changes to our underwriting policies. In general, these new policies require Sellers to maintain a higher company net worth. We have also implemented margin accounts, which are held by SPB and managed by IWF for any possible purchase deficiencies. The new policy 10 includes Seller's performance reviews, which are conducted on a quarterly basis to ensure continuing business relationships. Purchased loans are underwritten in accordance with both IWF's and SPB's policies and procedures. Several changes have been made to IWF's application and approval process that requires detailed information on the prospective applicant. After evaluating the application and independently verifying the applicant's credit history, business relationships, investor approvals, licensing status (among other critical credit verification), the application is submitted to SPB's loan committee for final disposition. After final approval, IWF personnel will conduct an on-site visit with the approved Seller to confirm the information provided in the application. IWF will confirm Seller's organizational structure, operational personnel, type of business conducted, along with a walk through on their operational procedures from processing through credit file shipment to the investor. All mortgage loans purchased by IWF on behalf of the approved Seller are secured by 1-4 family real estate properties. Upon the release of funds to close a real estate transaction, IWF holds all rights and interest to the mortgage loan. The repurchase line may also be secured by a personal guaranty executed by the principals of the mortgage company. Typically the loans are to be repurchased from IWF within 60 days of its initial purchase date. Credit Monitoring and Controls IWF has implemented daily purchase operational procedures with the intent of minimizing its risk exposure and ensure the quality of the purchased mortgage loans. IWF has also implemented quarterly reviews on all active Sellers to ensure that the Seller is maintaining its contractual obligations with IWF and to establish and maintain long term profitable business relationships. IWF has implemented the following changes: . Approved Sellers are required to execute a Master Repurchase Agreement, Sellers Warranties Agreement and UCC filings, as well as having IWF recorded as a loss payee on their Errors and Omissions Insurance and Fidelity Bond. . All margin accounts (to cover margin deficits) are held with IWF's parent company, Southern Pacific Bank, and monitored by IWF. . Sellers are required to provide evidence of underwriting approvals from either internal underwriters if the Seller has been approved for delegated underwriting by the ultimate purchaser of the mortgage loan, or from the ultimate investor in the mortgage loan, prior to each purchase transaction. . Repurchase wires are received directly from an approved third party investor. . Detailed status of the outstanding loans are required if a loan has not been repurchased after its permissible period. Pricing and Funding IWF typically charges its Sellers Prime minus 0.50% to Prime plus 2% for each loan purchased, along with transaction fees ranging from $50 to $120 per transaction. Asset Quality The amount of non-performing assets attributable to IWF's business at December 31, 2000, 1999 and 1998 were $9.4 million, $7.8 million, and $4.1 million, respectively. The amount of net charge-offs relating to IWF's loans during the year ended December 31, 2000 was $16.4 million. IWF experienced $1.6 million and $0 in charge-offs for the years ended December 31, 1999 and 1998. The increases in NPL's and charge-offs during 2000 was the result of fraud and from enforcing stricter underwriting and collection policies on IWF's customers. See Item 7. "Management's Discussion and Analysis--Asset Quality," for more information about IWF's non-performing assets and non-accrual loans. 11 Marketing IWF expects to continue developing its business relationships nationwide. IWF markets its business by attending industry tradeshows, advertising in such publications as the Mortgage Banker, the National Mortgage Professional and the National Mortgage News and by direct mail. Loan Participation and Investment Group General SPB formed the Loan Participation and Investment Group ("LPIG") in September 1995 to invest in and purchase senior secured debt of other companies (referred to as a "participation") offered by commercial banks in the secondary market. We stopped originating new commitments for LPIG during 1998 as we believe that the capital that is currently being deployed at SPB to support LPIG's business could be better utilized in our other core businesses. As such, we anticipate that the current outstanding balance of LPIG's loans will decrease over time as this portfolio runs-off. The principal types of loans acquired by LPIG are senior-secured bank loans, in the form of revolving lines of credit and long-term loans or letters of credit. As a part of its business, LPIG invested in loan participations through both on and off balance sheet financing arrangements. The on balance sheet investments are funded by the FDIC insured deposits of SPB, while LPIG's off balance sheet financing is primarily conducted through a trust and total return swap instrument. During the year ended December 31, 1999, we entered into total rate of return swap contracts for investment purposes with various investment bank counter parties, the provisions of which entitle our company to receive the total return on various nationally syndicated bank loans and pay for a floating payment of one month LIBOR plus a spread. These contracts are off balance sheet instruments, and are managed by SPB's LPIG division. As of December 31, 2000 and 1999, we were party to total rate of return swap contracts with a total notional amount of syndicated bank loans of $65.2 million and $83.6 million, respectively, under which we were obligated to pay one month LIBOR plus a weighted average spread of 0.88%. The weighted average remaining life of these contracts was 51.2 months and 60.0 months at December 31, 2000 and 1999. For the years ended December 31, 2000 and 1999, we recognized $2.7 million and $2.9 million in interest income on these total return swaps and ($3.8) million and $197,000 in net mark-to-market gains or (losses), respectively. The cash flows from these swaps are generated by investments in nationally syndicated bank loans which have experienced high default rates in the year ended December 31, 2000. Additionally, credits in the swaps are subject to market price risk, and as such could result in significant gains or losses to our company. LPIG's On Balance Sheet Loan Portfolio The following table sets forth certain information regarding LPIG's commitments and outstanding balances at December 31, 2000, 1999 and 1998 as follows:
At December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- (Dollars in thousands) Commitments.................................... $289,110 $459,533 $523,300 Loans outstanding.............................. 123,471 216,961 222,100 Average outstanding balance per loan........... 4,410 6,027 4,936 Average commitment per loan.................... 10,325 12,765 11,929 Weighted average yield......................... 7.84% 7.55% 8.21%
Underwriting/Credit Monitoring and Controls By purchasing loan participations, LPIG built its loan portfolio without loan origination costs or ongoing loan servicing costs and with minimal administrative costs. LPIG attempted to minimize the risk of investing in loan participations by performing a comprehensive analysis of a borrower's creditworthiness including analysis of operating performance, cash flow, capital structure, collateral, customers, suppliers, industry and competition. Loans are monitored on at least a quarterly basis for performance against projections and compliance with loan covenants. 12 Set forth below is a table showing LPIG's outstanding loan and commitment balances by industry at December 31, 2000 and 1999:
At December 31, 2000 At December 31, 1999 ------------------------------------- ------------------------------------- Outstanding % of Commitment % of Outstanding % of Commitment % of Balance Total Balance Total Balance Total Balance Total ----------- ------ ---------- ------ ----------- ------ ---------- ------ (Dollars in thousands) Manufacturing........... $ 3,682 2.98% $ 24,647 8.53% $ 26,469 12.20% $ 63,189 13.75% Television broadcasting........... 14,044 11.37 33,790 11.69 13,773 6.35 44,483 9.68 Entertainment........... 11,477 9.30 11,641 4.03 36,332 16.74 43,453 9.46 Packaging............... 11,212 9.08 19,394 6.71 19,432 8.96 31,545 6.86 Hotels.................. 10,134 8.21 26,407 9.13 18,135 8.36 28,774 6.26 Automobile rentals ..... -- -- 15,000 5.19 -- -- 25,000 5.44 Telecommunications...... 22,688 18.38 25,000 8.65 20,238 9.33 25,000 5.44 Mining.................. -- -- 16,000 5.53 7,000 3.23 23,000 5.00 Food processing ........ 5,857 4.74 10,000 3.46 11,216 5.17 18,697 4.07 Waste disposal services............... 4,452 3.61 10,245 3.54 8,433 3.89 18,643 4.06 Party goods distribution........... 5,166 4.18 14,886 5.15 3,780 1.74 14,940 3.25 Office products......... 8,809 7.13 10,627 3.68 6,624 3.05 14,725 3.20 Defense................. 3,098 2.51 13,388 4.63 4,131 1.90 14,421 3.14 Air carrier............. -- -- -- -- 9,106 4.20 13,400 2.92 Park management......... 3,324 2.69 6,278 2.17 7,636 3.52 13,091 2.85 Rail transportation..... 10,100 8.18 10,100 3.49 12,360 5.70 12,600 2.74 Chemicals............... 634 .51 10,557 3.65 -- -- 10,557 2.30 Healthcare.............. 6,600 5.35 6,750 2.33 9,687 4.46 9,835 2.14 Automobile parts........ 643 .52 9,000 3.11 -- -- 9,000 1.96 Electronics............. 1,551 1.26 7,143 2.47 -- -- 7,143 1.55 Equipment rentals....... -- -- -- -- -- -- 6,750 1.47 Garment................. -- -- 5,400 1.87 -- -- 5,400 1.18 Paper................... -- -- -- -- 2,323 1.07 3,030 0.66 Ecological.............. -- -- 2,857 .99 286 0.13 2,857 0.62 -------- ------ -------- ------ -------- ------ -------- ------ Total.................. $123,471 100.00% $289,110 100.00% $216,961 100.00% $459,533 100.00% ======== ====== ======== ====== ======== ====== ======== ======
Pricing and Funding LPIG loans are typically priced based on the 1, 2 and 3 month LIBOR rate plus a spread on the outstanding balance of loans. Asset Quality At December 31, 2000, 1999, and 1998, LPIG had non-performing assets of $26.2 million, $0 and $0, respectively. During the years ended December 31, 2000, 1999 and 1998, LPIG experienced $32.3 million, $3.9 million and $0 in net loan charge-offs, respectively. See Item 7. "Management's Discussion and Analysis--Asset Quality," for more information about LPIG's non-performing assets and non-accrual loans. Lewis Horwitz Organization ("LHO") General We acquired LHO in October 1999. See "Management's Discussion and Analysis--The Lewis Horwitz Organization" for more information regarding the acquisition. LHO is an internationally recognized commercial finance lender engaged in providing financing for independent motion picture and television production. Typically, LHO lends to independent producers of film and television on a senior secured basis, basing its credit decisions on the creditworthiness and reputation of distributors and sales agents who have contracted to distribute the films. 13 Loan Products and Originations LHO provides loans (with a typical term of 12 to 18 months) and letters of credit for the production of motion pictures and television shows or series that have a predictable market worldwide, and therefore, a predictable level of revenue arising from licensing of the distribution rights throughout the world. LHO also provides various types of credit facilities to creditworthy companies in the film and television industry. LHO is a widely-recognized leader in film financing with over 30 years of experience. LHO's lending officers have a combined total of over 100 years in financing experience. LHO believes it has a competitive advantage due to its extensive worldwide contacts among sales agents, distributors and independent producers in an industry where name recognition and personal contacts are crucial to success. LHO's experience has allowed it to rapidly adapt to changing industry standards in order to maintain its competitive position. LHO lends to independent producers of film and television, many of which are located in California. LHO, however, has borrowing clients based all over the world. Independent producers tend to be those producers that do not have major studio distribution outlets for their product. Large film and television studios generally maintain their own distribution outlets and finance their projects with internally generated financing. In addition to funding production loans against a number of distribution contracts, LHO has pioneered a conservative valuation of selected unsold rights to cover a portion of the production budget (gap). LHO's Loan Portfolio The following table sets forth certain information regarding LHO's commitments and outstanding balances at December 31, 2000 and 1999 as follows:
At December 31, ----------------- 2000 1999 -------- ------- (Dollars in thousands) Commitments............................................... $101,350 $23,132 Outstanding loans......................................... 83,688 15,824 Outstanding unfunded commitments.......................... 17,662 7,308 Average outstanding balance per loan...................... 1,391 1,582 Average outstanding commitment per loan................... 1,469 731 Weighted average production gap per loan.................. 10.40% 17.97%
Underwriting LHO's lending officers review the quality of the distributors and their contracts, the budget, the schedule of advances, and valuation of all distribution rights when considering a new lending opportunity. After closing, each requested advance is approved by the lending officer and the bonding company on a weekly basis to ensure that LHO is not advancing ahead of an agreed-upon cash flow schedule. The assigned lending officer also periodically speaks with the producer, bonding company and sales agent regarding the progress of the film. LHO's lending officers perform extensive follow-up on every loan to ensure that any unsold distribution rights are sold (i.e., distribution contracts are generated by the sales agent) prior to and after the delivery of the film or television production. Generally, a lending officer will speak to the sales agent at least monthly regarding the agent's progress on sales of distribution rights. The loan documentation grants LHO the right to impose certain penalties on the borrower and exercise certain other rights, including replacing the sales agent, if sales are not consummated within the appropriate time. Loans are repaid principally from revenue received from distribution contracts. In many instances, the distribution contracts provide for multiple payments payable at certain milestones (such as execution of contract, commencement of principal photography or completion of principal photography). The maturity date of the loan is generally six to nine months after completion of the production in order to permit all payments from distributors to be received within the maturity of the loan. Delivery of the completed production is made to the various distributors only upon or after their minimum guarantees have been paid in full. 14 Pricing and Funding LHO typically charges its customers an interest rate ranging from the Prime Rate to Prime plus 2.00% (exclusive of loan fees) on the outstanding balance of their loans. Loan fees typically range from, 1.00% to 2.50% with an additional fee up to 7.0% depending on the level of gap. Asset Quality The amount of non-performing assets attributable to the LHO division at December 31, 2000 and 1999 were $8.0 million and $8.2 million, respectively. All but one of these assets were acquired as part of the LHO acquisition, and were on non-accrual status at the time of their purchase. The balance of these non-performing assets represents the estimated value of a film library consisting of 34 films. Subsequent to December 31, 2000, we purchased an additional 14 non-performing loans/assets with an estimated value of $4.9 million in satisfaction of the LHO purchase agreement. These purchases completed our obligation under the LHO acquisition agreement in full. See Item 7. "Management's Discussion and Analysis--Asset Quality," for more information about LHO's non-performing assets and non-accrual loans. Imperial Business Credit, Inc. General Imperial Business Credit, Inc. ("IBC") is a wholly owned subsidiary located in San Diego, California. IBC ceased originating new business in April, 2000. At that time IBC sold its origination office in Atlanta and closed the Denver origination office. IBC is continuing as a lease portfolio servicing entity by servicing its existing portfolio and a new portfolio originated by an affiliated division of SPB. Servicing Activities IBC provides lease portfolio servicing activities for SPB. IBC and SPB are parties to a master servicing agreement that enumerates the responsibilities and obligations of IBC in servicing the leases originated by SPB. In general, SPB originates leases that are funded by SPB and IBC is contracted as the servicer. The servicer duties include; generation of invoices, tax compliance, cash application, accounting, reporting and collection activity. In exchange for services performed, IBC receives a fee of 0.40% per annum based on the gross receivables of the lease portfolio being serviced for SPBC and 1.15% for the leases previously funded through IBC's securitization facility, respectively. In addition, IBC is generally entitled to receive all late fees and other miscellaneous fees related to the entire serviced portfolio. IBC's Lease Portfolio The focus of IBC's lease activities had historically been equipment lease financing to small and medium-sized businesses. During the first quarter of 2000, defaults on leases originated through IBC's broker and small-ticket lease programs continued at a high level. It was determined that IBC could not make the returns necessary to continue in business as an originator of new leases and the origination offices were closed or sold. Generally, IBC funded the origination or acquisition of its leases through its short term warehouse credit facilities with third party lenders and SPB and subsequently sold its receivables in the private asset securities market through its securitization program (the "1997-2 Trust"). The following table sets forth the lease activity for IBC for the years ended December 31, 2000, 1999 and 1998:
At December 31, -------------------------- 2000 1999 1998 -------- -------- -------- (In thousands) Leases funded.................................... $ 30,933 $125,202 $114,318 Lease securitizations............................ 43,598 132,359 117,724 Leases serviced for others....................... 170,823 243,463 242,624
15 Lease Finance Operations Through June 2000, IBC specialized in originating, acquiring, selling, securitizing and servicing non-cancelable, full-payout equipment leases for small and medium-sized business in various industries throughout the United States. Subsequent to this date, IBC's efforts have been focused solely on the servicing of its leases funded through the securitization facility, and servicing leases on behalf of SPB. IBC had historically focused on small- ticket leases with contract amounts between $5,000 and $75,000. IBC derived its earnings from gains recognized on the securitization or sale of leases, from the spread on portfolios held for investment and loans held for sale during the warehouse period and from servicing and related ancillary fees on its servicing portfolio. In each securitization, IBC received advances based on a percentage which is less than the aggregate present value of cash flows from an undifferentiated pool of leases, effectively over collateralizing lease-backed notes or certificates. Over the life of the lease pool securitized, IBC is eligible to receive the excess cash flow resulting from the difference between the lease payments received and the payment of (i) principal and interest to investors in lease-backed notes or certificates and (ii) backup servicing and trustee fees and other securitization expenses. As a result of the recent credit downgrades on our Senior Notes by Moody's and Standard and Poor's ratings services, IBC is in technical default of the terms of the 1997-2 Trust. As such, the insurer of the Class A certificates may cause the 1997-2 Trust to go into "Turbo" amortization. Under Turbo amortization, virtually all cash flows generated in the 1997-2 Trust would be used to pay off the outstanding balance of the Class A certificates, while the Class B and C Certificates, a majority of which are owned by IBC, would receive virtually no cash flows for principal and interest payments until the Class A certificates have been paid in full. IBC received a waiver of this technical default in March 2001. The waiver will be renewed monthly by the insurer, at its option. There can be no assurance given that the insurer will continue to grant the monthly waiver to IBC. If the waiver were not to be granted, IBC's monthly cash flow would decrease by approximately $1.0 million per month, and cash flow to our parent company would decrease by approximately $500,000 per month. The outstanding balances of the securities and retained interests in the 1997-2 Trust owned by IBC were $9.0 million and $4.2 million, at December 31, 2000, respectively. Lease Products and Originations IBC historically emphasized full payout leases with terms of 24 to 60 months. Generally, these leases were categorized as direct finance leases. IBC used a standard, non-cancelable, full-payment finance lease. The substantial majority of the leases originated by IBC provided that the lessee may purchase the equipment for $1.00 at the expiration of the lease, with the remainder of the leases calling for either a mandatory 10% of original cost price buy-out or an optional fair market value buy-out. The following table sets forth IBC's lease originations by equipment type for the periods presented:
Year Ended December 31, 2000 Year Ended December 31, 1999 Year Ended December 31, 1998 ---------------------------------- ---------------------------------- ---------------------------------- Number of Principal Number of Principal Number of Principal Leases Amount % of Total Leases Amount % of Total Leases Amount % of Total Originated Originated Originations Originated Originated Originations Originated Originated Originations ---------- ---------- ------------ ---------- ---------- ------------ ---------- ---------- ------------ (Dollars in thousands) Computers........ 232 $ 5,350 17.3% 910 $ 19,016 15.2% 1,130 $ 22,990 20.1% Automotive....... 344 3,929 12.7 1,465 16,092 12.9 1,574 17,474 15.3 Furniture and fixtures........ 161 3,460 11.2 778 16,778 13.4 522 12,232 10.7 Heavy equipment.. 149 3,247 10.5 549 12,829 10.2 524 10,775 9.4 Restaurant....... 213 3,401 11.0 770 11,762 9.4 864 10,074 8.8 Manufacturing/Machine work............ 100 2,917 9.4 323 8,226 6.6 178 5,174 4.5 Health/Sports equipment....... 27 1,143 3.7 104 3,131 2.5 117 3,719 3.3 Print/Typeset equipment....... 11 461 1.5 89 2,403 1.9 107 2,337 2.0 Dry cleaning/Washing.. 11 314 1.0 32 875 0.7 34 1,235 1.1 Clothing manufacture..... 10 327 1.1 41 1,533 1.2 10 520 0.5 Radio and television production equipment....... 241 2,224 7.2 896 7,756 6.2 527 7,277 6.4 Other............ 195 4,160 13.4 1,234 24,801 19.8 1,092 20,511 17.9 ----- ------- ----- ----- -------- ----- ----- -------- ----- Total........... 1,694 $30,933 100.0% 7,191 $125,202 100.0% 6,679 $114,318 100.0% ===== ======= ===== ===== ======== ===== ===== ======== =====
16 Underwriting While IBC originated leases, it screened its origination sources by checking personal references and financial and credit information. Broker and certain vendor originators were compensated by IBC on a commission basis. Origination sources generally retained liability for leases only insofar as there was any fraud or misrepresentation in the applications or documentation, unless a special recourse obligation was negotiated with the originator. Upon receipt of an application, IBC began an investigation of the creditworthiness of the applicant. IBC credit underwriting procedures were based upon the use of, among other things, pre-screened broker referrals, standardized lease application documents, credit investigations, and in certain transactions, tax returns, financial statements and other relevant credit information concerning the lessee. IBC focused on the time the business has been owned and operated, type of business and the applicant's credit requirements. Once a lease had been approved, a standardized lease agreement and other documents were prepared. Lease approvals were applicable for 90 days and with quoted rates for 60 days. When the equipment was shipped and installed, IBC verified that the lessee had received and accepted the equipment before paying the vendor's invoice. Credit Monitoring and Controls IBC services all leases that it originated or purchased. IBC's servicing activities, with respect to both leases retained by IBC or leases securitized or sold to third parties, consist of: . collecting, accounting for and posting all payments received . responding to lessee inquiries . taking all necessary action to maintain the security interest granted in the leased equipment . investigating delinquencies and taking appropriate action . communicating with the lessee to obtain timely payments . repossessing and reselling the collateral when necessary and . generally monitoring each lease IBC believes that its ability to monitor lessee performance and collect payments is primarily a function of its collection and support systems. IBC's collections policy is designed to identify payment problems early to permit IBC to quickly address delinquencies and, when necessary, to act to preserve equity in the equipment leased. Collection procedures are intended to commence immediately upon payments becoming 11 days past due. Pricing IBC typically charged its customers a fixed rate of 10.5% to 17.0% on the original equipment cost financed. Asset Quality On balance sheet non-performing assets attributable to IBC's leasing operations at December 31, 2000 and 1999 were $9,000 and $720,000, respectively. See Item 7. "Management's Discussion and Analysis--Asset Quality," for more information about IBC's non-performing assets and non-accrual loans. 17 The following table sets forth the amount and delinquency status for IBC's lease servicing portfolio at December 31, 2000, 1999 and 1998.
At December 31, ----------------------------------------------------------- 2000 1999 1998 ------------------- ------------------- ------------------- Amount % of Total Amount % of Total Amount % of Total -------- ---------- -------- ---------- -------- ---------- (Dollars in thousands) Current......... $164,434 96.3% $235,884 96.9% $233,535 96.3% 30-60 days...... 2,502 1.5 2,925 1.2 3,534 1.5 60-90 days...... 1,438 0.8 1,508 0.6 2,037 0.8 90+ days........ 2,449 1.4 3,146 1.3 3,519 1.4 -------- ----- -------- ----- -------- ----- Total......... $170,823 100.0% $243,463 100.0% $242,625 100.0% ======== ===== ======== ===== ======== =====
Multifamily and Commercial Mortgage Lending We conduct our commercial mortgage lending operations through the Income Property Lending Division of SPB. Income Property Lending Division General The Income Property Lending Division ("IPL") of SPB was formed in February 1994. As of December 31, 2000, IPL had six loan origination offices in California, Utah, Illinois and Florida. Loan Portfolio The focus of IPL's lending activities is the small loan market for 5+ unit multifamily apartments and commercial buildings. The following table sets forth the loan activity for IPL for the years ended December 31, 2000, 1999 and 1998:
At December 31, -------------------------- 2000 1999 1998 -------- -------- -------- (In thousands) Loans funded..................................... $235,890 $339,666 $366,074 Average loan size................................ 447 442 394 Whole loan sales................................. 141,926 283,674 304,169 Gross loans outstanding.......................... 364,176 254,140 145,456 Loans serviced for others........................ -- 25,110 759,247
Loan Products and Originations IPL generally seeks to make 70% of its loans secured by apartment buildings and 30% of its loans secured by commercial properties. Most of IPL's business is generated through in-house loan representatives who market the loans directly to mortgage brokers and borrowers. IPL also uses direct mailing, referrals from brokers and real estate developers. Most of IPL's loans have been secured by properties in California. Margins vary over the 6-month LIBOR index ranging from 2.15% to 4.0% depending on product type, property location and credit history of the borrower. IPL's loan programs include 30-year adjustable rate loans tied to the 6-month LIBOR and Bank of America prime indexes. IPL also originates fixed rate loans which accounted for approximately 20% and 42% of IPL's loan production in 2000 and 1999. During 2000 and 1999, 65% and 50.3% of IPL's total loan originations were secured by property located in California. IPL sells the majority of its loan production to third parties. 18 Substantially all of IPL's loans contain prepayment restrictions. Such restrictions may prohibit prepayments in whole or in part during a specified period of time and/or require the payment of a prepayment fee. Such prepayment restrictions can, but do not necessarily, provide a deterrent to prepayments. IPL may from time to time originate loans with a balloon payment due at maturity. The ability of a borrower to pay such amount will normally depend on its ability to fully refinance the loan or sell the related property at a price sufficient to make the required loan payments. Underwriting IPL generally uses underwriting criteria that generally require a maximum loan-to-value ratio of 80% and minimum debt coverage ratio of 1.2x on all loans. Loan originations not following this criteria may be funded based on other mitigating factors such as down payment size, strength of borrower, etc. With respect to apartment loans, IPL uses standard government agency documentation and approved independent appraisers. IPL's underwriting is intended to assess the economic value of the mortgaged property and the financial capabilities, credit standing and managerial ability of the borrower. Appraisals and field inspections, performed by SPB approved appraisers and certified inspectors, and title insurance are required for each loan. With respect to the loans secured by commercial properties, IPL's policies typically require that usage comply with local zoning and use ordinances and the use of the commercial space is compatible with the property and neighborhood. The property must have a stable occupancy history, be located in a good market and have adequate parking. IPL reviews the state of repairs of the property, whether there are any unacceptable covenants, if the property is built to code, and any environmental hazards. IPL also looks at the borrower's financial statements to determine the borrower's equity in the property. IPL analyzes whether the borrower will be able to meet all of the mortgaged property's loan obligations and if the borrower holds other property and how those other properties are performing. IPL also looks at the borrower's other income as a possible source of repayment for the loan. Pricing IPL establishes loan pricing at least once each week based on prevailing interest rates and general market conditions. The standard pricing is based on factors such as the anticipated price IPL would receive upon sale or securitization of the loan, the anticipated interest spread realized during the period of accumulating loans, the targeted profit margin and the anticipated costs associated with sale or securitization. Credit Monitoring and Controls SPB services all loans held for investment or available for sale. These servicing activities consist of: . collecting, accounting for and posting . communicating with the borrowers to all payments received, obtain timely payments, . responding to inquires, . repossessing and reselling the collateral when necessary, and . investigating delinquencies and taking . generally monitoring each loan. appropriate action,
Asset Quality Non-performing assets attributable to IPL's operations at December 31, 2000 and 1999 were $1.7 million and $459,000, respectively. See Item 7. "Management's Discussion and Analysis--Asset Quality," for more information about IPL's non-performing assets and non-accrual loans. 19 Asset Management Activities We conduct advisory and asset management services through our wholly owned subsidiary Imperial Credit Asset Management, Inc. Through October 22, 1999, we also conducted asset management services through Imperial Credit Commercial Asset Management Corp. Imperial Credit Asset Management, Inc. Imperial Credit Asset Management, Inc. ("ICAM") was formed in April 1998. ICAM manages Pacifica Partners I L.P., and Cambria Investment Partnership I, L.P. Pacifica Partners I is a $500 million collateralized loan obligation fund we launched in August 1998. Pacifica Partners I's assets consist of approximately $400 million in nationally syndicated bank loans and approximately $100 million in high yield bonds. We have invested net cash of $51.3 million through a total return swap in the subordinated and equity interests of Pacifica Partners I at December 31, 2000. The recoverability of this asset is dependent upon the future cash flows from Pacifica Partners I. These cash flows come from investments in nationally syndicated bank loans and high yield bonds which have experienced high default rates in the year ended December 31, 2000. Pacifica Partners I's actual cash flows from August 1998 through December 31, 2000 have been greater than originally projected. The average yield from all of the assets in Pacifica Partners I was 9.33% in 2000 and 8.52% in 1999. Additionally, we received net management fees of approximately 60 basis points on total assets under management. For the year ended December 31, 2000 and 1999, ICAM earned net management fees before expenses of $3.1 million and $3.1 million, respectively, from managing Pacifica Partners I. At December 31, 2000 and 1999, we had also invested $6.0 million and $10.0 million, respectively, in Cambria which is a hedge fund that invests in syndicated bank loans. During the third quarter of 2000, we decided to liquidate the assets in Cambria. At December 31, 2000 and 1999, Cambria had total assets under management of approximately $58.3 million and $134.9 million, respectively. The return on our investment was 8.00% for the year ended December 31, 2000 and 14.0% for the year ended December 31, 1999. ICAM earns fees equal to one percent of assets under management plus a 20% incentive fee for positive returns for each calendar year. For the years ended December 31, 2000 and 1999, ICAM earned management fees of $159,000 and $833,000 from managing Cambria. Imperial Credit Commercial Asset Management Corp. Imperial Credit Commercial Asset Management Corp. ("ICCAMC") was formed in 1997. See "Item 13. Certain Relationships and Certain Transactions-- Relationships with ICCMIC--ICCMIC Management Agreement". ICCMIC was a publicly traded corporation which elected to be taxed as a real estate investment trust that invested primarily in performing multifamily and commercial real estate loans, direct investments in real estate and commercial mortgage-backed securities. In October 1997, ICCMIC completed its initial public offering and sold approximately 34.5 million shares of common stock at $15.00 per share resulting in net proceeds of approximately $481.2 million. We purchased 2,970,000 shares of ICCMIC common stock in the offering and an additional 100,000 shares in December 1997 for a total of $43.0 million. During 1998, we wrote down our investment in ICCMIC common stock by $13.0 million to $9.75 per share due to an other than temporary decline in the value of ICCMIC's common stock. In 1999, we sold 500,000 shares of ICCMIC common stock at $10.88 per common share, generating net proceeds of $5.4 million, resulting in a gain on sale of securities totaling $562,000. As of December 31, 1999, we owned 9.0% of the common stock of ICCMIC. ICCAMC, a wholly-owned subsidiary, managed the day to day operations of ICCMIC through October 22, 1999. For the year ended December 31, 1999, 1998 and from the period of initial public offering through December 31, 1997, ICCAMC earned $5.9 million, $6.3 million and $940,000, respectively, in gross management fees from ICCMIC. In addition, we received cash dividends of $3.1 million, $3.6 million and $399,000 during the years ended December 31, 1999, 1998 and from the period of initial public offering through December 31, 1997, respectively. On March 28, 2000, we acquired all of the outstanding shares of ICCMIC (consisting of 25,930,000 shares not already owned by us and certain of our affiliates and subsidiaries) for a cash purchase price of $11.575 per share. See "Liquidity and Capital Resources--The ICCMIC Acquisition," for further details. 20 Investment Banking and Brokerage Imperial Capital Group, LLC Imperial Capital Group, LLC ("ICG") formed in July 1997 was a majority owned subsidiary through the fourth quarter of 2000. During the fourth quarter of 2000, we sold a portion of our ICG holdings to ICG and to certain members of ICG's management. The Company currently owns 38.5% of ICG as compared to 63.2% prior to the sale. As a result of the sale, beginning with the fourth quarter of 2000, we will report future ICG results of operations as equity in the operations of ICG. ICG together with its subsidiaries, Imperial Capital, LLC and Imperial Asset Management, LLC, offer individual and institutional investors financial products and services. Imperial Capital, LLC, is a registered broker/dealer with the United States Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. It provides investment opportunities and research to individual and institutional investors, raises private and public capital for middle market companies, and trades debt, equity and asset backed securities. Imperial Asset Management, LLC, is an investment advisor registered with the United States Securities and Exchange Commission, and provides investment management services to high net worth individuals and institutional clients. ICG raised total debt and equity proceeds of $184.5 million through September 30, 2000 and $137.3 million in the year ended December 31, 1999 for its corporate clients through private placement offerings. Through the nine months ended September 30, 2000 (the period in which we consolidated the operations of ICG) ICG generated $30.0 million in investment banking and brokerage fee revenues and $27.2 million and $18.5 million in the years ended December 31, 1999 and 1998, respectively. Through the nine months ended September 30, 2000 (the period in which we consolidated the operations of ICG) ICG generated $4.0 million in net income and net income of $2.5 million and a net loss of ($3.9) million in the years ended December 31, 1999 and 1998, respectively. ICG has been engaged by our company to provide investment banking services in connection with our recapitalization transaction. Under the terms of the engagement, ICG may earn fees of up to $5.6 million upon the successful completion of the recapitalization transaction. ICG has entered into a separate agreement with our company that requires the prepayment of $2.6 million of principal amount of subordinated debt owed to our company by ICG upon the payment of the fees earned as a result of the recapitalization transaction. See Item 7. "Management's Discussion and Analysis--Results of Operations--Recapitalization Transaction" for more information. Other Core Operations Imperial Credit Lender Services, Inc. In July 1998, ICII acquired the assets of Imperial Credit Lender Services, Inc. ("ICLS") formerly Statewide Documentation, Inc., for a purchase price of $5.0 million worth of ICII common stock. ICLS initially began its operations in 1981. Its primary business is providing loan documentation preparation and loan closing services nationwide. Additionally, ICLS provides national notary and recording services. For the year ended December 31, 2000, 1999 and the period from our acquisition in July of 1998 through December 31, 1998, ICLS earned loan closing fees of $1.4 million, $1.4 million and $845,000, respectively. ICLS's net losses were $4.8 million, $694,000 and $135,000 for the years ended December 31, 2000, 1999 and the period from our acquisition in July 1998 through December 31, 1998, respectively. The loss of $4.8 million in 2000 is attributable to the $4.1 million write- off of goodwill during the third quarter of 2000. In February of 2001, the Company disposed of ICLS for its remaining net book value. Total Return Swaps As a part of the Pacifica Partners I LP collateralized loan obligation ("CLO") fund we launched in August 1998, we delivered subordinate bonds of approximately $51.3 million into a total rate of return swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of the swap currently entitle us to receive the total return on the subordinate bonds delivered and pay CIBC a floating payment of LIBOR plus a weighted average spread of 0.75%. Prior to October, 2000 the provisions of the swap entitled us to receive the total return 21 on the subordinate bonds delivered and pay CIBC a floating payment of LIBOR plus a weighted average spread of 1.36%. We posted cash collateral of $51.3 million at December 31, 2000 and $25.9 million at December 31, 1999 to CIBC as collateral for the swap. These amounts are classified as Trading Securities on the consolidated balance sheet at December 31, 2000 and 1999. The assets in the swaps are subject to market price risk, and as such, sales of assets in the swaps could result in significant gains or losses to our company. Non Core Business Lines We also operate "non-core" businesses, which consist of businesses that we've decided to de-emphasize or exit. We call these businesses Equity Interests and De-emphasized/Discontinued/Exited Businesses. Our exit from these non-core businesses will allow our management to focus on our core business lines. Equity Interests At December 31, 2000 and 1999, we had no equity interests in publicly traded entities. During the years ended December 31, 1998 and 1997, we held equity interests in three publicly traded entities, Franchise Mortgage Acceptance Company ("FMC"), Impac Mortgage Holdings, Inc. ("IMH") and Southern Pacific Funding Corporation ("SPFC"). During the fourth quarter of 2000, the Company reduced its ownership percentage in ICG from 63.2% to 38.5% through the sale of a part of its equity interest to ICG and certain management members of ICG. As a result, we began to consider ICG as an Equity Interest beginning in the fourth quarter of 2000. The income from ICG is accounted for by the equity method of accounting beginning with the fourth quarter of 2000. FMC FMC was a publicly traded company through November 1, 1999 that originated and serviced loans and equipment leases to small businesses. We sponsored FMC's initial public offering in November 1997. As part of the initial public offering of FMC, we recorded a total gain on sale of FMC common stock of $92.1 million in 1997. Our investment in FMC contributed $30.0 million, $3.2 million and $41.8 million to our revenues in 1999, 1998 and 1997, respectively. During the fourth quarter of 1999, FMC was acquired by Bay View Capital Corporation ("BVC") and we sold our 38.3% common stock ownership interest resulting in a pre-tax gain on sale of $30.1 million for the year ended December 31, 1999. As of December 31, 1999 and 1998, we owned none and 11,023,492 shares or 38.3% of the outstanding common stock of FMC, respectively. For the year ended December 31, 1998, our investment in FMC was reflected on our consolidated balance sheet as "Equity Interest in Franchise Mortgage Acceptance Company" and was accounted for pursuant to the equity method of accounting until the third quarter of 1999. During the third quarter we determined that we did not have the ability to exercise significant influence over FMC and, therefore, we changed to the cost method of accounting for this investment. IMH IMH is a publicly traded real estate investment trust (AMEX symbol: IMH). We sponsored IMH as a publicly traded company in November 1995 and our subsidiary, Imperial Credit Advisors, Inc., acted as its manager until December 31, 1997. Pursuant to a Termination Agreement entered into in December 1997, related to the Management Agreement between Imperial Credit Advisors, Inc. and IMH, we received 2,009,310 shares of IMH common stock and certain securitization-related assets, and, in exchange, we canceled a note receivable from IMH's subsidiary, Impac Funding. During 1998, we wrote down our investment in IMH common stock by $24.5 million to $5.00 per share due to an other than temporary decline in the value of IMH's common stock. During the years ended December 31, 1999 and 1998, we sold 1,887,110 shares and 122,200 shares of IMH stock, resulting in a gain of $929,000 and a loss of $185,000 respectively. We received cash dividends of $157,000 and $2.9 million for the years ended December 31, 1999 and 1998. At December 31, 1999, we did not own any shares of IMH common stock. 22 SPFC SPFC was a publicly traded sub-prime mortgage banking company which originated, purchased and sold high yielding, single family sub-prime mortgage loans. We sponsored SPFC as a public company in June 1996 and sold a portion of our holdings raising $64.6 million. At December 31, 1999, we did not own any shares of SPFC common stock. As of December 31, 1998, we owned 9,742,500 shares of SPFC common stock, representing 47.0% of the outstanding common stock. Our investment in SPFC contributed none, $12.7 million and $25.9 million to our revenues in 1999, 1998 and 1997, respectively. In October 1998, SPFC petitioned for Chapter 11 bankruptcy protection under Federal bankruptcy law. In 1998, as a result of SPFC's bankruptcy filing, we wrote-off our entire equity interest and other assets totaling $82.6 million. Our stockholdings in SPFC were reflected on our consolidated balance sheet as "Equity Interest in SPFC" and, until SPFC's bankruptcy filing and termination of new business activities, were accounted for pursuant to the equity method of accounting. ICG During the fourth quarter of 2000, we sold a portion of our ICG holdings to ICG and to certain members of ICG's management. The Company currently owns 38.5% of ICG as compared to 63.2% prior to the sale. As a result of the sale, we will no longer consolidate the operations of ICG. Beginning with the fourth quarter of 2000, we consider ICG to be an Equity Interest and will report future ICG results of operations as equity in the operations of ICG. ICG together with its subsidiaries, Imperial Capital, LLC and Imperial Asset Management, LLC, offer individual and institutional investors financial products and services. Imperial Capital, LLC, is a registered broker/dealer with the United States Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. It provides investment opportunities and research to individual and institutional investors, raises private and public capital for middle market companies, and trades debt, equity and asset backed securities. Imperial Asset Management, LLC, is an investment advisor registered with the United States Securities and Exchange Commission, and provides investment management services to high net worth individuals and institutional clients. For the nine months ended September 30, 2000, ICG raised total debt and equity proceeds of $184.5 million and $137.3 million in 1999 for its corporate clients through private placement offerings. During the three months ended December 31, 2000 (the period in which we began to account for our investment in ICG as an Equity Interest) ICG generated $479,000 in equity in the net income of ICG. Discontinued/De-emphasized Operations/Exited Businesses De-emphasized/Discontinued/Exited Businesses--represents those business units we decided to either de-emphasize, discontinue, or exit. We decided to de-emphasize, discontinue or exit these business lines because they were not meeting our expectations for a variety of reasons. These reasons included: significant credit losses, insufficient loan production volumes, inadequate gross profit margins, and risks associated with international lending operations. We include the following significant operations in Exited Businesses: Auto Marketing Network, Inc., the Auto Lending, the Alternative Residential Mortgage, and the Consumer Loan Divisions of SPB, and Credito Imperial Argentina ("CIA"), our residential loan production business in Argentina. Auto Marketing Network, Inc. During the third quarter of 1998, we discontinued the operations of Auto Marketing Network, Inc ("AMN"). AMN financed the purchase of new and used automobiles primarily to sub-prime borrowers on a nationwide basis. Since the acquisition of AMN in March 1997, it had recorded losses and experienced significant increases in non-performing assets, loan charge-offs and loan loss provisions. 23 Losses from AMN's discontinued operations, net of taxes were as follows:
Disposition For the For the Period from Period from Year Ended Year Ended August 1, 1998 to January 1, 1998 December 31, 2000 December 31, 1999 December 31, 1998 to July 31, 1998 ----------------- ----------------- ----------------- ---------------- (In thousands) Loss from discontinued operations............. $5,218 $899 $ -- $3,232 Loss on disposal of AMN.................... -- -- 11,276 -- ------ ---- ------- ------ Net loss from discontinued operations............. $5,218 $899 $11,276 $3,232 ====== ==== ======= ======
For the year ended December 31, 2000, AMN incurred additional operating losses from discontinued operations of $5.2 million, net of income taxes, primarily related to the establishment of a $3.5 million deferred tax asset valuation allowance, loan loss provisions of $1.1 million, $574,000 in mark- to-market write downs on securities and professional fee expenses of $756,000. For the year ended December 31, 1999, AMN incurred additional operating losses from discontinued operations of $899,000, net of income taxes, primarily related to legal expenses and mark-to-market adjustments on AMN securities. In 1998 we recorded a loss on disposal of AMN totaling $11.3 million including charges (net of taxes) of $5.6 million for securities valuation, $1.2 million for disposition of furniture and equipment and other assets, $5.6 million for estimated future servicing obligations to a third party servicer, $1.3 million in liquidation allowances for non-accrual loans and repossessed autos, $2.1 million in severance costs, occupancy and general and administrative expenses. These charges were partially offset by the estimated net interest income on loans and securities for the next year (disposition period) of $4.5 million. The remaining assets of AMN are subject to mark-to-market adjustments based on prepayment, credit loss, and interest rate fluctuations. AMN may incur additional write downs in future periods if the performance of the remaining securities at AMN do not meet our current projections. Additionally, AMN could be subject to increased expenses as a result of litigation costs in connection with the Steadfast Insurance Company v. Auto Marketing Network Inc. and Imperial Credit Industries, Inc. case. (See Item 3.--"Legal Proceedings.") At December 31, 2000 and 1999, AMN had no outstanding warehouse lines of credit. The net assets of AMN's discontinued operations were as follows:
At December 31, --------------- 2000 1999 ------- ------- (In thousands) Loans...................................................... $ 2,310 $ 5,207 Securities................................................. -- 8,685 Retained interests in securitization....................... 14,002 12,436 Income taxes receivable.................................... -- 8,971 Other net assets........................................... 1,318 2,193 ------- ------- $17,630 $37,492 ======= =======
Consumer Credit Division Consumer Credit Division ("CCD"), a division of SPB, closed its operations in December 1998. The costs of closing this division were immaterial. We decided that the returns generated by CCD were not meeting our profitability expectations, and that the time necessary to improve profitability did not justify further investment. CCD was formed in early 1994 to offer loans primarily to finance home improvements and consumer goods. Home improvement loans ranged from $5,000 to $350,000 and the loans were typically secured by a junior lien. CCD also purchased unsecured installment sales contracts to finance certain home improvements. Total CCD loans outstanding were $7.1 million at December 31, 2000, $18.7 million at December 31, 1999 and $30.5 million at December 31, 1998. We sold $7.5 million, $11.7 million and $14.6 million of these loans in 24 2000, 1999 and 1998, respectively. At December 31, 2000, 1999 and 1998 we held $5.8 million, $14.1 million and $29.4 million of these loans for sale. At December 31, 2000, 1999 and 1998, CCD had $686,000, $633,000, and $253,000 in non-accrual loans, respectively. Auto Lending Division The Auto Lending Division ("ALD"), a division of SPB, closed its operations in February 1999 due to significant losses on non-performing assets in 1998. We made the decision to close the operations of ALD in the fourth quarter of 1998. ALD offered loans primarily to finance automobile purchases by sub-prime borrowers. ALD also purchased automobile loans from other independent loan originators. The costs of closing this division were immaterial. During the years ended December 31, 2000, 1999, and 1998, we incurred additional losses on the existing auto loan portfolio and wrote-down the value of the portfolio by $0, $24.3 million, and $21.5 million, respectively. At December 31, 2000 and 1999, we held $2.3 million and $6.0 million of ALD loans. During the years ended December 31, 2000, 1999 and 1998, we sold $0, $45.3 million and $71.6 million of ALD's loans, respectively. The amount of non-performing assets attributable to ALD at December 31, 2000 and 1999 were $0 and $245,000, respectively. Imperial Credit Worldwide, Ltd. Imperial Credit Worldwide ("ICW") closed its operations in October 1998. ICW was the holding company for our international finance activities and was the majority owner of Credito Imperial Argentina ("CIA"), our former mortgage banking company conducting residential mortgage business in Argentina. Due to the decline in the Latin American financial markets, CIA ceased originating loans for its portfolio in October 1998. In May 1999, we sold the remaining balance of CIA's net mortgage loan portfolio totaling $22.8 million, for a loss of $112,000. Total CIA loans held for sale at December 31, 1999 and 1998 were $0 and $30.0 million, respectively. These loans were carried on our company's books at their estimated fair value of $22.8 million at December 31, 1998. 25 Loans and Leases Held for Investment The following table sets forth certain information regarding our loans and leases held for investment. Substantially all of our company's loans and leases held for investment are held by Southern Pacific Bank and are funded by FDIC insured deposits:
At December 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (In thousands) Loans secured by real estate: One to four family...... $ 72,502 $ 93,914 $ 125,616 $ 205,788 $ 375,476 Multifamily............. 42,695 35,249 56,229 17,261 2,527 Commercial.............. 14,025 14,022 25,677 13,202 11,011 ---------- ---------- ---------- ---------- ---------- 129,222 143,185 207,522 236,251 389,014 Leases.................. 10,431 1,125 1,048 7,745 99,717 Consumer and auto loans.................. 3,480 7,072 26,511 147,603 34,248 Franchise loans......... 8,797 18,277 50,520 62,219 115,910 Asset-based and cash stream loans........... 752,883 748,122 633,299 484,828 288,528 Loan participations..... 123,471 216,961 222,106 196,420 160,672 Mortgage warehouse lines.................. 50,639 78,068 181,001 122,488 -- Film and television production loans....... 83,688 15,824 -- -- -- Commercial loans........ 18,223 48,853 34,509 35,861 13,260 ---------- ---------- ---------- ---------- ---------- 1,180,834 1,277,487 1,356,516 1,293,415 1,101,349 Loans in process........ 11,860 (5,472) (5,636) (7,081) -- Unamortized premium (discount)............. 1,341 1,389 3,109 2,211 (6,336) Deferred loan fees...... (7,916) (8,492) (9,014) (9,104) (6,415) ---------- ---------- ---------- ---------- ---------- 1,186,119 1,264,912 1,344,975 1,279,441 1,088,598 Allowance for loan and lease losses........... (63,625) (31,841) (24,880) (26,954) (19,999) ---------- ---------- ---------- ---------- ---------- Total................. $1,122,494 $1,233,071 $1,320,095 $1,252,487 $1,068,599 ========== ========== ========== ========== ==========
Our loans and leases held for investment are primarily: . asset-based and cash stream loans to middle market companies mainly in California, . syndicated commercial loan participations, . first and second lien mortgages secured by residential and income producing real property mainly in California, . warehouse loans to residential mortgage loan brokers, and . television and motion picture production loans to independent producers. Although we continue to diversify our portfolio, a substantial portion of our debtors' ability to honor their contracts is dependent upon the economy of California. A decline in California real estate values may adversely affect certain underlying loan collateral. SPB's single largest loan was $23.5 million at December 31, 2000 and $27.4 million at December 31, 1999. SPB's ten largest loans and outstanding commitments aggregated $177.4 million and $225.5 million at December 31, 2000, respectively. See "Item 1. Business" for more information on SPB's average loan size by division. Also see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset Quality" for more information about non-performing assets, non-accrual loans, and our allowance for loan and lease losses. 26 Funding Our liquidity requirements are met primarily by SPB. Business operations conducted through divisions of SPB are primarily financed through deposits, our capital contributions, and Federal Home Loan Bank borrowings. Southern Pacific Bank Deposits SPB is an FDIC insured industrial bank which is regulated by the California Department of Financial Institutions and the FDIC. See "--Regulation" for a more detailed description of regulations governing SPB. At December 31, 2000 and 1999, SPB had total deposits of approximately $1.6 billion and $1.6 billion, respectively (amounts in both years exclude our deposits maintained with SPB). SPB solicits both individual and institutional depositors for new accounts through print advertisements and computerized referral networks. SPB currently maintains two deposit gathering facilities in Southern California. At these facilities, tellers provide banking services to customers such as accepting deposits and making withdrawals. However, customers are not offered check writing services or comparable demand deposit accounts. Generally, certificates of deposit are offered for terms of one month-36 months. See "--Regulation--Industrial Bank Operations--Limitations on Types of Deposits" for a description of limitations on types of deposits that SPB, as an industrial bank, can accept. The following table sets forth the distribution of SPB's deposit accounts (prior to eliminating inter-company transactions) and the weighted average nominal interest rates on each category of deposits:
At December 31, -------------------------------------------------------------------------------------- 2000 1999 1998 ---------------------------- ---------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average % of Interest % of Interest % of Interest Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate ---------- -------- -------- ---------- -------- -------- ---------- -------- -------- (Dollars in thousands) Savings accounts ....... $ 56,150 3.4% 4.94% $ 66,415 4.1% 4.79% $ 57,249 3.3% 4.27% Money market accounts .. 25,020 1.5 5.74 -- -- -- -- -- -- Time deposits of less than $100,000 ......... 1,147,201 70.0 6.66 1,235,468 76.0 5.82 1,199,825 69.9 5.61 Time deposits of $100,000 and over ..... 409,712 25.1 6.79 324,271 19.9 5.49 459,614 26.8 5.62 ---------- ----- ---- ---------- ----- ---- ---------- ----- ---- Total ................. $1,638,083 100.0% 6.62% $1,626,154 100.0% 5.71% $1,716,688 100.0% 5.57% ========== ===== ==== ========== ===== ==== ========== ===== ====
The following table sets forth the dollar amount of deposits by time remaining to maturity:
At December 31 ----------------------------------------------------------- 2000 1999 1998 ------------------- ------------------- ------------------- % of % of % of Amount Deposits Amount Deposits Amount Deposits ---------- -------- ---------- -------- ---------- -------- (Dollars in thousands) Three months or less ... $ 501,051 30.6% $ 461,128 28.3% $ 552,077 32.2% Over three months through six months .... 402,033 24.5 353,999 21.8 452,782 26.4 Over six months through twelve months ......... 597,254 36.5 583,338 35.9 478,000 27.8 Over twelve months ..... 137,745 8.4 227,689 14.0 233,829 13.6 ---------- ----- ---------- ----- ---------- ----- Total ................. $1,638,083 100.0% $1,626,154 100.0% $1,716,688 100.0% ========== ===== ========== ===== ========== =====
27 The following table sets forth the time certificates $100,000 and over by time remaining to maturity:
At December 31 ----------------------------------------------------- 2000 1999 1998 ----------------- ----------------- ----------------- % of % of % of Amount Deposits Amount Deposits Amount Deposits -------- -------- -------- -------- -------- -------- (Dollars in thousands) Three months or less ... $ 81,194 19.8% $ 95,964 29.6% $129,479 28.1% Over three months through six months .... 129,850 31.7 75,403 23.2 148,832 32.4 Over six months through twelve months ......... 166,818 40.7 103,129 31.8 114,803 25.0 Over twelve months ..... 31,850 7.8 49,847 15.4 66,500 14.5 -------- ----- -------- ----- -------- ----- Total ................. $409,712 100.0% $324,343 100.0% $459,614 100.0% ======== ===== ======== ===== ======== =====
Interest expense associated with certificates of deposit of $100,000 and over was approximately $28.1 million for the year ended December 31, 2000, $18.2 million for the year ended December 31, 1999 and $24.2 million for the year ended December 31, 1998. SPB has historically increased its deposits as necessary so that deposits together with its cash, liquid assets, Federal Home Loan Bank ("FHLB") borrowings and warehouse borrowings, have been sufficient to provide funds for all of SPB's lending activities. At December 31, 2000, there were $65.0 million in outstanding FHLB borrowings. Repurchase and Warehouse Facilities We use repurchase facilities and warehouse lines of credit in order to fund certain loan and lease originations and purchases. As of December 31, 2000, we had the following warehouse lines, reverse repurchase facilities and notes payable:
Interest Index (basis Rate Commitment Outstanding points) Expiration Date -------- ---------- ----------- -------------- ----------------- (Dollars in thousands) Lehman Brothers (Corona Film Finance Fund)(1).. 6.60% $39,044 $39,044 Fixed rate January 5, 2001 Imperial Bank (ICII)(2).............. 10.00 10,000 10,000 Prime plus 100 June 18, 2001 Cap Mark Services (ICCMIC)............... 8.50 10,508 10,508 Fixed rate December 11, 2027 Orix Real Estate Capital (ICCMIC)............... 7.37 23,346 23,346 Fixed rate January 2, 2013 Other notes payable (ICII)................. 8.00 -- 1,220 Fixed rate None ------- ------- $82,898 $84,118 ======= =======
- -------- (1) The borrowings from Lehman Brothers were repaid on January 5, 2001. (2) The borrowings from Imperial Bank were repaid on February 23, 2001. Securitization Transactions and Loan Sales Securitizations of Assets As a fundamental part of our business and financing strategy prior to 1998, we sold a significant amount of our loans and leases through securitization, except for loans held for investment by SPB. Securitizations were performed historically by our prior divisions and subsidiaries: FMC, SPFC and AMN. We have, however, de-emphasized the use of securitizations as part of our refocused business strategy. During 2000, 1999 and 1998, IBC was the only subsidiary that sold assets through securitizations. During 2000, IBC ceased originating new equipment leases. In a securitization, the cash flows of the underlying receivables, such as loans and leases, are apportioned to bonds having various credit ratings, yields and maturities. These bonds, which are collateralized by the 28 underlying loans and leases, are sold to investors at market prices. In most cases, we retained the servicing of the loans and leases; servicing is the process of collecting the payments from the borrowers and remitting the required payments to the investors. We are paid a fee for such servicing, which is earned monthly and collected from the remittances on the assets securitized. When we sell loans and leases in a securitization, we recognize a gain to the extent that the selling price in cash exceeds the carrying value of the loans and leases sold based on the estimated relative fair values of the loans and leases sold, any assets we obtain and any liabilities we incur in the securitization. When we securitize loans and leases, we generally retain an interest in the securitized assets which may be one or more of the bonds, servicing assets and/or call options created through the securitization. The liabilities we incur when we securitize loans and leases include, generally, recourse obligations, put options and servicing liabilities. The retained interest in a securitization represents, generally, a credit enhancement for the investors in that this interest is either subordinated to the other bonds sold or represents an over collateralization amount. In either case, as holder of the retained interest, we incur the risk of loss and prepayment on the underlying loans and leases and will be last to receive the cash flows apportioned to such retained interests. At the time of the securitization, the retained interest and servicing assets are recorded at their fair values. Because an active market does not typically exist for these types of assets, we generally estimate their fair values by discounting cash flows we expect to receive. In discounting the cash flows, we make estimates of loan prepayments, loan defaults and loan losses. These estimates are based on actual historical prepayments in our servicing portfolios tempered by our expectation of how future changes in interest rates will impact prepayments, and actual default and loss rates we have experienced for the types of loans and leases sold. The discount rate we use is the rate determined by us to be the rate used by other market participants under similar circumstances. We evaluate the carrying value of the retained interests and servicing assets on a quarterly basis by re-estimating their fair values using updated assumptions for prepayments, default and loss rates, and discount rate. When the estimated fair value of these assets is less than their carrying value, we take a loss for the deficiency by writing down the carrying value of the asset. Based on our comparison of the carrying values of these assets to their estimated fair values, we realized a loss of $5.4 million, $15.0 million and $4.4 million during 2000, 1999 and 1998, respectively. Similar losses could occur in the future and may have a material adverse effect on our net income. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations". At December 31, 2000 and 1999, our consolidated balance sheets include the following interest-only securities, subordinated bonds, servicing assets, and retained interests:
December 31, --------------- Retained Interest and Servicing Assets 2000 1999 -------------------------------------- ------- ------- (In thousands) Interest only securities included with trading securities... $10,019 $11,978 Subordinated bonds.......................................... $20,973 $12,201 Servicing rights............................................ 600 802 Retained interest in loan and lease securitizations......... 6,330 10,220
For further information, see notes 1, 6 and 10 of Notes to Consolidated Financial Statements. During 2000, 1999 and 1998, we only securitized leases originated by IBC. For the years ended December 31, 2000, 1999 and 1998, we securitized loans and leases totaling $43.6 million, $132.4 million and $117.7 million, respectively. We sold $141.7 million and $283.7 million of loans in 2000 and 1999, respectively through whole loan sale transactions. Most of the loans sold through whole loan sales were originated by IPL. 29 Competition The businesses in which we operate are highly competitive. We face significant competition from companies that may be substantially larger and have more capital than we do. These competitors include: . other commercial finance lenders . savings and loan associations . commercial banks . other thrift and loan companies . credit unions . money market mutual funds . securities firms
Competition can take many forms, including convenience in obtaining a loan or lease, customer service, marketing and distribution channels and interest rates and fees charged to borrowers. Regulation During 2000, SPB entered into regulatory orders with the FDIC and the DFI in response to credit losses and losses from operations. Such orders specify certain actions and regulatory capital targets with which the Bank must comply. At December 31, 2000, the Bank was considered "undercapitalized" by the banking regulators. Banks so categorized are subject to certain restrictions, including prohibitions on the payment of dividends, restrictions on compensation, and increased supervisory monitoring, among other things. Other restrictions may be imposed by the regulators including requirements to raise additional capital, sell assets or sell the entire bank. On March 30, 2001, the Company contributed to the Bank $21.2 million in cash in the form of new equity capital and converted $22.0 million of subordinated debt into perpetual preferred stock of the Bank. Such capital infusions, in addition to Bank earnings subsequent to December 31, 2000, restored the Bank's capital to amounts above the "adequately capitalized" regulatory minimums cited in banking regulations. Management believes that the Bank will not meet any of the required target capital ratios required by the regulatory orders during 2001. At this time, the financial impact, if any, of regulatory actions that may result from the failure of the Bank to meet minimum capital requirements of the Orders cannot be determined. Each regulatory agency has available various remedies, including enforcement actions and sanctions. Among other sanctions, if the Bank is unable to meet its regulatory capital requirements, or is determined to have other serious regulatory or supervisory problems, the FDIC and/or the DFI could place the Bank in conservatorship or receivership. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. For further information, see Note 4 of Notes to Consolidated Financial Statements. We are subject to extensive Federal and State regulation in the United States. Among other things, regulations affect our: . warehouse lending business, . maximum interest rates, finance and other charges, . loan origination and credit activities, . disclosure to customers, . terms of secured transactions, . collection, repossession and claims handling procedures, . multiple qualification and licensing requirements for doing business in various jurisdictions, and . other trade practices. Our affiliate ICG's operating companies are registered as a broker-dealer with the Securities and Exchange Commission ("SEC") and state securities regulatory agencies, and with the SEC as an investment advisor. We are also a member of the National Association of Securities Dealers. Banks and their subsidiaries and affiliates are extensively regulated under both federal and state law. The following is not intended to be a complete description of the statutes and regulations applicable to Southern 30 Pacific Bank's business. The description of statutory and regulatory provisions is qualified in its entirety by reference to the particular statute or regulation. A number of changes to laws and regulations affecting SPB have occurred in the past several years and can be expected to occur in the future. The nature, timing and impact of new and amended laws and regulations cannot be accurately predicted. ICII and its non-bank subsidiaries are affiliates of SPB within the meaning of the Federal Reserve Act. Under the Federal Reserve Act, there are certain restrictions on loans by SPB to ICII and to its non-bank affiliates and all such affiliates in the aggregate, on investments by SPB in any affiliate's securities and on SPB taking any affiliate's securities as collateral for loans to any borrower. SPB is subject to certain restrictions with respect to engaging in the issue, flotation, underwriting, public sale or distribution of certain types of securities. We are also prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of any property or the furnishing of services. SPB is supervised by California's Department of Financial Institutions ("DFI"), and is a member of the Federal Deposit Insurance Corporation ("FDIC"). It is subject to the provisions of the Federal Deposit Insurance Act and to regular examinations by the DFI and the FDIC. SPB is not a member of the Federal Reserve System ("Fed"), although it is subject to reserve requirements of the Fed. There are various requirements and restrictions under the laws of the State of California and of the United States affecting SPB in its operations, and these laws and extensive administrative regulations cover many aspects of SPB's business such as investments, branching, municipal securities and other activities, including restrictions on the nature and amount of loans which may be made. As SPB's primary regulator, the DFI has broad supervisory and enforcement authority over SPB and its subsidiaries. The DFI may impose penalties for and seek correction of violations of laws or regulations or unsafe or unsound practices by: (1) assessing monetary penalties; (2) issuing cease and desist or removal and prohibition orders against a company, its directors, officers or employees and other persons; (3) initiating injunctive actions; or (4) taking possession of the business and property of an industrial bank. Certain provisions of the California Financial Code provide for the institution of civil or criminal actions against industrial banks and their officers, directors, employees and affiliates for violations of the law and related regulations. SPB's investment certificates (also referred to as "deposits") are insured by the Bank Insurance Fund of the FDIC to the full extent permissible by law. As an insurer of deposits, the FDIC issues regulations, conducts examinations, requires the filing of reports and generally regulates the operations of institutions to which it provides deposit insurance, including SPB. Either notice to or approval by the FDIC and the DFI is required before any merger, consolidation or change in control, or the establishment, relocation or closing of a branch office of SPB. However, only the DFI's approval is required to establish a loan production office limited to the solicitation of loans. Among other things, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") provided authority for special assessments and required the FDIC to develop a general risk-based assessment system. The amount of FDIC assessments paid by insured depository institutions is based on their relative risk as measured by regulatory capital ratios and certain other factors. Under this system, in establishing the insurance premium assessment for each bank, the FDIC takes into consideration the probability that the Bank Insurance Fund ("BIF") will incur a loss with respect to the bank, and charges a bank with perceived higher inherent risks a higher insurance premium. The FDIC will also consider the different categories and concentrations of assets and liabilities of the institution, the likely amount of any such loss, the revenue needs of the BIF, and any other factors the FDIC deems relevant. Capital FDIC regulations contain risk-based capital adequacy standards applicable to financial institutions like SPB whose deposits are insured by the FDIC. These guidelines provide a measure of capital adequacy and are intended to reflect the degree of risk associated with both on and off balance sheet items, including residential loans sold with recourse, legally binding loan commitments and standby letters of credit. Unlike SPB, ICII, because it is not directly regulated by any bank regulatory agency, is not subject to any minimum capital requirements. See "--Holding Company Regulations." 31 A financial institution's risk-based capital ratio is calculated by dividing its qualifying capital by its risk-weighted assets. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher levels of capital being required for the categories perceived as representing greater risk. Financial institutions generally are expected to meet a minimum ratio of qualifying total capital to risk-weighted assets of 8%, of which at least 50% of qualifying total capital must be in the form of core capital (Tier 1), which includes common stock, noncumulative perpetual preferred stock, minority interests in equity capital accounts of combined subsidiaries and mortgage servicing rights and a percentage of purchased credit card relationships, subject to certain amount limitations. Supplementary capital (Tier 2) consists of the allowance for loan and lease losses up to 1.25% of risk-weighted assets, cumulative preferred stock, intermediate-term preferred stock, hybrid capital instruments and term subordinated debt. The risk-based capital standards were amended in September 1998 so that up to 45 percent of the pre-tax net unrealized holding gains on certain available-for-sale equity securities could be included in the Tier 2 capital calculation. The maximum amount of Tier 2 capital that may be recognized for risk-based capital purposes is limited to 100% of Tier 1 capital (after any deductions for disallowed intangibles). The aggregate amount of term subordinated debt and intermediate term preferred stock that may be treated as Tier 2 capital is limited to 50% of Tier 1 capital. Certain other limitations and restrictions apply as well. At December 31, 2000 and 1999, the Tier 2 capital of SPB consisted of a portion of its allowance for loan losses and $42.0 million in term subordinated indebtedness. The FDIC has adopted a 3% minimum leverage ratio that is intended to supplement risk-based capital requirements and to ensure that all financial institutions, even those that invest predominantly in low risk assets, continue to maintain a minimum level of core capital. A financial institution's minimum leverage ratio is determined by dividing its Tier 1 capital by its quarterly average total assets, less intangibles not includable in Tier 1 capital. 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. Prior to the enactment of the Budget Act, FDIC assessments for interest payments on bond obligations issued by the Financing Corporation ("FICO") were solely paid by SAIF member institutions. Under the Budget Act, both BIF and SAIF members now share in the cost of the FICO bond interest payments. Beginning January 1, 1997 and continuing through December 31, 1999, partial sharing occurred. During this initial period, SAIF member institutions paid 0.0630% of domestic deposits while BIF member institutions, such as SPB, paid 0.0126% of domestic deposits. Full pro rata sharing of the FICO bond interest payments took effect on January 1, 2000. FDICIA also requires each insured depository institution to prepare annual financial statements in accordance with generally accepted accounting principles which must be audited by an independent public accountant. Each institution must also prepare a management report stating management's responsibility for preparing the institution's annual financial statements, for complying with designated safety and soundness laws and regulations and for other related matters. In addition, the report must contain an assessment by management of the effectiveness of internal controls and procedures over financial and regulatory reporting and of the institution's compliance with designated laws and regulations. The institution's independent public accountant must examine, attest to, and report separately on, assertions of management concerning internal controls and procedures. SPB is complying with these requirements. FDICIA requires the establishment of minimum acceptable operational and managerial standards, and standards for asset quality, earnings, and valuation of publicly traded shares for depository institutions and their holding companies. The operational standards must cover internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and employee compensation. The Federal bank regulatory agencies have adopted final regulations which require institutions to adopt written real estate lending policies that, among other things, must be consistent with guidelines adopted by the 32 agencies. Among the guidelines adopted are maximum loan-to-value ratios for land loans (65%), development loans (75%), construction loans (80- 85%), loans on owner occupied 1-4 family property, including home equity loans (no limit, but loans at or above 90% require private mortgage insurance), and loans on other improved property (85%). The guidelines permit institutions to make loans in excess of the supervisory loan-to-value limits if such loans are supported by other credit factors, but the aggregate of such nonconforming loans should not exceed the institution's risk-based capital, and the aggregate of non-conforming loans secured by real estate other than 1-4 family property should not exceed 30% of risk-based capital. In 1995, Federal bank regulatory agencies determined that the allowance for loan losses established pursuant to Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," ("SFAS No. 114") should be characterized as a general allowance (created against unidentified losses) rather than a specific allowance (created against identified losses). As a general allowance, the SFAS No. 114 allowance is includable in Tier 2 capital, subject to existing regulatory capital limitations. SPB is subject to the Community Reinvestment Act of 1977 as amended ("CRA"). CRA requires SPB to ascertain and meet the credit needs of the communities it serves, including low and moderate income neighborhoodsSPB's compliance with CRA is monitored by the FDIC, which assigns SPB a publicly available CRA rating. An assessment of CRA compliance is required by the FDIC in connection with applications for approval of certain activities, such as mergers with or acquisitions of other banks. In April 1995, the Federal regulatory agencies issued a comprehensive revision to the rules governing CRA compliance. In assigning a CRA rating to a bank, the new regulations place greater emphasis on measurements of performance in the areas of lending (specifically, the bank's home mortgage, small business, small farm and community development loans), investment (the bank's community development investments) and service (the bank's community development services), although examiners are still given a degree of flexibility in taking into account unique characteristics and needs of the bank's community and its capacity and constraints in meeting such needs. The new regulations also require increased collection and reporting of data regarding certain kinds of loans. Although the new regulations became generally effective on July 1, 1995, various provisions have different effective dates, and the new CRA evaluation criteria went into effect for examinations beginning on July 1, 1997. Although management cannot project the impact of the substantial changes in the new rules on the Bank's CRA rating, it will continue to take steps to comply with the requirements in all respects. The most recent examination under the current regulations found the Bank to be rated Satisfactory. Capital Adequacy Guidelines Risk-adjusted capital guidelines, issued by bank regulatory authorities, assign risk weighting to assets and off-balance sheet items and place increased emphasis on common equity. The guidelines currently require a minimum Tier I capital ratio of 4% and a total risk weighted capital ratio of 8% in order for an institution to be classified as adequately capitalized. Institutions which maintain a Tier I ratio of 6% and total capital ratio of 10% are defined as well capitalized. Tier I capital basically consists of common shareholders' equity and non-cumulative perpetual preferred stock and minority interest in consolidated subsidiaries minus intangible assets. At December 31, 2000, SPB was undercapitalized with Tier 1 leverage and total risk-weighted ratios of 3.46% and 6.59%, respectively. Banks such as SPB categorized as "undercapitalized" or worse are subject to certain restrictions, including the requirement to file a capital plan with the primary federal regulator, prohibitions on the payment of dividends and management fees, restrictions on executive compensation, and increased supervisory monitoring, among other things. Other restrictions may be imposed on the bank either by its primary regulator or by the FDIC, including requirements to raise additional capital, sell assets, or sell the entire bank. Once a bank becomes "critically undercapitalized" it must generally be placed in receivership or conservatorship within 90 days. SPB, in December 2000, consented to the issuance by the FDIC of an order (the "FDIC Order") to cease and desist from what the FDIC alleges to be certain unsafe and unsound practices relating to SPB's operations. SPB also has consented to the DFI's similar, though not identical, order (the "DFI Order" and together with the FDIC Order, the "Orders"). SPB has not admitted or denied the claimed basis of the FDIC or DFI for the Orders, but intends to comply fully with their respective requirements. 33 The Orders set forth certain requirements with which SPB must comply, including the following: . SPB is required to have and maintain qualified management, including a chief executive officer and other persons experienced in lending, collection and improving asset quality and earnings. Further, during the effectiveness of the Orders, SPB must obtain the prior approval of the FDIC and DFI to the appointment of any new director or senior executive officer for SPB, and the DFI has the right to determine whether present members of SPB's management are acceptable. . Under the FDIC Order, SPB must increase its equity capital by $19 million by March 31, 2001, and by an additional $20 million in stages through December 31, 2001. SPB must also attain a total risk based capital ratio of 10.50% and a Tier 1 capital ratio of 8.00% by March 31, 2001 and must increase those ratios, in stages through December 31, 2001, to 12.00% and 9.00%, respectively. Under the DFI Order, SPB is required by March 31, 2001 to increase its adjusted tangible shareholder's equity by $29 million and by an additional $15 million by June 30, 2001. Also, by March 31, 2001, SPB must attain an adjusted tangible shareholder's equity of at least 7.00% of its adjusted tangible total assets, and must increase this ratio by 0.50% each quarter to 8.50% at December 31, 2001. The DFI Order limits the maximum amount of SPB's deferred tax assets that may be included in the adjusted tangible shareholder's equity calculation to the lesser of (x) the amount of deferred tax assets that are dependent upon future taxable income expected to be realized within one year or (y) 10% of adjusted tangible shareholder's equity existing before any disallowed deferred tax assets. SPB was not in compliance with this requirement at March 31, 2001. . The required increases in capital may be accomplished through capital contributions by ICII to SPB, the sale of common stock or noncumulative perpetual preferred stock of SPB, the exchange of Bank debt held by ICII for such preferred stock, or any other means acceptable to the FDIC and the DFI. SPB must adopt and implement a capital plan acceptable to the FDIC and the DFI to achieve and maintain these capital requirements. . Within 10 days of the effective dates of the Orders, SPB must eliminate all assets that were classified as "Loss" and one-half of the assets that were classified "Doubtful" as of March 31, 2000, or as of June 26, 2000 under the FDIC Order, and reduce by March 31, 2001 its assets that were classified as "Substandard" or "Doubtful", as of June 26, 2000, to not more than $90 million. SPB has already satisfied the requirements of March 31, 2001 by charging off or collecting certain of those assets. SPB also must reduce by June 30, 2001 and September 30, 2001 its assets that were classified "Substandard" or "Doubtful", as of June 26, 2000, to not more than $70,000,000 and $50,000,000, respectively. . Under the FDIC Order, SPB may not extend additional credit to any borrower that has a loan or other credit from SPB that has been charged off or classified "Loss" or "Doubtful", in whole or part, and is uncollected. With certain exceptions, SPB is restricted from extending additional credit to any borrower with a Bank loan or other credit that has been charged off or classified "Substandard", in whole or part, and is uncollected. . SPB must revise, adopt and implement policies acceptable to the FDIC and the DFI regarding its lending and loan review procedures, transactions with insiders and affiliates, and its requirements for reporting lending practices and other strategies to SPB's chief executive officer. SPB's Board must also review the adequacy of SPB's allowances for loan and lease losses and adopt a policy for regularly determining the adequacy of such allowances. . SPB must develop and adopt a detailed business plan acceptable to the FDIC and the DFI to control overhead and other expenses and restore SPB to a sound condition. . SPB must provide quarterly progress reports to the FDIC and DFI regarding its actions to comply with the Orders. . SPB may not pay any cash dividends, make any other shareholder distributions or pay bonuses to its executive officers without the prior approval of its regulators, nor may it engage in any new lines of business without the prior approval of the FDIC and the DFI. SPB and ICII already have taken a number of actions that were intended to enable SPB to comply with the requirements of the Orders. However, these actions did not succeed in enabling SPB to comply with all such 34 requirements at March 31, 2001 and SPB's ability to comply may be subject to events outside the control of SPB and ICII, such as capital market trends and general economic conditions. The actions undertaken include: . ICII exchanged $9.0 million of SPB's subordinated debt and contributed $5.0 million in cash in exchange for 50,000 shares of SPB's Series A noncumulative perpetual preferred stock. Also, on March 30, 2001, ICII exchanged an additional $22.0 million of SPB's subordinated debt and contributed $14.0 million in cash in exchange for 36,000 shares of SPB's Series B noncumulative perpetual preferred stock and also on that date made a capital contribution of $7.2 million in cash to SPB. . ICII and SPB have developed a capital plan intended to achieve the FDIC and DFI capital requirements by selling certain non-core assets of SPB and ICII, reducing the assets of SPB, exchanging additional Bank subordinated debt held by ICII for noncumulative perpetual preferred stock of SPB, and the making by ICII of additional capital contributions to SPB. Part of this capital plan includes the transactions contemplated in the Master Recapitalization Agreement described below in "Recapitalization Transaction" that describes the recapitalization transactions and status to date. . SPB has made changes in its management to address the requirements of the Orders and contemplates further changes as required. These changes included: (1) the resignation of several Bank executive officers, including its president and chief executive officer, chief credit officer, risk management department head, and the executive management of CBC, (ii) the assumption by SPB's chairman of the duties as president of SPB and (iii) the addition of various new personnel to positions with SPB, including an experienced chief credit officer, who has a major commercial banking background, and a head of the Risk Management Department of SPB, who was an FDIC examiner, and other appointments of personnel to handle credit administration and risk management functions. Also, CBC has been more fully integrated into SPB's management reporting structure and several individual managers within CBC have been assigned increased responsibility. . SPB has adopted and implemented new policies and procedures in its lending, credit administration and lending review areas. . SPB has developed detailed business plans which address marketing, asset diversification, credit administration, management oversight, non-accrual and classified assets and operating efficiencies among other items. ICII and SPB are in the process of revising their capital plan that was submitted to the FDIC and the DFI. Such capital plan has not yet been approved by the FDIC and the DFI. The plan indicates that the Bank will not meet any of the above cited capital ratio targets at the indicated dates. However, the preliminary revised plan indicates that SPB's capital ratios at December 31, 2001, will qualify it to be categorized as "Well Capitalized" at that time. At this time, the financial impact, if any, of regulatory actions that may result from the failure of SPB to meet the minimum capital requirements of the orders cannot be determined. Although such capital infusions and conversions caused the Bank's capital ratios to be above those required by statute to be considered "adequately capitalized," the Bank does not meet the capital ratio targets specified by the Orders. An additional approximately $38 million would have had to be contributed to cause the Bank to meet the capital ratio targets specified by the Orders at March 31, 2001. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Achievement of the capital plan depends on future events and circumstances, the outcome of which cannot be assured. Nevertheless, management believes, at this time, that SPB will meet all the provisions of the preliminary revised capital plan and that SPB will qualify to be classified as "Well Capitalized" at December 31, 2001. The preliminary revised capital plan includes the following elements determined by management to be necessary to meet the regulatory capital requirements cited above: . Cash capital contributions by ICII; . Conversion of Bank subordinated debt owned by ICII into preferred stock; . Restoration of a portion of SPB's deferred tax asset as allowed by regulations; . Reductions in problem assets and related loan loss provisions; and . Return to profitable operations. 35 On March 30, 2001, SPB's parent company, ICII contributed $21.2 million in cash, all of which was in the form of Tier 1 capital. Additionally, ICII converted $22.0 million of SPB's subordinated debt into non cumulative perpetual preferred stock of SPB. These capital infusions and conversions, in addition to earnings at SPB subsequent to December 31, 2000, restored SPB's capital to amounts above the "adequately capitalized" minimums of 4% and 8%, respectively, as defined by banking regulations. Transactions With Affiliates Under California and Federal law, loans to and obligations of directors and executive officers and their related companies must be on terms and under conditions that are substantially the same, or at least as favorable to SPB, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies. In addition, SPB is prohibited from engaging in "covered transactions" with an affiliate if the aggregate amount of such transactions with any one affiliate would exceed 10% of SPB's capital stock and surplus, or in the case of all affiliates, if the aggregate amount of such transactions exceeds 20% of SPB's capital stock and surplus. "Covered transactions" include loans or extensions of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate (subject to certain exemptions), the acceptance of securities issued by an affiliate as collateral security for a loan or extension of credit to any person or company, or the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. For certain "covered transactions," collateral requirements in specified amounts will be applicable. SPB also is prohibited from purchasing low-quality assets from its affiliates, except under limited circumstances. SPB engages in certain transactions which involve its affiliates, including our company and our other subsidiaries. As such, many of the transactions between ICII, our affiliates and SPB are subject to Federal and state affiliate transaction regulations. Further, under Federal law, a transaction by SPB with any person shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to that affiliate. The term "affiliate" excludes any company (other than a bank), that is a subsidiary of SPB, unless the Federal authorities have determined by regulation or order not to exclude such subsidiary. Absent such determination, transactions conducted between SPB and its non-bank subsidiaries would not be subject to the amount limitations and collateral requirements under Federal law. This exemption, however, is unavailable for transactions between a bank and a subsidiary that engages in activities not permissible for the parent depository institution. Prompt Corrective Action The FDIC regulations contain a prompt corrective action rule which was adopted in response to requirements under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA requires the Federal banking regulators to take "prompt corrective action" with respect to banks that do not meet minimum capital requirements. The FDIC's rules provide that an institution is "well capitalized" if its risk-based capital ratio is 10% or greater; its Tier 1 risk-based capital ratio is 6% or greater; its leverage ratio is 5% or greater; and the institution is not subject to a capital directive of a federal bank regulatory agency. A bank is "adequately capitalized" if its risk-based capital ratio is 8% or greater; its Tier 1 risk-based capital ratio is 4% or greater; and its leverage ratio is 4% or greater (3% or greater for the highest rated institutions). An institution is considered "undercapitalized" if its risk-based capital ratio is less than 8%; its Tier 1 risk-based capital ratio is less than 4%, or its leverage ratio is 4% or less (less than 3% for the highest rated institutions). An institution is "significantly undercapitalized" if its risk- based capital ratio is less than 6%; its Tier 1 risk-based capital ratio is less than 3%; or its leverage ratio is less than 3%. A bank is deemed to be "critically undercapitalized" if its ratio of tangible equity (Tier 1 capital) to total assets is equal to or less than 2%. An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it engages in unsafe or unsound banking practices. 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 36 party general unsecured creditors of the holding company. Undercapitalized institutions: are prohibited from making capital distributions or paying management fees to controlling persons; may be subject to growth limitations; are restricted from ongoing acquisitions, branching and entering into new lines of business; and are limited in the appointment of additional directors or senior executive officers. Finally, the institution's regulatory agency has discretion to impose certain of the restrictions generally applicable to significantly undercapitalized institutions. In the event an institution is deemed to be significantly undercapitalized, it may be required to: sell stock; merge or be acquired; restrict transactions with affiliates; restrict interest rates paid; divest a subsidiary; or dismiss specified directors or officers. If the institution is a bank holding company, it may be prohibited from making any capital distributions without prior approval of the Federal Reserve Board and may be required to divest its subsidiaries. Our parent company is not a bank holding company. A critically undercapitalized institution is generally prohibited from making payments on subordinated debt and may not, without the approval of its principal bank supervisory agency, enter into a material transaction other than in the ordinary course of business; engage in any covered transaction; or pay excessive compensation or bonuses. Critically undercapitalized institutions are subject to appointment of a receiver or conservator. Effectively, the FDIC would have general enforcement powers over SPB and our company in the event that SPB were deemed undercapitalized. SPB's Capital Ratios. The following tables indicate SPB's capital ratios under (1) the FDIC risk-based capital requirements, and (2) the FDIC minimum leverage ratio at December 31, 2000 and 1999.
At December 31, ---------------------------------------------------------------------------------------------- 2000 1999 ---------------------------------------------- ---------------------------------------------- Well Well Minimum Capitalized Minimum Capitalized Actual Requirement Requirement Actual Requirement Requirement -------------- -------------- -------------- -------------- -------------- -------------- Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- (Dollars in thousands) Risk-based Capital...... $121,833 6.59% $147,997 8.00% $184,997 10.00% $219,278 10.67% $164,445 8.00% $205,557 10.00% Risk-based Tier 1 Capital................ 65,497 3.54 73,999 4.00 110,998 6.00 160,018 7.78 82,223 4.00 123,334 6.00 FDIC Leverage Ratio..... 65,497 3.46 75,789 4.00 94,736 5.00 160,018 8.94 71,610 4.00 89,512 5.00
SPB was undercapitalized at December 31, 2000. Management has taken action to improve the capital ratios. At March 31, 2001, SPB met the requirements for "adequately capitalized", however, this was not sufficient to meet the requirements of the regulatory orders. See Item 7. "Managements Discussion and Analysis--Agreements Entered Into With Southern Pacific Bank's Regulators and Recapitalization Transaction" and Note 4 of Notes to Consolidated Financial Statements. Lending Laws We are required to comply with the Equal Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors from discriminating against applicants on the basis of race, color, religion, sex, age or marital status. ECOA also prohibits creditors from discriminating based on the fact that all or part of the applicant's income derives from a public assistance program or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. Regulation B under ECOA restricts us from obtaining certain types of information from loan applicants. It also requires certain disclosures regarding consumer rights and requires us to advise applicants of the reasons for any credit denial. If the applicant is denied credit or the rate or charge for loans increases as a result of information obtained from a consumer credit agency, another statute, the Fair Credit Reporting Act of 1970 ("FCRA") requires us to supply the applicant with the name and address of the reporting agency. In addition, FCRA also imposes other reporting and disclosure requirements on creditors. We are also subject to the Real Estate Settlement Procedures Act of 1974, as amended, and are required to file an annual report with the Department of Housing and Urban Development under the Home Mortgage Disclosure Act. In addition, we are subject to various other Federal and state laws, rules and regulations governing, among 37 other things, the licensing of, and procedures which must be followed by, mortgage lenders and servicers, and disclosures which must be made to consumers. We may incur civil and criminal liability if we fail to comply with the requirements. Environmental Liability We may foreclose on properties securing loans that are in default in the course of our business. There is a risk that hazardous or toxic substances or petroleum constituents could be on such properties. In such event, we could be held responsible for the cost of cleaning up or removing such waste depending upon our activities, and such cost could exceed the value of the underlying properties. Under the laws of certain states, contaminated property may be subject to a lien on the property to assure payment for cleanup costs. In several states, this lien has priority over the lien of an existing mortgage or owner's interest. In addition, under the laws of some states and under the Federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), we may become liable for cleanup of a property and adjacent properties that are contaminated by releases from the mortgaged property if we engage in certain activities. In 1996, CERCLA was amended to eliminate lender liability under CERCLA in certain circumstances, including foreclosure if the lender resells the property at the earliest practicable, commercially reasonable time on commercially reasonable terms. In addition, CERCLA was changed to provide more guidance to lenders about the nature of activities that would and would not give rise to liability under CERCLA. These amendments do not apply to state environmental laws. Also, foreclosure and our other activities on contaminated property may subject us to state tort liability. Gramm-Leach-Bliley Act of 1999 On November 12, 1999, the federal Gramm-Leach-Bliley Act ("GLB") was enacted. The GLB, which is a major piece of financial reform legislation, repealed sections of the federal Glass-Steagall Act generally prohibiting affiliations and management interlocks between banking organizations and securities firms, and added new substantive provisions to the Bank Holding Company Act ("BHCA"). Specifically, the GLB created a new entity, the "financial holding company" ("FHC"), which is authorized to engage in activities which are "financial" in nature and "incidental" to financial activities. Insured banks such as SPB have new authority under GLB, subject to certain limitations, to engage in various activities of a "financial" nature. GLB also makes major changes to the federal regulation of a bank's securities activities, and contains provisions governing (i) the insurance activities of FHCs and the regulation of these activities, (ii) the privacy of customer information, (iii) the structure of and access to the Federal Home Loan Bank system, (iv) modifications of the Community Reinvestment Act, and (v) other changes to banking laws. Major provisions of GLB took effect starting March 11, 2000. Our Company is not currently subject to the Bank Holding Company Act, and therefore this new law is not expected to have a material effect on the nature and scope of our current operations. While the future impact of GLB on our Company's and SPB's operations cannot be predicted at this time, GLB may allow our Company, through SPB and otherwise, authority to engage in new activities of a banking and financial nature. In addition, the new law may increase the ability of other financial services providers to compete with us by permitting certain firms (such as securities firms and insurance companies) for the first time to establish or acquire banks, and allowing banking firms to enter into new lines of financial business. The customer privacy requirements of the GLB, which are expected to be effective in 2001, will require SPB, as well as any of our other affiliates which are engaged in a financial business with retail customers, to disclose to these customers, when they establish the customer relationship and at least annually thereafter, their privacy policies and practices for disclosing and protecting customer financial information. In addition, a financial institution will not be able to share with a nonaffiliated third party any nonpublic personal information of its customers and consumers unless that financial institution provides advance notice of its information-sharing policies to these persons, and will be obliged to permit a customer or consumer to "opt out" of the financial institution's ability to share nonpublic customer information with nonaffiliated third parties. 38 Several Federal regulatory agencies have proposed regulations implementing the privacy provisions of the GLB. Generally, these proposals (i) outline the type and content of notice initially required to customers and consumers of the institution's privacy policies and practices, (ii) limit the right to disclose nonpublic personal information to nonaffiliated third parties, and (iii) describe the form and method of providing information-sharing "opt out" notices to consumers and customers. When these regulations become final, SPB, as well as our Company's affiliates which are "financial institutions" (generally meaning any of our affiliates which engages in a retail financial business), will be required to comply with these requirements. At this time, the specific impact of GLB's new privacy and other regulatory requirements on our operations cannot be precisely determined. It is possible, however, that GLB will result in some increases in our federal regulatory and compliance costs and responsibilities as these new privacy and regulatory changes become effective. Further, the new law gives states authority to regulate, among other things, the insurance, privacy and information-sharing activities of financial organizations, and changes in state regulatory requirements may also have an impact on our compliance costs and responsibilities. Future Laws Each of our businesses is highly regulated, and the applicable laws, rules and regulations are subject to change. There are currently proposed various laws, rules and regulations which, if adopted, could affect our operations. We cannot assure you that these proposed laws, rules and regulations, or other such laws, rules or regulations will not be adopted in the future. If adopted, they could make compliance more difficult or expensive, restrict our ability to originate, broker, purchase or sell loans, further limit or restrict the amount of commissions, interest and other charges we earn on loans we originate, broker, purchase or sell, or otherwise adversely affect our business or prospects. Depositor Preference The Federal Deposit Insurance Act provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of the institution (including claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the institution's parent holding company. Limitations on Types of Deposits To maintain the exemption from the BHCA, SPB currently offers investment certificates in the form of passbook accounts, money market deposit accounts and certificates of deposit. SPB does not offer nor is it authorized by California law to offer demand deposit accounts. Insurance Premiums In September 1996, Congress passed the Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("the Budget Act") which provided that, among other things, Savings Association Insurance Fund ("SAIF") members and BIF members would have the same risk-based deposit insurance assessment schedule with respect to FDIC deposit insurance premiums, effective January 1, 1997, whereas previously, FDIC insurance premiums were based on the level of reserves in the BIF and the SAIF. The assessment schedule proposed by the FDIC ranges from 0.00% to 0.27% of deposits annually and is based upon the capital position and a supervisory evaluation of each institution. As of January 1, 1997, assessments were set at the following percentages of deposits:
Group Group Group A B C ----- ----- ----- Well capitalized....................................... 0.00% 0.03% 0.17% Adequately capitalized................................. 0.03% 0.10% 0.24% Undercapitalized....................................... 0.10% 0.24% 0.27%
39 SPB has been assigned the assessment risk classification of Group B. As a result, SPB's FDIC insurance premium for the quarterly period ending March 31, 2001 is 0.10% of deposits annually, or approximately $408,000 per quarter. SPB's deposit insurance premium for the year ended December 31, 2000 was approximately $254,000. SPB's insurance premium has increased from 0.03% annually in 2000 to 0.10% annually starting in the first quarter of 2001. Recent Legislation The California Industrial Loan Law governed the activities of SPB until September 30, 2000. On that date, all California-chartered industrial banks, (except for those that act as premium finance agencies and that provide insurance premium financing) including SPB, became subject to the statutes and regulations of the California Revised Banking Law applicable to commercial banks. The notable exception remains the prohibition against offering demand deposits. Holding Company Regulations ICII is exempt from regulation as a bank holding company because SPB is not considered a "bank" under the BHCA. The Competitive Equality Banking Act of 1987 ("CEBA") subjected certain previously unregulated companies to regulation as bank holding companies by expanding the definition of the term "bank" in the BHCA. Notwithstanding, the FDIC does view the source of strength doctrine applicable to bank holding companies to be relevant to the continued capital strength of non-member state banks such as SPB. SPB may cease to fall within those exceptions if it engages in certain operational practices, notably accepting demand deposit accounts. SPB currently has no plans to engage in any operational practice that would cause it to fall outside of one or more of the exceptions to the term "bank" as defined by CEBA. Under CEBA, we are treated as if we are a bank holding company for the limited purposes of applying certain restrictions, such as those on loans to insiders, transactions with affiliates and anti-tying provisions. Limitations on Acquisitions of Voting Stock of the Company Any person who wishes to acquire 10% or more of the capital stock or capital of a California industrial bank or 10% or more of the voting capital stock or other securities giving control over management of its parent company must obtain the prior written approval of the DFI. Similarly, the Federal Change in Bank Control Act of 1978 requires any person or company that obtains "control" of an insured depository institution to notify the appropriate Federal banking agency, which would be the FDIC in the case of SPB, 60 days prior to the proposed acquisition. If the FDIC has not issued a notice disapproving the proposed acquisition within that time period (including a possible 120-day extension), the person may retain its interest in such institution. Any person acquiring 10% or more of the common stock of our Company is subject to these requirements. For purposes of the statute, "control" is defined as the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of an insured depository institution. However, there is a rebuttable presumption that any person acquiring 10% or more of any class of voting securities of said institution is presumed to have "control." In such cases, such person must file an application for approval with the FDIC or rebut the presumption. Employees As of December 31, 2000, we had 428 employees on a full-time equivalent ("FTE") basis, as follows: Southern Pacific Bank.................................................. 331 Imperial Business Credit, Inc. ........................................ 54 Imperial Credit Industries, Inc. ...................................... 26 Imperial Credit Lender Services, Inc. ................................. 11 Imperial Credit Asset Management Inc. ................................. 5 ICII Ventures, Inc. ................................................... 1 --- Total................................................................ 428 ===
40 We believe that our relations with these employees are satisfactory. We are not a party to any collective bargaining agreement. ITEM 2. PROPERTIES Our executive offices occupy approximately 24,063 square feet of space in Torrance, California at a current monthly rental of approximately $34,000. SPB's executive offices occupy approximately 28,749 square feet of space in Torrance, California at a current monthly rental of $38,900. In February 2000, we moved SPB's executive offices from Los Angeles to Torrance, California. Not including SPB, we currently lease offices in Beverly Hills, San Diego, Santa Ana Heights and Irvine, California, as well as in Denver, Colorado. SPB and its divisions operate in California through branches and loan production offices and in other states through loan production offices and representatives. ITEM 3. LEGAL PROCEEDINGS Our company is a defendant in a consolidated federal securities class action, In re Southern Pacific Funding Corporation Securities Litigation, Lead Case No. CV98-1239-MA, in the United States District Court for the District of Oregon. This action was initially filed in October 1998. Plaintiffs allege that SPFC failed to properly mark down the value of its residual interests, failed to properly reflect increased levels of prepayments and actual prepayment and default rates on its loans and made false and misleading public statements concerning its financial condition. Plaintiffs allege claims against our company and two of our directors (and others) under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the Securities Act of 1933. On July 21, 1999, the Court certified a class of persons who purchased the securities of SPFC during the period October 7, 1997 through October 1, 1998. On December 8, 1999, the Court set a pretrial conference for October 31, 2000 and trial for November 6, 2000. On July 31, 2000, all parties in the case (other than our company) reached a tentative settlement of the action. That settlement, which does not require payment of any consideration by our company, is subject to court approval. Subsequently, agreement was reached on October 10, 2000 to settle all remaining claims against our company, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 15 of the Securities Act of 1933, for a cash payment by our company of $3 million and issuance of warrants to purchase three million shares of ICII common stock, at an exercise price of $3 per share, to members of the class. The warrants, which expire in seven years, will be freely tradable. On February 21, 2001, the Court approved all of the settlements and dismissed the action with prejudice. Our company and three of our directors are defendants in a consolidated federal securities class action, In re Imperial Credit Industries, Inc. Securities Litigation, Case No. 98-8842 SVW, in the United States District Court for the Central District of California. This action, purportedly filed on behalf of a class of persons who purchased our company's securities during the period January 29, 1998 through October 1, 1998, was originally filed in November 1998. Plaintiffs allege that defendants made false and misleading statements and omitted to reveal the truth concerning the value of Imperial Credit Industries, Inc.'s investments in SPFC, resulting in an artificial inflation of the price of our securities. On defendants' motions, the Court dismissed, with leave to amend, plaintiffs' original complaint and their consolidated amended class action complaint. On February 22, 2000, the Court denied defendants' motion to dismiss plaintiffs' second amended consolidated class action complaint. On March 9, 2000, defendants answered the second amended consolidated class action complaint and asserted a number of affirmative defenses. On March 21, 2000, plaintiffs moved for class certification. On August 7, 2000, the Court granted plaintiffs' motion for class certification. The Court has set the pretrial conference for April 30, 2001 and trial for May 8, 2001. On February 9, 2001, the Court granted plaintiffs leave to file a third amended complaint, in which plaintiffs added a new defendant, KPMG LLP, our company's independent auditor. On March 6, 2001, defendants answered the third amended complaint and asserted a number of affirmative defenses. Our company is a defendant in Steadfast Insurance Company v. Auto Marketing Network Inc. and Imperial Credit Industries, Inc. ("ICII"), filed on August 12, 1997 in the Northern District of Illinois, Case No. 97-C-5696. The plaintiff is seeking damages in the amount of $27 million allegedly resulting from the fraudulent inducement to enter into, and the subsequent breach of, a motor vehicle collateral enhancement 41 insurance policy. In May 1998, we filed a counterclaim against the plaintiff for $54 million in damages based on the allegation that the underlying claim was filed in bad faith. In January 1999, the Court entered a preliminary injunction which enjoined us from transferring assets of Auto Marketing Network, Inc., in amounts that would cause the total assets of Auto Marketing Network to be less than $20 million in value. The injunction has since been removed. We moved to dismiss ICII from the lawsuit and, on April 17, 2000, the Court granted ICII's motion in part and found that ICII is not liable for any of Steadfast's losses arising from payments for defaulted loans. The Court has pending a motion for partial summary judgment, filed by the plaintiff, and a motion for summary judgment filed by ICII on its counterclaim against Steadfast. Steadfast also has counter-moved for summary judgment on ICII's counterclaim, and the parties have filed motions seeking the exclusion of each other's expert witnesses. The Court cancelled a March 12, 2001 hearing on all pending motions and has not rescheduled or indicated when a written order could be expected. ICCMIC and three of its directors, one of whom is a director and one a former director of ICII, are defendants in a putative class action lawsuit filed on March 17, 2000, by John Huston in the United States District Court for the Central District of California, Case No. CV00-02751 ABC. The complaint alleges that ICCMIC's prospectus issued in connection with its initial public offering in October 1997 contained material omissions and misrepresentations concerning (1) the expenses to be incurred by ICCMIC, (2) ICCMIC's ability to reduce the base management fee paid to ICCMIC's management company, (3) the management agreement termination fee payable to ICCMIC's management company in the event that ICCMIC terminated the management agreement, and (4) certain conflicts of interest. The complaint alleges a claim under Section 11 of the Securities Act of 1933 and seeks the certification of a class of shareholders of ICCMIC who purchased shares of ICCMIC at any time between October 22, 1997 and October 21, 1999. On April 4, 2000, defendants moved to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. On June 9, 2000, the Court issued an order denying defendants' motion to dismiss. On June 23, 2000, defendants answered the complaint and asserted a number of affirmative defenses. On July 31, 2000, plaintiff moved for class certification. On October 17, 2000, the Court stayed all proceedings and certified for interlocutory appeal to the Ninth Circuit Court of Appeals its order denying defendants' motion to dismiss. On January 12, 2001, the Ninth Circuit Court of Appeal denied defendants' petition for permission to appeal. On March 26, 2001, the District Court struck plaintiff's motion for class certification and ordered plaintiff to take further action to give proper notice to potential class members. Our company and two of our directors, among others, are defendants in an adversary proceeding filed by the liquidating trustee of the Southern Pacific Funding Corp. liquidating trust on October 5, 2000, in the U.S. Bankruptcy Court for the District of Oregon, In re Southern Pacific Funding Corp. Case No. 398- 37613-elp 11, Beck v. Imperial Credit Industries, Inc., et al, Adv. Proc. No. 00-03337-elp. The trustee seeks to recover damages in excess of $238.5 million for losses alleged to have been incurred by SPFC in connection with its sub-prime lending and securitization program during the years 1995- 1998. The trustee alleges that the losses were caused by defendants' breaches of fiduciary duties and negligence. In addition, the trustee seeks equitable re-characterization of certain ICII claims against the SPFC bankruptcy estate and also asserts a right of setoff against all defendants' various claims against the bankruptcy estate for the wrongs alleged in the breach of fiduciary duties and negligence claims. The Company and its two directors moved to dismiss the adversary proceedings for lack of subject matter jurisdiction and failure to state a claim. These motions were heard by the Bankruptcy Court on December 20, 2000. By orders entered January 18, 2001, the Bankruptcy Court denied the motion to dismiss for lack of subject matter jurisdiction but granted, with leave to amend, the motion to dismiss for failure to state a claim. The trustee has until April 18, 2001 to file an amended complaint. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 42 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common stock has been quoted on the NASDAQ National Market under the symbol "ICII" since May 18, 1992. The following table sets forth the high and low closing sales prices for our common stock as reported by the NASDAQ National Market.
2000 High Low 1999 High Low ---- ----- ----- ---- ----- ----- First Quarter $6.06 $4.19 First Quarter $9.94 $7.06 Second Quarter 4.56 3.31 Second Quarter 9.44 6.94 Third Quarter 4.78 1.50 Third Quarter 6.97 4.31 Fourth Quarter 1.50 0.41 Fourth Quarter 6.50 4.00
At March 30, 2001, the closing sales price of our common stock as reported by the NASDAQ National Market was $0.9375. At March 30, 2001, there were approximately 90 shareholders of record. We were informed by Nasdaq in a letter dated January 18, 2001 that our Common Stock may be delisted from the Nasdaq National Market in that it had failed to maintain a minimum bid price of $1.00 over the prior 30 consecutive trading days as required by NASD Rule 4450(a)(5) (the "Nasdaq Rule") unless the Company meets the requirements for continued listing under the Nasdaq Rule within ninety (90) days of the date of such letter, or April 18, 2001. We have not paid cash dividends on our common stock and we do not anticipate paying cash dividends on our common stock in the foreseeable future. We intend to retain earnings for use in our operations and the expansion of our business. The indentures for our 9 7/8% Senior Notes and our Resettable Rate Debentures restrict our payment of cash dividends. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources". SPB is subject to certain regulatory restrictions on the payment of dividends. See "Item 7. Business-- Management's Discussion and Analysis--Limitations on Dividends". We have undertaken the repurchase of our common stock under several authorized share repurchase programs. During 1998, 1999, and 2000 we repurchased 2,485,684, 3,682,536 and 1,122,300 shares of common stock at an average cost per share of $9.65, $8.00, and $3.62 in each year, respectively. Since beginning share repurchases, we have repurchased a total of 7,315,520 shares of common stock at an average price of $7.92 per share. All of our repurchases effected under our stock repurchase programs were effected in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. On May 14, 1999, we entered into an agreement with our former parent Imperial Bank, a subsidiary of Imperial Bancorp. On May 17, 1999, we repurchased 10% or 3,682,536 shares of our outstanding common stock for $8.00 per share or $29.5 million. The repurchase from Imperial Bank was financed through the private issuance of $30.0 million of Series B 11.50% Mandatorily Redeemable Cumulative Preferred Stock to a group of independent investors. Preferred Share Purchase Rights. On October 12, 1998, we distributed preferred share purchase rights as a dividend to our shareholders of record at the rate of one right for each outstanding share of our common stock. The rights are attached to our common stock and will only be exercisable and trade separately if a person or group acquires or announces the intent to acquire 15% or more of our common stock (25% or more for any person or group holding 15% or more of our common stock on October 12, 1998). Each right will entitle shareholders to buy one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $40. If our company is acquired in a merger or other transaction after a person has acquired 15% or more of our outstanding common stock (25% or more for any person or group holding 15% or more of our common stock on October 12, 1998), each right will entitle the shareholder to purchase, at the right's then-current exercise price, a number of the acquiring company's common shares having a market value of twice such price. The acquiring person would not be entitled to exercise these rights. In addition, if a person or group acquires 43 15% or more of our company's common stock, each right will entitle the shareholder (other than the acquiring person) to purchase, at the right's then-current exercise price, a number of shares of our company's common stock having a market value of twice such price. Following the acquisition by a person of 15% or more of our common stock and before an acquisition of 50% or more of our common stock, our board of directors may exchange the rights (other than the rights owned by such person) at an exchange ratio of one share of common stock per right. Before a person or group acquires beneficial ownership of 15% (or 25% as applicable) or more of our common stock, the rights are redeemable for $.0001 per right at the option of our board of directors. The rights will expire on October 2, 2008 unless redeemed prior to that date. Our board is also authorized to reduce the ownership thresholds referred to above to not less than 10%. The rights are intended to enable all of our shareholders to realize the long-term value of their investment in our company. 44 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following schedules set forth selected consolidated financial data as of or for each of the years in the five-year period ended December 31, 2000. Such selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
Years Ended December 31, -------------------------------------------------- 2000 1999 1998 1997 1996 --------- -------- --------- -------- -------- (In thousands, except per share data) Income Statement Data: Interest Income: Interest on loans and leases.................... $ 194,213 $178,229 $ 200,827 $176,146 $188,242 Interest on investments.... 28,213 25,841 28,965 24,776 10,807 Interest on other finance activities................ 2,399 3,368 6,048 2,678 8,422 --------- -------- --------- -------- -------- Total interest income.... 224,825 207,438 235,840 203,600 207,471 Interest expense........... 140,213 121,607 123,106 118,213 135,036 --------- -------- --------- -------- -------- Net interest income...... 84,612 85,831 112,734 85,387 72,435 Provision for loan and lease losses.............. 180,975 35,340 15,450 20,975 9,773 --------- -------- --------- -------- -------- Net interest (expense) income after provision for loan and lease losses.................. (96,363) 50,491 97,284 64,412 62,662 Fee and other income (loss): (Loss) gain on sale of loans and leases.......... (771) 6,480 14,888 69,737 88,156 Asset management fees...... 3,239 10,054 7,591 5,810 3,347 Investment banking and brokerage fees............ 21,057 27,198 18,463 7,702 -- Loan servicing income...... 5,993 6,885 11,983 9,474 1,680 Gain (loss) on sale of securities................ 12,988 32,742 (592) 112,185 82,690 Equity in net income of ICG....................... 479 -- -- -- Equity in net income of SPFC...................... -- -- 12,739 25,869 -- Equity in net (loss) income of FMC............. -- (53) 3,235 (3,050) -- Mark to market on securities and loans held for sale.................. (12,810) (28,641) (42,388) (341) -- Loss on impairment of securities................ -- -- (120,138) -- -- Gain on termination of REIT advisory agreement... -- -- -- 19,046 -- Gain on sale of servicing rights.................... -- -- -- -- 7,591 Rental income.............. 8,183 -- -- -- -- Other income............... 12,278 13,894 13,118 4,060 10,807 --------- -------- --------- -------- -------- Total fee and other income (loss)........... 50,636 68,559 (81,101) 250,492 194,271 --------- -------- --------- -------- -------- Expenses: Personnel expense.......... 50,097 60,341 61,636 51,609 48,355 Other expenses............. 52,940 66,259 59,200 63,252 50,694 Merger costs............... 9,397 -- -- -- -- --------- -------- --------- -------- -------- Total expenses........... 112,434 126,600 120,836 114,861 99,049 --------- -------- --------- -------- -------- (Loss) income from continuing operations before income taxes, minority interest and extraordinary item........ (158,161) (7,550) (104,653) 200,043 157,884 Income taxes................ 2,356 (3,074) (44,064) 74,267 69,874 Minority interest in income (loss) of consolidated subsidiaries............... 1,125 1,474 (1,464) 10,513 12,026 --------- -------- --------- -------- -------- (Loss) income from continuing operations before extraordinary item...................... (161,642) (5,950) (59,125) 115,263 75,984 Operating loss from discontinued operations of AMN, net of income taxes... (5,218) (899) (3,232) (25,347) -- Loss on disposal of AMN, net of income taxes............ -- -- (11,276) -- -- --------- -------- --------- -------- -------- (Loss) income before extraordinary item........ (166,860) (6,849) (73,633) 89,916 75,984 Extraordinary item--gain (loss) on early extinguishment of debt, net of income taxes............ 3,534 4,021 -- (3,995) -- --------- -------- --------- -------- -------- Net (loss) income.......... $(163,326) $ (2,828) $ (73,633) $ 85,921 $ 75,984 ========= ======== ========= ======== ======== Comprehensive (loss) income.................... $(165,024) $ 974 $ (76,745) $ 82,837 $ 77,783 ========= ======== ========= ======== ======== Basic (loss) income per share: (Loss) income from continuing operations..... $ (4.96) $ (0.17) $ (1.55) $ 2.99 $ 2.11 Loss from discontinued operations, net of income taxes..................... (0.16) (0.02) (0.08) (0.66) -- Loss on disposal of AMN, net of income taxes....... -- -- (0.30) -- -- Extraordinary item--gain (loss) on early extinguishment of debt, net of income taxes............ 0.11 0.11 -- (0.10) -- --------- -------- --------- -------- -------- Net (loss) income per common share.............. $ (5.01) $ (0.08) $ (1.93) $ 2.23 $ 2.11 ========= ======== ========= ======== ======== Diluted (loss) income per share: (Loss) income from continuing operations..... $ (4.96) $ (0.17) $ (1.55) $ 2.82 $ 1.95 Loss from discontinued operations, net of income taxes..................... (0.16) (0.02) (0.08) (0.62) -- Loss on disposal of AMN, net of income taxes....... -- -- (0.30) -- -- Extraordinary item--gain (loss) on early extinguishment of debt, net of income taxes............ 0.11 0.11 -- (0.10) -- --------- -------- --------- -------- -------- Net (loss) income per common share.............. $ (5.01) $ (0.08) $ (1.93) $ 2.10 $ 1.95 ========= ======== ========= ======== ======== Weighted average diluted shares outstanding......... 32,573 34,517 38,228 40,855 38,975
45
At or for the Year Ended December 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 -------- --------- --------- --------- --------- (Dollars in thousands) Cash Flow Data: Net cash (used in) provided by operating activities............. $(32,250) $ 151,622 $ (37,135) $ 18,563 $ (31,135) Net cash provided by (used in) by investing activities............. 21,682 (202,863) (174,982) (320,627) 244,177 Net cash provided by (used in) financing activities............. 7,608 (212,633) 464,510 273,196 (177,961) -------- --------- --------- --------- --------- Net (decrease) increase in cash.... $ (2,960) $(263,874) $ 252,393 $ (28,868) $ 35,081 ======== ========= ========= ========= ========= SPB Regulatory Capital Ratios: California leverage limitation(1).......... 4.98 % 10.45 % 10.45 % 13.20 % 13.50 % Risk-based--Tier 1...... 3.54 % 7.78 % 8.42 % 8.75 % 9.71 % Risk-based--Total....... 6.59 % 10.67 % 11.12 % 12.25 % 10.87 % FDIC Leverage Ratio..... 3.46 % 8.94 % 8.62 % 8.30 % 9.35 % Asset Quality Ratios : Non-performing assets as a percentage of total assets................. 4.11 % 2.84 % 2.06 % 4.31 % 2.64 % Allowance for loan and lease losses as a percentage of non- performing loans....... 81.02 % 62.18 % 65.11 % 53.87 % 38.94 % Net charge-offs as a percentage of average total loans and leases held for investment(2).......... 12.00 % 1.79 % 1.92 % 2.72 % 0.94 % Selected Ratios: Ratio of earnings to fixed charges......... (0.1x) 0.9x 0.2x 2.7x 2.2x Pre-tax interest coverage ratio........ (5.6x) 0.8x N/A 8.1x 17.4x Ratio of indebtedness to total capitalization(3)..... 84.8 % 54.6 % 55.4 % 47.2 % 40.5 %
At December 31, ------------------------------------------------------ 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (In thousands) Balance Sheet Data: Cash.................... $ 30,938 $ 33,898 $ 297,772 $ 45,379 $ 74,247 Interest-bearing deposits............... 183,193 248,182 1,415 103,738 3,369 Securities.............. 227,734 242,139 235,423 227,468 84,296 Loans and leases held for sale............... 386,469 289,398 319,061 153,469 940,096 Loans and leases held for investment, net.... 1,122,494 1,223,071 1,320,095 1,252,487 1,068,599 Retained interests in loan and lease securitizations........ 6,330 10,220 27,011 22,895 159,707 Total assets............ 2,127,577 2,201,615 2,417,183 2,094,389 2,470,639 Deposits................ 1,632,704 1,614,758 1,714,252 1,156,022 1,069,184 Borrowings from FHLB.... 65,000 -- 20,000 45,000 140,500 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES")...... 42,885 61,750 70,000 70,000 -- Other borrowings........ 84,118 74,309 102,270 144,841 694,352 Senior and convertible subordinated notes..... 176,757 185,185 219,858 219,813 163,209 Total liabilities....... 2,088,135 1,996,235 2,183,662 1,770,456 2,231,131 Shareholders' equity.... 39,442 205,380 233,521 323,933 239,508
- -------- (1) Ratio of (i) SPB's total shareholder equity to (ii) total deposits. (2) Excluding charge-offs at AMN, the ratio of charge-offs to average loans held for investment was 11.78% in 2000, 1.73% in 1999, 0.59% in 1998 and 1.16% in 1997. (3) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness plus total shareholders' equity. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Organization We are a diversified commercial and real estate lending and financial services holding company that was incorporated in 1991 in the State of California. Our headquarters are located in Torrance, California. Our business 46 activities are conducted through three wholly owned subsidiaries: Southern Pacific Bank ("SPB") (SPB was considered undercapitalized at December 31, 2000 and has entered into regulatory orders with the DFI and FDIC. See Item 1. Business--Regulation and Note 4 of Notes to Consolidated Financial Statements), Imperial Business Credit Inc. ("IBC"), and Imperial Credit Asset Management, Inc. ("ICAM"). Prior to November 1, 1999, we held a significant equity interest in a publicly traded company--Franchise Mortgage Acceptance Company ("FMC"). Through March 28, 2000, our company owned a 9% equity interest in a commercial REIT, Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC"). Through October 22, 1999, a wholly owned subsidiary of ours, Imperial Credit Commercial Asset Management Corp. ("ICCAMC"), managed the assets and operations of ICCMIC (See--"Liquidity and Capital Resources--The ICCMIC Acquisition"). On March 28, 2000 we acquired all of the outstanding common stock of ICCMIC that we did not already own. Our parent company, our subsidiaries, and our affiliates offer a wide variety of deposit and commercial loan products, asset management services, and investment banking and brokerage services. Our core businesses originate loans and leases funded primarily by FDIC insured deposits. Our business strategy currently emphasizes: . the recapitalization of SPB in an effort to meet the requirements of regulatory orders, . the reduction of classified assets (assets classified as substandard, doubtful and loss), . the improvement of credit underwriting and credit risk management, . the continued diversification of SPB's loan portfolios, . investing in and managing businesses in high margin niche segments of the financial services industry. Overview of Consolidated Operations Financial Position At December 31, 2000, our total assets were $2.1 billion as compared to $2.2 billion at December 31, 1999. Our total net loans remained unchanged at $1.5 billion at December 31, 2000 and December 31, 1999. Our outstanding assets and loans did not increase over the prior year due to a lack of profitability at SPB which reduced capital levels necessary to support growth. On a consolidated basis, our cash and interest bearing deposits decreased to $214.1 million at December 31, 2000 as compared to $282.1 million at December 31, 1999. At our parent company, cash and interest bearing deposits decreased to $15.9 million at December 31, 2000 as compared to $46.2 million at December 31, 1999. Liquidity at our holding company was reduced primarily due to the additional investment of $44.0 million of capital into SPB, the repurchase of $27.3 million of outstanding long term debt, and legal/professional and legal settlement costs of $6.0 million. Our deposits at SPB remained relatively unchanged at $1.6 billion at December 31, 2000 and December 31, 1999. Our long term debt decreased to $219.6 million at December 31, 2000 as compared to $246.9 million at December 31, 1999 due to our repurchase of $27.3 million of our Senior Notes and company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES"). Our retained interests in loan and lease securitizations were $6.3 million at December 31, 2000 as compared to $10.2 million at December 31, 1999. Approximately $4.2 million of the retained interest balance at December 31, 2000 were related to the lease securitizations at IBC. The decrease in retained interests primarily resulted from a $4.7 million write-down, coupled with cash collections and sales of retained interests totaling $1.3 million. Retained interests increased by $2.4 million as a result of the accretion of discount in 2000. At December 31, 2000 our shareholders' equity decreased to $39.4 million as compared to $205.4 million at December 31, 1999. The decrease in shareholders' equity was primarily the result of provisions for loan losses, mark to market charges on loans and securities held for sale, lawsuit settlement costs, and ICCMIC merger related costs. Additionally, as a result of the losses sustained by our company, management reassessed the Company's ability to realize its $87.0 million of gross deferred tax assets. As a result of management's 47 reassessment, shareholders' equity was negatively impacted by $63.3 million as a result of establishing a deferred tax asset valuation allowance. Our book value per share and tangible book value per share decreased to $1.23 and $1.37 at December 31, 2000 as compared to $6.19 and $5.50 at December 31, 1999, respectively. Consolidated Results of Operations During 2000, our operating results included the following significant items or events: . A provision for loan and lease losses totaling $181.0 million due to increased non accrual loans and charge-offs, primarily at our Coast Business Credit ("CBC") and Loan Participation and Investment Group ("LPIG") divisions. . Total mark-to-market charges of $12.8 million primarily effecting IBC's retained interests, and LPIG loans financed through total return swaps. . The establishment of a $63.3 million deferred tax asset valuation allowance as a result of our company's continuing operating losses. For further information see Note 22 of Notes to Consolidated Financial Statements. . Legal settlement costs of $6.9 million, primarily arising from the settlement of the Southern Pacific Funding Corporation ("SPFC") Securities Litigation. . A gain on sale of Auction Finance Group ("AFG") totaling $12.4 million resulting from the sale of our minority interest in AFG. . The completion of the ICCMIC transaction on March 28, 2000. The Company incurred severance costs of $9.4 million and generated $29.3 million in negative goodwill. . The write off of ICLS's remaining balance of goodwill totaling $4.1 million. The net loss for the year ended December 31, 2000 was $163.3 million or $5.01 diluted net loss per share including an operating loss from discontinued operations of $5.2 million or $0.16 diluted net loss per share and an extraordinary gain on the early extinguishment of debt of $3.5 million or $0.11 diluted net income per share. The operating results for the year ended December 31, 2000 were primarily impacted by high levels of loan charge-offs and non-performing loans resulting in an increased provision for loan and lease losses of $181.0 million. The Company has increased its allowance for loan and lease losses to $63.6 million or 81.02% of non-accrual loans at December 31, 2000 as compared to $31.8 million or 62.18% of non-accrual loans at December 31, 1999. For the year ended December 31, 1999, the Company reported a net loss of $2.8 million or $0.08 diluted net loss per share including an operating loss from discontinued operations of $899,000 or $0.02 diluted net loss per share and an extraordinary gain on the early retirement of debt of $4.0 million or $0.11 diluted net income per share. Net Interest Income For the year ended December 31, 2000, interest income increased to $224.8 million as compared to $207.4 million for the same period last year. Interest income increased primarily as a result of increases in the average balance of outstanding loans, primarily at the CBC and Income Property Lending Division ("IPL") lending divisions. The average yield on loans at SPB decreased to 11.18% during the year ended December 31, 2000 as compared to 11.33% in the same period last year. The decrease in yields primarily resulted from an increase in average outstanding non-accrual loans and the related foregone interest income of approximately $87.8 million and $9.0 million for the year ended December 31, 2000 as compared to approximately $57.5 million and $4.4 million for the prior year, respectively. The Company's total loans and leases held for sale and investment, net of allowance for loan and lease losses remained unchanged at $1.5 billion at December 31, 2000 and December 31, 1999. Interest expense was $140.2 million for the year ended December 31, 2000 as compared to $121.6 million for the same period last year. The increase in interest expense primarily resulted from an increase in both the cost and the average outstanding balance of the Federal Deposit Insurance Corporation insured deposits of SPB. 48 SPB's average outstanding deposits increased to $1.7 billion during 2000 as compared to $1.6 billion in the prior year. The average cost of deposits based on daily averages at SPB increased to 6.64% during the year ended December 31, 2000 as compared to 5.71% in the prior year. The increase in the average cost of deposits at SPB primarily occurred as a result of a general increase in interest rates during 2000. Interest on other borrowings also increased as a result of the ICCMIC acquisition. Average outstanding debt at ICCMIC totaled $57.1 million during 2000. The interest expense on ICCMIC's debt was $3.5 million for the year ended December 31, 2000. There were no comparable borrowings from ICCMIC in the year ended December 31, 1999. The increases in interest on deposits and other borrowings were partially offset by a decrease in interest on long-term debt which decreased 21.0% to $24.1 million for the year ended December 31, 2000 as compared to $30.5 million for the prior year. The decrease in interest on long-term debt resulted from the repurchase of long-term debt during the previous twelve months. For the year ended December 31, 2000, net interest income before provisions for loan and lease losses remained relatively unchanged at $84.6 million as compared to $85.8 million for the prior year. Net interest income before provisions for loan and lease losses decreased for the quarter and year ended December 31, 2000 primarily as a result of increased deposit costs coupled with lower yields on our loan portfolio. Fee and Other Income Fee and other income decreased $17.9 million to $50.6 million in 2000 as compared to $68.6 million in the prior year. Gain (loss) on sale of loans decreased $7.3 million to a loss of ($771,000) for 2000 as compared to a gain of $6.5 million in the prior year. Gain on sale of loans decreased primarily as a result of a lower principal balance of IPL loans sold in 2000 as compared to the prior year, in addition to decreased lease securitizations from IBC due to the cessation of lease originations during 2000, and losses from the sale of problem nationally syndicated participation loans. For the year ended December 31, 2000, the Company sold $141.8 million of IPL loans, $75.2 million of nationally syndicated participation loans, and $7.5 million of consumer loans generating gains (losses) of $2.0 million, ($2.7) million, and $0, respectively. For the year ended December 31, 1999, the Company sold $283.7 million of IPL loans, $53.8 million of loan participations and securitized $133.7 million of equipment leases, generating gains (losses) of $3.9 million, ($285,000) and $4.5 million, respectively. Asset management fees decreased $6.8 million to $3.2 million in 2000 as compared to $10.1 million in the prior year. Asset management fees decreased primarily due to the termination of the ICCMIC asset management agreement, and decreased average outstanding other assets under management. The balance of assets under management decreased to $542.8 million at December 31, 2000 as compared to $1.3 billion at December 31, 1999. The decrease was primarily due to our acquisition of ICCMIC in the first quarter of 2000. At December 31, 2000, there were no ICCMIC assets under management as compared to $664.9 million at December 31, 1999. During the fourth quarter of 2000, the Company reduced its ownership percentage in Imperial Capital Group ("ICG") from 63.2% to 38.5% through the sale of a part of its equity interest directly to ICG and certain management members of ICG. The Company generated gross proceeds from the sale of $2.7 million, and received $885,000 in cash and $1.8 million in the form of a short-term note. The Company's investment in and income from ICG is accounted for by the equity method of accounting beginning with the quarter ended December 31, 2000. For the three months ended December 31, 2000, the equity in net income of ICG was $479,000. Gain on sale of securities decreased $19.8 million to $13.0 million in 2000 as compared to $32.7 million in the prior year. During 2000 we sold our minority interest in AFG, resulting in a gain of $12.4 million. During 1999, the merger between Franchise Mortgage Acceptance Company ("FMC") and Bay View Financial was completed. We received $27.7 million in cash and 4.4 million shares of Bay View common stock from the sale and exchange of our 38.3% interest in FMC. We sold the shares of the Bay View common stock we received from the merger during 1999. As a result of these transactions, we recorded a pre-tax gain from both transactions of $30.1 million in 1999. 49 Rental income increased to $8.2 million in 2000. We reported no rental income during 1999. Rental income increased solely as a result of the ICCMIC acquisition in the first quarter of 2000. Rental income is produced from the income producing commercial real properties owned at ICCMIC. For the year ended December 31, 2000, mark-to-market losses were $12.8 million. The net mark-to-market losses for the year ended December 31, 2000 primarily related to a $5.0 million write-down of IBC's retained interests in lease securitizations and a $3.9 million write-down of LPIG's swap, and $3.9 million related to other trading securities. For the year ended December 31, 1999, mark-to-market losses were $28.6 million. The net mark-to-market losses for the year ended December 31, 1999 primarily relate to the write-down of sub-prime auto loans and the write-down of IBC's retained interests in lease securitizations. Noninterest Expenses Total noninterest expenses during the year ended December 31, 2000 decreased to $103.0 million as compared to $126.6 million for the prior year. The decrease in expenses primarily resulted from decreases in personnel expense, amortization of servicing rights, amortization of goodwill, and general and administrative expenses in addition to the deconsolidation of ICG. These decreases were partially offset by increases in lawsuit settlements and real property expenses. Prior to the reduction of the Company's equity interest in ICG to below 50% ownership, ICG was accounted for as a consolidated subsidiary. As such, the total expenses of ICG are included in the Company's results of operations in the prior year and through the nine months ended September 30, 2000. Beginning with the deconsolidation of ICG in the fourth quarter of 2000, ICG's expenses are not consolidated with the Company's other operations, making some comparisons to prior periods not meaningful. Assuming ICG was accounted for under the equity method, during the year ended December 31, 2000 total noninterest expenses decreased 17.1% to $84.9 million as compared to $102.4 million for the prior year. The decrease in expenses primarily resulted from decreased personnel, amortization of servicing rights, legal and professional, amortization of goodwill, and general and administrative expenses. The reductions in noninterest expenses above were partially offset by increases in lawsuit settlement costs and real property expenses. Assuming ICG was accounted for under the equity method, during the year ended December 31, 2000, personnel expenses decreased to $35.3 million as compared to $40.9 million in the prior year. The decrease was primarily the result of reduced Full Time Equivalent Employees ("FTE") and reduced bonus expense at SPB and ICII. At December 31, 2000, the Company had 428 FTE as compared to 537 FTE (excluding ICG) at December 31, 1999. Assuming ICG was accounted for under the equity method, during the year ended December 31, 2000, general and administrative expenses were $17.8 million as compared to $21.1 million in prior year. General and administrative expenses decreased in both periods as a result of the Company's efforts to cut costs and increase operational efficiency. During the year ended December 31, 2000, lawsuit settlements were $6.9 million as compared to $371,000 in the prior year. Lawsuit settlements increased for the year ended December 31, 2000 as compared to the prior year as a result of an agreement reached by the Company with the plaintiffs to settle the securities class action litigation identified as In re Southern Pacific Funding Corporation Securities Litigation, Lead Case No. CV98-1239-MA, in the U.S. District Court for the District of Oregon. ICII has paid $3.0 million to the plaintiffs' settlement fund and agreed to issue warrants to purchase three million shares of ICII Common Stock with an exercise price of $3.00 per share. The warrants have a term of seven years from the date of issuance. The Common Stock to be issued upon the exercise of the warrants will be registered and freely tradable and have the same rights as ICII's existing Common Stock. The warrants have change of control, typical anti-dilution and adjustment features. The settlement of this litigation resulted in charges totaling approximately $7.0 million during the year ended December 31, 2000. During the year ended December 31, 2000, amortization of goodwill, net was $1.4 million as compared to $14.5 million in the prior year. Amortization of goodwill, net decreased as the Company wrote off $12.3 million of IBC's remaining goodwill in the fourth quarter of 1999. In the third quarter of 2000, the Company wrote off 50 the remaining $4.1 million balance of goodwill related to Imperial Credit Lender Services, Inc. ("ICLS"), our loan documentation and signing business. In February 2001, we sold the assets of ICLS for its remaining net book value. We do not anticipate any gain or loss from the sale of ICLS. Additionally, amortization of goodwill decreased as a result of the amortization of negative goodwill associated with the ICCMIC acquisition in the first quarter of 2000. The amortization of negative goodwill at ICCMIC reduced amortization of goodwill, net by $5.4 million during 2000. There was no comparable amortization of negative goodwill during 1999. Real property expenses began to be incurred by our company as a result of the ICCMIC acquisition in the first quarter of 2000. These costs solely relate to the income producing properties owned at ICCMIC. Real property expenses totaled $4.2 million for the year ended December 31, 2000. There were no real property expenses incurred in 1999. Non-accrual Loans Our non-accrual loans and leases increased to $78.5 million at December 31, 2000 as compared to $51.3 million at December 31, 1999. The increase in non- accrual loans occurred primarily in the CBC and LPIG portfolios. The increase in CBC's non-accrual loans and charge-offs for the year ended December 31, 2000 was the result of prior management's asset work out strategy which resulted in lending additional funds to problem borrowers in an attempt to rehabilitate the borrower. This strategy resulted in significant unsecured overadvances to CBC's borrowers. Additionally, CBC's customers have been negatively impacted by the economic slowdown in the technology and telecommunications industries. All unsecured loans related to non-performing credits have been charged off as of December 31, 2000. The increase in LPIG's non-accrual loans and charge-offs for the year ended December 31, 2000 resulted from a general increase in defaults of nationally syndicated loans. See Item 7. "Management's Discussion and Analysis--Asset Quality," for more information about non-performing assets and non-accrual loans. Allowance for Loan and Lease Losses The allowance for loan and lease losses was $63.6 million or 5.39% of total loans held for investment at December 31, 2000 as compared to $31.8 million or 2.50% at December 31, 1999, respectively. The ratio of the allowance for loan and lease losses to non-accrual loans and leases ("coverage ratio") increased to 81.02% at December 31, 2000 as compared to 62.18% at December 31, 1999. For the year ended December 31, 2000, the provision for loan and lease losses was $181.0 million as compared to $35.3 million for the same period last year. The higher provision for loan and lease losses is primarily related to management's decision to aggressively work out or dispose of increased levels of non-accrual and potential problem loans, particularly in the CBC and LPIG loan portfolios. Agreements Entered Into with Southern Pacific Bank's Regulators As a result of a joint examination by the Federal Deposit Insurance Corporation ("FDIC") and the California Department of Financial Institutions ("DFI"), SPB entered into regulatory orders with the FDIC and with the DFI. The orders contain several requirements including but not limited to, increasing SPB's capital and regulatory defined capital ratios, dividend restrictions, classified asset limitations, lending policy restrictions and procedures, and other such restrictions. Management believes the Company has responded to all of the directives addressed in the orders including the recent additions of new credit and risk management personnel, the partial recapitalization of SPB and the reduction of SPB's classified assets. At December 31, 2000, the Bank was considered "undercapitalized" by the banking regulators. Banks so categorized are subject to certain restrictions, including prohibitions on the payment of dividends, restrictions on compensation, and increased supervisory monitoring, among other things. Other restrictions may be imposed by the regulators including requirements to raise additional capital, sell assets or sell the entire bank. On March 30, 2001, the Company contributed to the Bank $21.2 million in cash in the form of new equity capital and converted $22.0 million of subordinated debt into perpetual preferred stock of the Bank. Such capital infusions, in addition to Bank earnings subsequent to December 31, 2000, restored the Bank's capital to amounts above the "adequately capitalized" regulatory minimums cited in banking regulations. Management believes that the Bank will not meet any of the required 51 target capital ratios required by the Orders during 2001. At this time, the financial impact, if any, of regulatory actions that may result from the failure of the Bank to meet minimum capital requirements of the Orders cannot be determined. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. We have been in discussions with the FDIC and the DFI with regard to our current and projected noncompliance with the regulatory orders and are in the process of completing an amended capital plan for 2001 to address our noncompliance. (See "Item 1. Business--Regulation--General" and Note 4 of Notes to Consolidated Financial Statements) Recapitalization Transaction On March 30, 2001 we completed the issuance of $16.2 million of Senior Secured Debt. The notes bear an interest rate of 12% and mature on April 30, 2002. The issuance of the Senior Secured Debt is the first step in a recapitalization plan first announced by our company in February 2001. Subsequent to the completed Senior Secured Debt offering, we will offer pro rata a package of the following securities in exchange (the "Debt Exchange") for our three currently outstanding series of debt securities (the "Old Notes"): (i) 12% Senior Secured Notes due 2005 (the "Exchange Notes"), (ii) up to 2.0 million shares of our Common Stock, no par value and (iii) warrants to purchase up to an additional 7.0 million shares of Common Stock at an exercise price of $2.15 per share. Concurrently with consummation of the Debt Exchange, we will issue up to 7.04 million shares of Common Stock to the holders of a majority in interest of our Old Notes who executed the recapitalization agreement. We further intend to issue and sell at least $10.0 million principal amount of 12% Convertible Subordinated Notes due 2005 to accredited investors in a private placement. The Convertible Subordinated Notes will be convertible into Common Stock of the Company at $1.25 per share. The holders of Old Notes will be offered Exchange Notes as follows: (i) the holders of our 10.25% Remarketed Par Securities due 2002 will be offered to convert into Exchange Notes at $0.80 per dollar of face amount of such Old Notes, (ii) the holders of our 9.875% Senior Notes due 2007 will be offered to convert into Exchange Notes at $0.65 per dollar of face amount of such Old Notes, and (iii) the holders of our 9.75% Senior Notes due 2004 will be offered to convert into Exchange Notes at $0.50 per dollar of face amount of such Old Notes. A majority-in-interest of the 10.25% Remarketed Par Securities due 2002 and our 9.875% Senior Notes due 2007 have agreed to participate in the Debt Exchange, and to strip the Old Notes of all currently existing financial covenants. Supplemental indentures eliminating all covenants related to the Old Notes have been executed. Subject to the occurrence of certain conditions (including the closing of the Debt Exchange and the issuance of Convertible Subordinated Notes), all of the Senior Secured Debt will be automatically exchanged into (i) $18.2 million principal amount of Exchange Notes, (ii) 249,052 shares of Common Stock, and (iii) warrants to purchase up to an additional 781,681 shares of Common Stock at an exercise price of $2.15 per share. Each of the Senior Secured Debt purchasers will further have the right during the period following the Debt Exchange and ending March 31, 2002 to elect to exchange all or a portion of their Exchange Notes and related shares of Common Stock and Debt Exchange Warrants into $18.2 million principal amount of Convertible Subordinated Notes. The Convertible Subordinated Notes will have a 12% coupon and will be convertible into Common Stock at $1.25 per share. The Senior Secured Debt Holders will be entitled to receive additional amounts of Exchange Notes in connection with the sale of such notes by March 31, 2002 (and for a period of 60 days thereafter) if, with respect to specified types of sales, the average trading price of the Exchange Notes during the 30-day period ending on the last day of the month preceding the month in which such sale occurs is less than a price of 89 or, for other specified types of sales, if their net proceeds from such sales, are less than 89% of the principal amount of the Exchange Notes that are sold. In any such event, each of such holders will be entitled to receive from us, pro rata in accordance with the respective aggregate principal amounts of such Exchange Notes held by such holder, additional principal amounts of Exchange Notes as will generate net proceeds equal to the difference, expressed as a dollar amount, between (i) 89% of the aggregate principal amount of the Exchange Notes sold by such holder and, depending on the types of sales, either the sum of (a) the average trading value of such Exchange Notes and (b) the net proceeds, if any, resulting from the required concurrent actions as defined in the 52 recapitalization agreement or the sum of (x) the net proceeds from such sale of Exchange Notes and (y) the net proceeds, if any, resulting from the required concurrent actions; provided, that in either event, the maximum principal amount of additional Exchange Notes so issuable to all such holders in the aggregate will be limited to $5.0 million. If additional Exchange Notes are required to be issued, 2.0 million shares of Common Stock that would otherwise be issued to the holders of a majority interest in our Old Notes will be reduced by 800 shares for each $1,000 in principal amount of additional Exchange Notes required to be so issued. Sales of Exchange Notes made above the 89% of principal amount threshold by a holder would be taken into account in determining the amount of Exchange Notes, if any, issuable to such holder for sales below the 89% threshold. In addition, if the average trading price of the Exchange Notes during the 30 day period ending March 31, 2002 is less than 70, the Senior Secured Debt Holders will be issued the maximum principal amount of additional Exchange Notes without being obligated to sell any of their Exchange Notes. Upon successful completion of the proposed offering ICII will receive gross proceeds of approximately $26 million of new capital, most of which will be invested in Tier I capital of SPB. We believe that this new capital will assist our company in its attempt to increase capital levels at SPB in order to meet regulatory requirements. However, the funds raised as a result of issuing the Senior Secured Debt and the Convertible Subordinated Notes will not provide sufficient capital by themselves to meet the requirements of SPB under its regulatory orders, and as such, we expect to raise additional capital or reduce the size of SPB in order to meet the capital requirements of the regulatory orders. Furthermore, the future exercise of warrants issued in connection with the Debt Exchange is expected to provide approximately an additional $15.0 million of capital for our company at the time of their exercise approximately three years from the date of issuance of the Exchange Notes. There can be no assurance that the proposed offering can be completed or that sufficient amounts of capital combined with asset reductions can be achieved such that the Bank might comply with its regulatory order requirements. Business Lines We manage our business by evaluating the results of operations from each of our business units. Our core businesses include: . Coast Business Credit ("CBC")--an asset-based lending business; . Imperial Warehouse Finance, Inc. ("IWF")--a residential loan warehouse line business; . Loan Participation and Investment Group ("LPIG")--a division of SPB investing in nationally syndicated bank loans; . The Lewis Horwitz Organization ("LHO")--a film and television production lending business; . Imperial Business Credit, Inc. ("IBC")--an equipment lease servicing business; . Income Property Lending Division ("IPL")--a multifamily origination and commercial mortgage banking business; . Imperial Capital Group, LLC ("ICG")--an investment banking and brokerage business; . Asset Management Activities ("AMA")--an investment fund management business; . Other Core Operations ("OCO")--our holding company investments and support functions, our loan documentation service operations, and the administrative and servicing operations of Southern Pacific Bank. We also operated other businesses in 2000, 1999 and 1998 that we consider our "non-core" businesses. These are businesses that we have made the decision to de-emphasize during 1999 and 1998. We group these businesses into the following categories: . Equity Interests--Franchise mortgage lending, sub prime residential mortgage banking business, and beginning in the fourth quarter of 2000, investment banking and brokerage; . De-emphasized/Discontinued/Exited Businesses--Consumer lending, auto lending, residential mortgage lending, foreign mortgage lending businesses, and third party mortgage servicing operations. 53 Our exit from these non-core businesses has allowed our management to focus on our core business lines that have historically proven to be our most profitable businesses. Following is a summary of these businesses results of operations in 2000 as compared to 1999. CORE BUSINESS LINES The following table reflects average loans and leases outstanding and the average yields earned on our core business units for 2000 and 1999:
Average Loans and Leases Average Outstanding Yield ----------------- ------------ Business Line 2000 1999 2000 1999 ------------- -------- -------- ----- ----- (Dollars in thousands) CBC.......................................... $806,987 $658,764 13.03% 13.17% IWF.......................................... 69,667 130,075 7.72 8.28 LPIG......................................... 182,917 240,621 7.97 7.55 LHO.......................................... 59,241 6,056 12.65 14.77 IBC.......................................... 3,059 10,700 12.99 12.54 IPL.......................................... 358,520 226,548 9.47 8.85
Our largest subsidiary is SPB, a $1.8 billion industrial bank, which operates five of our core businesses: CBC, IPL, LPIG, IWF, and LHO. The FDIC insured deposits of SPB are the primary source of funding for each of these businesses. Coast Business Credit CBC's net loss for 2000 was $72.1 million as compared to net income of $7.9 million for 1999. The decrease in CBC's net income for 2000 was primarily attributable to an increase in the provision for loan losses, partially offset by an increase in net interest income. CBC's net income for 2000 includes a provision for loan losses of $113.5 million as compared to $24.7 million for the previous year. CBC's provision for loan losses increased sharply due to an increase in CBC's non-accrual loans and charge-offs for the year ended December 31, 2000. Management believes that CBC's non-accrual loans and charge-offs increased due to a failed problem asset work out strategy deployed by CBC's previous management. During the course of the previous two years, CBC's management made the decision to advance funds to problem borrowers in an attempt to rehabilitate the borrower. This strategy resulted in significant unsecured overadvances to CBC's borrowers. The increases in charge-offs and provision for loan losses related to these credits, and the economic slowdown in the technology and telecommunications industries have been a significant cause of CBC's recent poor financial performance. Additionally, the deterioration of collateral values and the beginning of a general economic downturn in the telecommunications and technology sectors have negatively impacted CBC's loan portfolio. We believe that CBC will continue to record relatively higher levels of provisions for loan losses due to higher levels of non-performing loans and an economic downturn as long as CBC's non-accrual loans remain at elevated amounts. See Item 1. "Business--Coast Business Credit" for a discussion of the actions taken by SPB to mitigate these types of charge offs in the future. CBC increased its average loans outstanding in 2000 to $807.0 million as compared to $658.8 million for the previous year. As a result of the increase in CBC's average loans outstanding, CBC's net interest income increased to $60.3 million for 2000 as compared to $54.0 million for the previous year. The yield on CBC's loans decreased to 13.03% for 2000 as compared to 13.17% for the previous year. The decrease in yield was primarily attributable to an increase in the average outstanding balance of non-accrual loans during 2000 as compared to 1999. CBC earned other income totaling $9.7 million in 2000 as compared to $8.2 million for the previous year. Other income for 2000 includes a $1.1 million gain on sale of securities. CBC recorded the $1.1 million gain on sale of securities from the exercise of warrants in the equity securities of a borrower and the subsequent sale of 54 its stock in the second quarter of 2000. The remaining balance of other income primarily consists of audit and other fees charged by CBC to its customers. CBC's total expenses were $27.8 million for 2000 as compared to $24.3 million for the prior year. Total expenses increased in 2000 as compared to the prior year primarily due to increased legal costs related to loan collections activity as well as to higher personnel, data processing, FDIC insurance premiums, and general and administrative expenses associated with CBC's loan portfolio growth. Legal and professional fees increased $1.1 million to $1.6 million as compared to $526,000, and general and administrative expenses increased $1.8 million to $4.0 million as compared to $2.2 million in 2000 and 1999, respectively. CBC's FTE decreased to 134 at December 31, 2000 as compared to 135 at December 31, 1999. At December 31, 2000, CBC's non-accrual loans were $31.8 million as compared $22.2 million at December 31, 1999. At December 31, 2000, no CBC loans were 90 days delinquent and accruing interest. CBC incurred net charge- offs of $88.9 million for 2000 as compared to $17.4 million for the prior year. CBC's non-accrual loans are generally collateralized by accounts receivable, inventory, real estate, and other tangible assets. See "Consolidated Results of Operations--Provision for Loan and Lease Losses." Imperial Warehouse Finance, Inc. In October 2000, we hired a new President of IWF. The new President has 15 years of mortgage banking experience including retail, wholesale, bulk acquisitions and warehouse lending. As a result, IWF has obtained several new customer relationships and is enjoying increased success in maintaining higher average outstanding balances of repurchase lines. Beginning in the fourth quarter of 2000, IWF management implemented new underwriting guidelines and operational procedures that have increased IWF operating efficiency while lowering the overall level of risk associated with this line of business. See Item 1. "Business--Imperial Warehouse Finance, Inc.," for a description of the changes made at IWF to improve underwriting. IWF's net loss for 2000 was $17.7 million as compared to net income of $1.1 million for 1999. IWF's net loss increased in 2000 as compared 1999 as a result of a significant increase in the provision for loan losses. The provision for loan losses increased to $18.9 million for 2000 as compared to $1.2 million for 1999 primarily as a result of increased charge-offs related to fraud losses. Net interest income before the provision for loan losses was $800,000 for 2000 as compared to $4.1 million for 1999. The decrease in IWF's net interest income is related to a decrease in the average outstanding balance of loans and an increase in non-accrual loans. IWF's average loans outstanding and average yields for 2000 decreased to $69.7 million and 7.72% as compared to $130.1 million and 8.28% for 1999. The decrease in IWF's loan yields, were primarily due to an increase in IWF's non-accrual loans. IWF earned other income consisting primarily of loan fees charged to its customers of $309,000 for 2000 as compared to $1.5 million for 1999. Other income decreased in 2000 as compared to the prior year due to decreased loan funding transactions. IWF's total expenses increased to $4.4 million for 2000 as compared to $2.6 million for 1999. Total expenses increased as compared to the prior year primarily due to higher personnel and legal and professional expenses. The increase in personnel expenses was primarily associated with IWF's relocation to Torrance, California from its former headquarters in Voorhees, New Jersey, and the subsequent hiring of new management and personnel to run the operations of IWF. The increase in professional and legal expenses was primarily associated with increased legal costs which occurred as a result of increased collection efforts by IWF of its non-performing loans IWF's FTE decreased to 7 FTE at December 31, 2000 as compared to 12 FTE at December 31, 1999. At December 31, 2000, IWF's non-accrual loans increased to $9.4 million as compared to $7.8 million at December 31, 1999. IWF incurred net charge-offs of non-accrual loans of $16.4 million for 2000 and 55 $1.6 million for 1999. IWF's non-performing loans are collateralized by mortgage loans on single family residences and other real estate. During 2000, IWF advanced approximately $9.5 million to Island Mortgage Network ("Island") under its mortgage loan warehouse program. IWF became aware on June 30, 2000 that New York state banking regulators suspended Island's license. Island is a subsidiary of AppOnline.com. AppOnline.com was reported to have had an estimated $150 million in open mortgage loans on June 30 when New York state banking regulators suspended the license of its lending arm, Island. On July 19, 2000, AppOnline.com Inc. filed for Chapter 11 bankruptcy protection. We, along with other lenders, moved for appointment of a trustee, which the court recently approved. During 2000, we charged off $7.5 million of the Island warehouse advance. We are seeking recovery by all means possible, including legal action and insurance claims. In addition to the Island fraud, IWF incurred one other significant fraud-related loss in 2000 for $3.0 million. Loan Participation and Investment Group We are not originating any new commitments for LPIG at this time since we believe that the capital that is currently being deployed at SPB to support LPIG's business could be better utilized in our other core businesses. As such, we anticipate that the current outstanding balance of LPIG's loans will decrease over time as this portfolio runs-off. LPIG's net loss was $35.1 million for 2000 as compared to net income of $1.2 million for the prior year. The increase in LPIG's net loss was primarily the result of an increased provision for loan losses. LPIG's net revenues include a provision for loan losses of $39.3 million for 2000 as compared to $7.0 million in the prior year. LPIG's provision for loan losses increased primarily due to increased defaults on nationally syndicated credits during 2000 as compared to 1999. LPIG's average loans outstanding decreased to $182.9 million for 2000 as compared to $240.6 million in the prior year. As a result of the decrease in LPIG's average loans outstanding and increase in non-accrual loans, LPIG's net interest income decreased to $5.6 million for 2000 as compared to $8.4 million for the prior year. The yield on LPIG's loans for 2000 increased to 7.97% as compared to 7.55% in the prior year. The yield on LPIG's loans increased as a result of the general increase in Libor rates, partially offset by increases outstanding average balances of non-accrual loans throughout 2000. LPIG's other income totaled ($6.6) million for 2000 as compared to $2.0 million in the prior year. The decrease in other income was primarily the result of increased mark-to-market losses on nationally syndicated bank loans funded through total return swaps and losses on sales of potential problem LPIG loans. During 2000, LPIG's mark-to-market losses were $3.9 million as compared to mark-to-market gains of $268,000 in the prior year. During 2000, LPIG's losses on sales of problem loans were $2.7 million as compared to losses on sales of $277,000 in the prior year. Defaults on nationally syndicated credits have increased during the course of 2000. These increased defaults have negatively impacted LPIG's on balance sheet loan portfolio through increasing non-accrual loans, and LPIG's off-balance sheet loans funded through total return swaps through negative mark to market charges. LPIG's total expenses were relatively unchanged at $1.6 million for 2000 as compared to $1.4 million for 1999. Total expenses increased primarily due to higher occupancy and general and administrative expenses. LPIG's FTE was unchanged with 4 FTE at December 31, 2000 and 1999. The Lewis Horwitz Organization LHO was acquired on October 1, 1999. The acquisition was accounted for as a purchase, resulting in goodwill of $17.3 million. As part of the acquisition, we acquired all right, title and interest in $98.2 million of motion picture and television production loans. We also acquired other assets totaling $362,000 and assumed liabilities of $1.2 million in connection with the acquisition. The purchase price of the loans was equal to the gross carrying value of the loans on the books and records of Imperial Bank, except the purchase price of the 56 first $20 million in non-performing assets were allocated a discount of $3.6 million. Under the terms of the acquisition, we received all interest and fees on the $98.2 million of LHO originated loans and paid Imperial Bank Prime minus 2.50% through December 31, 2000. We also agreed to immediately purchase all loans that either were or become classified as non-accrual, when an interest or principal payment is 90 days or more past due. In February 2001, we completed the acquisition of all performing loans and non-performing LHO assets from Imperial Bank. From the acquisition of LHO on October 1, 1999 through December 31, 2000, we acquired gross non-performing assets of $23.6 million. In the first quarter of 2001, we acquired gross non-performing assets of $4.4 million. LHO's net income was $104,000 for 2000 as compared to $4,000 for the three month period from October 1, 1999 to December 31, 1999. LHO's net revenues for 2000 include a provision for loan losses of $558,000 as compared to $351,000 for the three month period from October 1, 1999 to December 31, 1999. LHO's average loans outstanding and average yield for 2000 were $59.2 million and 12.65%. LHO's average loans outstanding and average yields for the three month period from October 1, 1999 to December 31, 1999 were $6.1 million and 14.77%, respectively. As a result of the increase in average loans outstanding, and the completion of an entire year of operations in 2000, LHO's net interest income increased to $5.1 million as compared to $992,000 for the three month period from October 1, 1999 to December 31, 1999. LHO's total expenses were $4.0 million for 2000 as compared to $761,000 for the three month period from October 1, 1999 to December 31, 1999. LHO's expenses increased as a result of completing a full year of operations in 2000, as compared to only 3 months of operations in 1999. LHO had 16 FTE at December 31, 2000 as compared to 12 FTE at December 31, 1999. At December 31, 2000, LHO's non-accrual loans were $246,000. LHO had no non-accrual loans at December 31, 1999. At December 31, 2000, LHO's other repossessed assets were $7.8 million as compared to $8.2 million at December 31, 1999. LHO has not incurred any charge-offs of non-accrual loans since the acquisition on October 1, 1999. LHO's non-accrual loans and other repossessed assets are supported by the existing and estimated value of all future distribution rights of the underlying film or television production. All of LHO's other repossessed assets were acquired from Imperial Bank under the terms of the LHO purchase agreement, and are carried at their estimated realizable values. Imperial Business Credit, Inc. During the second quarter of 2000, we decided to cease originations of all small ticket leases by IBC. During April 2000, we sold or closed IBC's remaining origination offices. IBC's current operations primarily consist of servicing its remaining small ticket leases and the new originations of SPB's middle market leasing group. IBC's net loss was $5.7 million for 2000 as compared to a net loss of $13.3 million for the prior year. IBC's net loss decreased as compared to the prior year primarily due to decreased amortization of goodwill and a reduction in mark to market charges on retained interests in lease securitizations. IBC originated $30.9 million of leases for 2000 as compared to $125.2 million in the prior year. IBC securitized $43.6 million of leases for 2000 generating gain on sale revenue of $563,000 or 1.3% of the principal balance securitized. For 1999, IBC securitized leases of $132.4 million, generating gain on sale revenue of $4.5 million or 3.4% of the principal balance securitized. IBC's average leases outstanding and average yield for 2000 were $3.1 million and 12.99%. IBC's average leases outstanding and average yields for the prior year were $10.7 million and 12.54%. Despite the decrease in on-balance sheet average loans outstanding, IBC's net interest income increased to $2.3 million for 2000 as compared to $1.1 million in the prior year. The increase is primarily due to increased 57 interest on other financing activities at IBC. Interest on other financing activities results from the accretion of discounts on IBC's retained interests in lease securitizations. Additionally, net interest income increased at IBC due to a decrease in borrowings from our parent company, and a corresponding reduction in interest expense. IBC also generated other income (loss), including lease servicing fees from leases sold into its securitization facility and mark-to-market charges on trading securities and retained interests in lease securitizations of $1.6 million for 2000 as compared to ($1.4) million in the prior year. Lease servicing fees totaled $4.6 million for 2000 as compared to $4.5 million in the prior year. The mark to market charges on retained interests in lease securitizations of $5.0 million for 2000 and $11.9 million for the prior year were primarily the result of increased lease defaults. IBC's total expenses were $8.1 million for 2000 as compared to $22.2 million for the prior year. Total expenses decreased as compared to the prior year primarily due to reduced amortization of goodwill and reduced personnel and operating expenses. During the prior year, IBC wrote off $11.3 million of goodwill and as a result, IBC incurred no amortization of goodwill expense in 2000. Personnel and operating expenses decreased as a result of ceasing originations of all small ticket leases in the second quarter of 2000 and closing all of IBC's lease origination offices. (See Item 1.--"Business--Imperial Business Credit" for information regarding defaults under IBC's securitization facility) IBC's FTE decreased to 55 FTE at December 31, 2000 as compared to 94 FTE at December 31, 1999. Income Property Lending Division IPL's net income was $1.6 million for 2000 as compared to $2.0 million for the prior year. IPL originated $235.9 million of loans for 2000 as compared to $339.7 million for the prior year. During 2000, IPL sold $141.7 million of loans generating gains on sale of $2.0 million, or 1.4% of the principal balance of loans sold. During 1999, IPL sold $283.7 million of loans generating gains on sale of $2.0 million, or 0.7% of the principal balance of loans sold. Gain on sale of loans as a percentage IPL's loans sold increased for 2000 as compared to the prior year due to increased interest margins and an increase in demand for small balance income property loans in the secondary market. The volume of loans sold decreased as a result of retaining for portfolio a higher level of multifamily real estate loans originated by IPL during 2000. During 2000, the provision for loan losses at IPL increased to $2.2 million as compared to $142,000 in the prior year. The increase primarily relates to an increase in the balance of multifamily and commercial loans held for investment. IPL's net interest income was $12.1 million for 2000 as compared to $9.2 million for the prior year. The increase was primarily the result of an increased average balance of outstanding loans and increased average yield. IPL's average outstanding loan balance for 2000 increased to $358.5 million as compared to $226.5 million in the prior year. The increase in IPL's loan yields to 9.47% for 2000 as compared to 8.85% for the prior year was primarily due to an overall increase in LIBOR interest rates over the preceding twelve months. IPL's other revenues were $2.5 million for 2000 as compared to $3.0 million for the prior year. IPL's total expenses were $8.3 million for 2000 as compared to $8.7 million for 1999. Total expenses decreased for 2000 as compared to the prior year primarily due to lower personnel, telephone and other communications costs, and lower general and administrative expenses relating to decreased personnel and loan origination volumes. FTE decreased to 41 FTE at December 31, 2000 as compared to 69 FTE at December 31, 1999. IPL's non-accrual loans were $1.7 million or 0.05% of its outstanding loan portfolio at December 31, 2000, as compared to $237,000 or 0.09% of its outstanding loan portfolio at December 31, 1999. 58 Imperial Capital Group, LLC During the fourth quarter of 2000, we reduced our ownership in ICG from 63.2% to 38.5% through the sale of a part of our equity interest directly to ICG and to certain management members of ICG. As such, the income from ICG is accounted for by the equity method of accounting beginning with the quarter ended December 31, 2000. For the three months ended December 31, 2000, the equity in net income of ICG was $479,000 and is reported in our segment data under "Equity Interests." The results and data presented here reflect the consolidated operations of ICG through September 30, 2000 as compared to the year ended December 31, 1999, the periods in which ICG's operations were consolidated with the rest of our businesses. ICG's pre tax income increased to $2.8 million for the nine months ended September 30, 2000 as compared to $2.5 million for the prior year. The increase in pre-tax income for the nine months ended September 30, 2000 as compared to the prior year primarily resulted from increased fees received for successful corporate finance transactions completed by ICG through private placements as well as increased trading gains, partially offset by decreased trading commission revenues. For the nine months ended September 30, 2000, ICG raised $184.5 million of total debt and equity proceeds for their customers as compared to $128.0 million for the prior year. ICG's total expenses were $18.2 million for the nine months ended September 30, 2000 as compared to $17.4 million for prior year. Total expenses increased for the nine months ended September 30, 2000 as compared to the prior year primarily due to increased personnel, and general and administrative expenses resulting from increased corporate finance transactions. ICG's FTE decreased to 73 FTE at September 30, 2000 compared to 79 FTE at December 31, 1999. Asset Management Activities AMA's net loss was $7.0 million for 2000 as compared to a net loss $3,000 for the prior year. AMA's net loss increased primarily as a result of $9.4 million of merger costs associated with the ICCMIC acquisition, lower asset management fees due to the termination of the ICCMIC asset management agreement, and decreased average outstanding other assets under management. The balance of assets under management and management fees decreased to $542.8 million and $3.2 million for 2000 as compared to $1.3 billion and $10.1 million for the prior year, respectively. The decrease was primarily due to our acquisition of ICCMIC in the first quarter of 2000. At December 31, 2000, there were no ICCMIC assets under management as compared to $664.9 million at December 31, 1999. At December 31, 2000, our assets under management were $484.5 million at Pacifica Partners I L.P. ("Pacifica") and $58.3 million at the Cambria Investment Partnership I, L.P. ("Cambria"). At December 31, 1999, our assets under management were $467.1 million at Pacifica and $134.9 million at Cambria. Total expenses, excluding merger costs of $9.4 million, from AMA activities were $3.1 million for 2000 as compared to $9.8 million for 1999. The decrease in total expenses was primarily due to a decrease in personnel expenses at Imperial Credit Commercial Asset Management Corp. ("ICCAMC"), our wholly owned subsidiary, related to the termination of the ICCMIC asset management agreement. Total AMA FTE decreased to 7 FTE at December 31, 2000 as compared to 13 FTE at December 31, 1999. Other Core Operations OCO provides support to our subsidiaries through executive management oversight and advice, accounting, audit, operations, legal services, merger and acquisitions advice, human resources administration, insurance programs, office services, premises administration, and management information systems support. OCO also includes but is not limited to interest and dividend income from parent company loans, interest expense on our long-term debt, mark-to- market charges on the securities we invested in at our holding company, and extraordinary items. 59 For 2000, the net loss of OCO was $27.1 million, as compared to net income of $146,000 for the prior year. The net loss for 2000 includes a $3.5 million net gain from the early extinguishment of debt, as compared to a $4.0 million net gain from the early extinguishment of debt in 1999. The net loss for 2000 increased primarily as a result of increased expenses in addition to the establishment of a deferred tax asset valuation allowance. Total expenses of OCO were $14.9 million for 2000 as compared to $8.2 million for the prior year. The increase in expenses for 2000 as compared to the same periods in the prior year primarily resulted from increased legal and professional fees and litigation settlements. OCO's total expenses for 2000 includes legal settlement costs of $6.1 million. OCO's income tax expense for 2000 totaled $11.8 million in connection with the establishment of the deferred tax asset valuation allowance in the fourth quarter of 2000. There were no comparable expenses of this nature in the prior year. OCO's FTE decreased to 45 FTE at December 31, 2000 as compared to 53 FTE at December 31, 1999. OTHER BUSINESS LINES We also operate other businesses, which, except for ICG, consist of businesses that we've decided to de-emphasize. We group these businesses into the following categories: . Equity Interests--Represents our equity investments in other companies. During the fourth quarter of 2000, we reduced our ownership in ICG from 63.2% to 38.5% through the sale of a part of our equity interest directly to ICG and to certain management members of ICG. As such, the income from ICG is accounted for by the equity method of accounting beginning with the quarter ended December 31, 2000. . De-emphasized/Discontinued/Exited Businesses--represents our business units we decided to either de-emphasize, discontinue, or exit. Our exit from these non-core businesses will allow our management to focus on our core business lines. Equity Interest in ICG ICG is accounted for by the equity method of accounting beginning with the quarter ended December 31, 2000. For 2000, our Equity Interests generated net revenues of $479,000, exclusively from ICG, and net income of $878,000 as compared to net revenues of $31.2 million and a net loss of $18.5 million for 1999. Equity Interest and Gain on sale of FMC During 1999, equity in the net loss of FMC was $53,000. On November 1, 1999, the merger between FMC and Bay View was completed. We received $27.7 million in cash and 4.4 million shares of Bay View common stock from the sale and exchange of our 38.3% interest in FMC. On November 5, 1999, we announced the sale of 4,342,451 shares of the Bay View common stock we received from the FMC/Bay View merger. As a result of these transactions, we received approximately $86.3 million in total cash proceeds and we recorded a pre-tax gain from both transactions of $30.1 million. Equity Interest in SPFC On October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection under Federal bankruptcy laws in the U.S. Bankruptcy Court for the District of Oregon. As a result of SPFC declaring Chapter 11 bankruptcy and the corresponding decline in its common stock to below one dollar per share, and subsequent de-listing from the New York Stock Exchange, we wrote-off our total investment in and loan to SPFC. During 1999 and 1998 equity in the net income of SPFC was $0 and $12.7 million, respectively. 60 De-emphasized/Discontinued/Exited Businesses The Exited Businesses net loss from operations was $1.3 million for 2000 as compared to a net loss of $18.5 million for 1999. The decrease in net loss for 2000 as compared to 1999 primarily resulted from reduced mark-to-market charges, and income from assets purchased in the ICCMIC acquisition, which were acquired on March 28, 2000. The Exited Businesses incurred negative mark- to-market charges of $657,000 in 2000 compared to $28.3 million in 1999. Total expenses at our Exited Businesses decreased to $12.7 million for 2000 as compared to $24.6 million for 1999. The decrease in total expenses was primarily due to the wind-down of non-core businesses. Our non-core loans decreased to $95.1 million at December 31, 2000 as compared to $143.9 million at December 31, 1999. The remaining non-core portfolios primarily consist of lower risk single family mortgage loans. The following table reflects the ending outstanding balances of the loans from our Exited Businesses:
Loans and Leases Outstanding at December 31, ---------------- Exited Business Line 2000 1999 -------------------- ------- -------- (In thousands) Auto Lending Division of SPB................................ $ 2,283 $ 5,991 Consumer Lending Division of SPB............................ 6,366 15,639 Single family loans......................................... 77,686 104,008 Franchise loans............................................. 8,797 18,277 ------- -------- Total loans and leases from exited businesses............. $95,132 $143,915 ======= ========
The above table does not include net outstanding loans from the discontinued operations of AMN which were $2.0 million and $5.2 million at December 31, 2000 and 1999, respectively. During 2000 we sold $7.5 million of consumer loans from our exited business loan portfolio. Our sub-prime auto loan balances were reduced to $2.3 million at December 31, 2000 as compared to $6.0 million at December 31, 1999. At December 31, 2000, the remaining sub-prime auto loans are carried at 32.0% of the outstanding contractual balance. During 1999 we sold 1,887,110 shares of Impac Mortgage Holdings, Inc. ("IMH") stock resulting in a gain of $929,000. At December 31, 1999, we did not own any shares of IMH common stock. FTE at our Exited Businesses decreased to 3 FTE at December 31, 2000 as compared to 5 FTE at December 31, 1999. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 We reported a net loss for the year ended December 31, 1999 of $2.8 million or $0.08 diluted net loss per share as compared to a net loss of $73.6 million or $1.93 diluted net loss per share for the prior year. The loss for 1999 included an extraordinary gain on the early extinguishment of debt of $4.0 million or $0.11 diluted net income per share and operating losses relating to the discontinued operations of AMN of $899,000 or $0.02 diluted net loss per share, respectively. The net loss for the same period last year included operating losses of $3.2 million or $0.08 diluted net loss per share relating to the discontinued operations of AMN and a loss on the disposal of AMN of $11.3 million or $0.30 diluted net loss per share. During 1999, our operating results included the following items: . A gain on sale of Franchise Mortgage Acceptance Company ("FMC") totaling $30.1 million resulting from the sale of our 38.3% interest in FMC. 61 . The write-off of IBC's remaining balance of goodwill totaling $11.3 million. . The write-down of retained interests in lease securitizations at IBC totaling $11.9 million. The write downs for 1999 were primarily the result of increased lease defaults in the last quarter of 1999. . The write-down of auto loans at SPB totaling $24.8 million. An increase in delinquencies and non-accrual loans were the primary cause of the decline in the value of SPB's held for sale auto loan portfolio. . The acceleration of SPB's originated servicing rights amortization of $4.3 million due to SPB's exit from its third party loan servicing operations. Consolidated Net Revenue Our total net revenue increased to $119.1 million for 1999 as compared to $16.2 million for the prior year. The increase in net revenue was primarily due to the sale of our 38.3% equity ownership in FMC for a pre-tax gain of $30.1 million, an increase in investment banking and brokerage fees, and lower impairment and mark-to-market write-downs of loans and securities. These items were partially offset by lower net interest income and an increased provision loan and lease losses. Our total net interest income decreased to $85.8 million for 1999 as compared to $112.7 million for 1998. The decrease in net interest income was primarily due to a decrease in the average yield on earning assets. The decrease in yield primarily relates to the sale and run-off of non-core loans which were $143.9 million at December 31, 1999 as compared to $371.5 million at December 31, 1998. Non-core loans included higher yielding, higher risk loans such as sub-prime auto loans. Additionally, the higher level of non performing loans had a negative impact on net interest income in 1999 as compared to 1998. Interest expense on long term debt increased to $30.5 million for the year ended December 31, 1999 as compared to $30.3 million for the prior year primarily due to the issuance of $30.0 million of Series B Mandatorily Redeemable Cumulative Preferred Stock, partially offset by lower average balances of Senior Notes and ROPES. During the third and fourth quarters of 1999 we repurchased $34.8 million and $8.3 million of Senior Notes and ROPES resulting in an extraordinary net gain of $5.2 million on the early extinguishment of debt. Additionally, we retired the Series B Mandatorily Redeemable Cumulative Preferred Stock in the fourth quarter of 1999 resulting in an extraordinary net loss of $1.2 million on the early extinguishment of debt. Due to the above factors, our net interest margin decreased to 4.52% for 1999 as compared to 5.86% for 1998. Our gain on sale of loans and leases decreased to $6.5 million for the year ended December 31, 1999 as compared to $14.9 million for the same period last year primarily due to lower gains on whole loan sales of multifamily real estate loans originated by IPL. During 1999 we continued our plan to sell loans from our exited and non-core businesses. During 1999, we sold $45.3 million of auto loans, $33.4 million of single family loans, $11.7 million of consumer loans, and the remaining Argentine mortgage loan portfolio of $22.8 million, generating a net gain on sale of $321,000. Asset management fees increased to $10.1 million for 1999 as compared to $7.6 million for 1998. The increase was primarily due to increased average outstanding assets under management at ICCMIC and Pacifica Partners I. Investment banking and brokerage fees increased to $27.2 million for 1999 as compared to $18.5 million for 1998. The increased income from ICG primarily resulted from increased trading gains, partially offset by lower commission revenues. ICG raised total proceeds for their clients through corporate finance transactions of $137.3 million during the year ended December 31, 1999 as compared to $190.0 million during the prior year. Loan servicing income decreased to $6.9 million for 1999 as compared to $12.0 million for 1998 primarily due to our exit from the third party multifamily and commercial mortgage loan servicing businesses. Net mark-to-market losses of loans and securities held for sale were $28.6 million for 1999 as compared to $42.4 million in 1998. The mark-to-market adjustments for 1999 were primarily related to SPB's sub-prime auto loan portfolio and IBC's retained interest on lease securitizations. The mark-to- market losses for 1998 primarily related to our Argentinean residential mortgage, sub prime auto loan, and consumer loan portfolios. 62 Our equity in the net loss of FMC for 1999 was $53,000 as compared to income of $3.2 million for the prior year. We accounted for our equity interest in FMC using the equity method from January 1, 1999 through June 30, 1999. From July 1, 1999 through the sale of FMC's stock we accounted for our equity interest using the cost method. Our equity interest in FMC was sold during the fourth quarter of 1999. See "Item 7. Management's Discussion and Analysis--Equity Interests--Equity Interest and Gain on Sale of FMC." Consolidated Total Expenses Our total expenses increased to $126.6 million for 1999 as compared to $120.8 million for 1998. The increase was primarily related to increased goodwill amortization expense as a result of the write-off of $11.3 million of goodwill at IBC, and increased amortization of loan servicing rights as a result of SPB's exit from third party loan servicing. Our personnel expense decreased to $60.3 million for 1999 as compared to $61.6 million for 1998. During 1999, we reduced our full time equivalent ("FTE") employees by 11.6% to 581 at December 31, 1999 from 657 at December 31, 1998. Our amortization of servicing rights was $4.2 million for 1999 as compared to $1.5 million for 1998. The increase for 1999 as compared to 1998 was primarily due to accelerated amortization of servicing rights on our non-core multifamily and commercial real estate loan servicing operations at SPB due to the release of the servicing rights to a third party in connection with our exit from this non-core business. IBC's unamortized balance of goodwill totaling $11.3 million was written off during the fourth quarter of 1999. The write-off of IBC's goodwill was based on our estimate of future operations and cash flows. Based on our estimate, we determined that IBC's goodwill was not recoverable from continuing IBC's existing lines of business. Our amortization of goodwill was $14.5 million for 1999 as compared to $2.7 million for 1998. Our professional, occupancy, telephone and other communications, and general and administrative expenses decreased to $46.1 million for 1999 as compared to $51.2 million for 1998. The overall decrease was primarily due to the exit from non-core businesses and our related focus on increasing operating efficiencies at our core business operations. We have diversified our business lines to include investment products and asset management services in order to reduce our dependency on commercial lending. We operate as a diversified commercial lending, financial services and investment banking and brokerage holding company. We manage our business by looking at the results of operations from each of our business units. Our core businesses include: . Coast Business Credit ("CBC")--an asset-based lending business; . Imperial Warehouse Finance, Inc. ("IWF")--a residential loan warehouse line business; . Loan Participation and Investment Group ("LPIG")--a division of SPB investing in nationally syndicated bank loans; . The Lewis Horwitz Organization ("LHO")--a film and television production lending business; . Imperial Business Credit, Inc. ("IBC")--an equipment leasing business; . Income Property Lending Division ("IPL")--a multifamily origination and commercial mortgage banking business; . Imperial Capital Group, LLC ("ICG")--an investment banking and brokerage business; . Asset Management Activities ("AMA")--an investment fund management business; . Other Core Operations ("OCO")--our holding company investments and support functions, our loan documentation service operations, and the administrative and servicing operations of Southern Pacific Bank. 63 We also operated some other businesses in 1999 and 1998 that we consider our "non-core" businesses. These are businesses that we have made the decision to de-emphasize during 1999 and 1998. We group these businesses into the following categories: . Equity Interests--Franchise mortgage lending, sub prime residential mortgage banking business; . De-emphasized/Discontinued/Exited Businesses--Consumer lending, auto lending, residential lending, foreign mortgage lending businesses, and third party mortgage servicing operations. Our exit from these non-core businesses has allowed our management to focus on our core business lines that have proven to be our most profitable businesses. Following is a summary of these businesses' results of operations in 1999 as compared to 1998. CORE BUSINESS LINES The following table reflects average loans and leases outstanding and the average yields earned on our core business units for 1999 and 1998:
Average Loans and Leases Average Outstanding Yield ----------------- ------------ Business Line 1999 1998 1999 1998 ------------- -------- -------- ----- ----- (Dollars in thousands) CBC.......................................... $658,764 $592,600 13.17% 13.09% IWF.......................................... 130,075 164,300 8.28 9.94 LPIG......................................... 240,621 240,100 7.55 8.21 LHO.......................................... 6,056 -- 14.77 -- IBC.......................................... 10,700 11,300 12.54 13.60 IPL.......................................... 226,548 96,400 8.85 10.16
Our largest subsidiary is SPB, a $1.8 billion industrial bank, which operates as of January 1, 2000, five of our core businesses: CBC, IPL, LPIG, IWF-formerly known as PrinCap Mortgage Warehouse, Inc., and LHO. The FDIC insured deposits of SPB are the primary source of funding for each of these businesses. Coast Business Credit CBC's net income for 1999 was $9.7 million as compared to $12.4 million for 1998. CBC's net revenues include a provision for loan losses of $21.8 million for 1999 as compared to $3.5 million for 1998. CBC increased its average loans outstanding for 1999 to $658.8 million as compared to $592.6 million for 1998. Fundings of new commitments at CBC were $511.0 million for 1999 as compared to $447.7 million for 1998. As a result of the increase in CBC's average loans outstanding, CBC's net interest income increased $11.4 million to $54.0 million for 1999 from $42.6 million for 1998. The average yield on CBC's loans for 1999 increased to 13.17% as compared to 13.09% for the prior year primarily as a result of an increase in the prime rate and loan prepayment fees. CBC also earned other income primarily consisting of gain on sale of stock acquired through the exercise of warrants and loan administration and audit fees charged to its customers. CBC earned other income totaling $8.2 million in 1999 as compared $3.8 million in 1998. CBC's total expenses were $24.3 million for 1999 as compared to $21.2 million for 1998. Total expenses increased for 1999 as compared to the prior year primarily due to higher occupancy and telephone and other communications expenses associated with CBC's continued geographic expansion into several major metropolitan areas of the United States. These increases in expenses were partially offset by lower administrative expenses resulting from CBC's efforts to increase operating efficiencies. Additionally, personnel expense decreased for 1999 as compared to 1998 due to decreased bonus expense resulting from decreased profitability. CBC's FTE increased to 135 FTE at December 31, 1999 as compared to 122 FTE at December 31, 1998. 64 At December 31, 1999, CBC's non-accrual loans were $22.2 million as compared to $1.1 million at December 31, 1998. At December 31, 1999, one CBC loan totaling $2.7 million was 90 days delinquent and accruing interest as compared to none for the same period last year. As of February 28, 2000 there was no change in the accrual status of this loan, and it was in the process of collection. CBC incurred net charge-offs of non-accrual loans of $17.4 million for 1999 as compared to $67,000 for 1998. Non-performing loans at CBC are collateralized by accounts receivable and inventory. The increase in CBC's non-accrual loans, loan loss provision, and charge-offs resulted from a general decline in the quality of CBC's loan portfolio. Imperial Warehouse Finance, Inc. IWF's net income for 1999 was $1.1 million as compared to $3.2 million for 1998. IWF's net revenues includes a provision for loan losses of $1.2 million for 1999 and $704,000 for 1998. The increased loan loss provision for 1999 is primarily related to the increase in the balance of non-accrual loans. Net interest income was $4.1 million for 1999 as compared to $6.9 million for 1998. The decrease in IWF's net interest income is related to a decrease in the average outstanding balance of loans outstanding and an increase in non-accrual loans. IWF's average loans outstanding and average yields for 1999 decreased to $130.1 million and 8.28% as compared to $164.3 million and 9.94% for 1998. The decrease in IWF's loan yields, were primarily due to an increase in IWF's non-accrual loans. During 1999, we made the decision to relocate the IWF's operations from New Jersey to Torrance, California. As a result of the relocation, none of the employees of IWF made the move from New Jersey to California. We believe that as a result of the personal contacts that IWF's former employees had with the existing client base a substantial number of customers have paid off their warehouse lines with us and moved their relationships to the new employers of our former IWF employees. Additionally, during the fourth quarter of 1999, we implemented stricter underwriting guidelines and changed our marketing focus to the Western United States. We believe these factors are the primary cause of the overall decrease in the average outstanding balance of IWF's warehouse lines. Recently, we retained a new director of marketing which has resulted in an increase in applications for new warehouse lines. IWF earned other income consisting primarily of loan fees charged to its customers of $1.5 million for 1999 as compared to $2.3 million for 1998. IWF's total expenses decreased to $2.6 million for 1999 as compared to $3.0 million for 1998. Total expenses decreased for 1999 as compared to 1998 primarily due to lower personnel, general and administrative, telephone and other communications expenses resulting from our focus on increasing operating efficiencies. IWF's FTE decreased to 12 FTE at December 31, 1999 as compared to 14 FTE at December 31, 1998. At December 31, 1999, IWF's non-accrual loans increased to $7.8 million as compared to $4.1 million at December 31, 1998. We believe that as a result of our new underwriting policies and stricter collection policies, IWF's non- performing assets will increase in the short term. IWF incurred net charge- offs of non-accrual loans of $1.6 million for 1999 and $0 for 1998. IWF's non- performing loans are collateralized by mortgage loans on single family residences. Loan Participation and Investment Group LPIG's net income was $1.2 million for 1999 as compared to $3.8 million for 1998. LPIG's net income decreased in 1999 as compared 1998 as a result of a significant increase in the provision for loan losses during 1999. LPIG's net revenues include a provision for loan losses of $7.0 million for 1999 and a net recovery of $391,000 for 1998. The provision for loan losses increased in 1999 as compared to 1998 as a result of increased charge-offs related to one single loan participation. At December 31, 1999 and 1998, LPIG had no loans classified as non-performing loans. LPIG's net interest income was $8.4 million for 1999 as compared to $8.3 million for 1998. The decrease in LPIG's loan yields to 7.55% for 1999 as compared to 8.21% for 1998 was primarily due to an increase in 65 LPIG's average outstanding non-accrual loans. LPIG's average outstanding loans for 1999 and 1998 were approximately $240 million. For 1999 LPIG earned other income, which consisted primarily of loan fees and mark-to-market losses on securities of $2.0 million as compared to $166,000 for 1998. The decrease in loan fees resulted from reduced funding of new LPIG loan commitments. LPIG's total expenses were $1.4 million for 1999 as compared to $2.3 million for 1998. Total expenses decreased for 1999 as compared to 1998 primarily due to lower personnel, commission, telephone and other communications, and lower general and administrative expenses relating to our focus on increasing operating efficiencies. LPIG had 4 FTE at December 31, 1999 and December 31, 1998. We are not originating any new commitments for LPIG at this time since we believe that the capital that is currently being deployed at SPB to support LPIG's business could be more profitably used in CBC's, IWF's, IPL's and LHO's businesses. As such, we anticipate that the current outstanding balance of LPIG's loans will decrease over time as this portfolio runs-off. We do expect to expand our investments in LPIG-type loan products through off-balance sheet financing instruments such as total rate of return swaps. The Lewis Horwitz Organization On October 1, 1999, we purchased from Imperial Bank substantially all of the assets and assumed certain liabilities of The Lewis Horwitz Organization ("LHO"). The acquisition was accounted for as a purchase, and the purchase price of $7.0 million was allocated to the net assets acquired based on their fair values resulting in goodwill of $12.0 million. As part of the acquisition, we acquired all right, title and interest in $98.2 million of motion picture and television production loans. The purchase price of the loans is equal to the gross carrying value of the loans on the books and records of Imperial Bank, except the purchase price of the first $20 million in non-accrual loans were allocated a discount of $3.6 million. Under the terms of the acquisition, we receive all contractually due interest and fees on the $98.2 million of LHO originated loans and pay Imperial Bank Prime minus 2.50%. We have agreed to immediately purchase all loans that either are currently or become classified as non-accrual, when an interest or principal payment is 90 days or more past due. Imperial Bank has agreed to finance 50% of all non-accrual purchases at the Prime rate + 1.00%. As of December 31, 1999, we acquired non-accrual loans with a fair market value of $8.2 million. We have also agreed to purchase a minimum of $50 million of the above referenced loans, inclusive of all non-accrual loans purchased, on or before March 31, 2000. Additionally, we have agreed to purchase any remaining above referenced loans on or before December 31, 2000. We also acquired other assets totaling $362,000 and assumed liabilities of $1.2 million in connection with the acquisition. LHO was acquired by our company in October of 1999 and did not have any comparable net revenues, net income, or expenses in 1998. LHO's net income for 1999 was $4,000. LHO's net revenues include a provision for loan losses of $351,000. LHO's net income for 1999 are for the period from the date of acquisition (October 1, 1999) through December 31, 1999. Since October 1, 1999, LHO has originated $23.2 million of new film and television production commitments. LHO's average loans outstanding for 1999 were $6.1 million. From October 1, 1999 to December 31, 1999, LHO reported net interest income of $992,000. The average yield on LHO's loans from October 1, 1999 to December 31, 1999 was 14.77%. LHO also earned other income primarily consisting of loan fees totaling $127,000 for the period from October 1, 1999 to December 31, 1999. 66 LHO's total expenses were $761,000 from October 1, 1999 to December 31, 1999. LHO had 12 FTE at December 31, 1999. At December 31, 1999, LHO's non-accrual loans were $246,000. LHO did not incur any charge-offs of non-accrual loans from October 1, 1999 to December 31, 1999. Non-performing loans at LHO are collateralized by the distribution rights of the film or television production. All of LHO's non-accrual loans were acquired from Imperial Bank under the terms of the LHO purchase agreement. Imperial Business Credit, Inc. IBC's net loss increased to $13.3 million in 1999 as compared to a net loss of $960,000 for 1998. IBC's net loss increased for 1999 as compared to 1998 primarily due to the write-off of the remaining unamortized balance of goodwill and larger negative mark-to-market adjustments on retained interests in lease securitizations. IBC's unamortized balance of goodwill totaling $11.3 million was written off during the fourth quarter of 1999. The write-off of IBC's goodwill was based on our estimate of future operations and cash flows. Based on our estimate, we determined that IBC's goodwill was not recoverable from continuing IBC's existing lines of business. During the quarter ended December 31, 1999, defaults on leases originated through IBC's broker and small-ticket lease programs increased significantly. The increase in defaults caused us to reassess and increase the projected level of lease losses related to IBC's securitized leases. The reassessment resulted in a $11.9 million write-down of the carrying balance of retained interest in lease securitizations at IBC for 1999 as compared to a $2.3 million write-down for 1998. As a result of the reassessment of the level of expected losses from IBC's small ticket and broker originated business, we decided to significantly curtail IBC's lease originations from brokers. We closed IBC's broker business in its San Diego and Irvine offices, and discontinued relationships with over 200 brokers in IBC's Denver office. We intend to heavily weight IBC's future lease originations to middle market leasing and vendor leasing programs. IBC originated $125.2 million of leases for 1999, as compared to $114.3 million for 1998. IBC securitized $132.4 million of leases for 1999 generating gain on sale revenue of $4.5 million, or 3.4% of the principal balance securitized. For 1998, IBC securitized leases of $117.7 million, generating gain on sale revenue of $4.1 million, or 3.5% of the principal balance securitized. As a result of curtailing certain small ticket and broker business and increased loss assumptions in securitized leases, IBC expects lower originations and revenue in the near term. Currently, all of IBC's leases are initially funded with a warehouse line of credit from SPB, and then permanently funded through a revolving securitization facility. IBC's net interest income decreased to $1.1 million for 1999 as compared to $3.6 million for 1998 primarily due to an increase in borrowing costs and a decrease in the average balance and yield on outstanding leases held for sale. IBC also earned other income from servicing leases sold into its securitization facility of $4.5 million for 1999 as compared to $4.7 million for 1998. IBC earned other income of $1.5 million for 1999 as compared to $972,000 for 1998. IBC's total expenses were $22.2 million for 1999 as compared to $11.3 million for 1998. Total expenses increased for 1999 as compared to 1998 primarily due to the $11.3 million write-down of goodwill. IBC's FTE decreased to 94 FTE at December 31, 1999 compared to 99 FTE at December 31, 1998. At December 31, 1999, IBC's non-accruing leases were $77,000 as compared to $669,000 at December 31, 1998. Income Property Lending Division IPL's net income decreased to $2.0 million for 1999 as compared to net income of $3.3 million for 1998. The decrease in net income for 1999 as compared to the prior year primarily resulted from lower gain on sale of 67 loans partially offset by increased interest income earned on higher average outstanding balances of income property loans. IPL originated $339.7 million of loans in 1999 as compared to $366.1 million of loans in 1998. During 1999, IPL sold $283.7 million of its loans generating a gain on sale of $2.0 million, or 0.7% of the principal balance of loans sold. During 1998, IPL sold $304.2 million of its loans, generating a gain on sale of $8.8 million, or 2.9% of the principal balance of loans sold. Gain on sale of loan revenues as a percentage of IPL's loans sold decreased for 1999 as compared to 1998 due to decreased interest margins and a decrease in demand for small balance income property loans in the secondary market. IPL's net interest income for 1999 increased to $9.2 million as compared to $6.7 million for 1998. The increase was primarily the result of an increased average balance of outstanding loans. IPL's average outstanding loan balance increased to $226.5 million for 1999 as compared to $96.4 million for 1998. The increase was primarily the result of our strategy to retain for portfolio a higher level of multifamily real estate loans originated by IPL. The decrease in IPL's average loan yields to 8.85% in 1999 as compared to 10.16% in 1998, was primarily due to increased competition and reduced interest margins among income property loan originators. IPL's total expenses were $8.7 million for 1999 as compared to $11.7 million for 1998. Total expenses decreased for 1999 as compared to 1998 primarily due to lower personnel, telephone and other communications, and lower general and administrative expenses relating to our focus on increasing operating efficiencies partially offset by higher professional fees. FTE decreased to 69 FTE at December 31, 1999 compared to 70 FTE at December 31, 1998. IPL's non-accrual loans were $237,000 or 0.09% of its outstanding loan portfolio at December 31, 1999, as compared to $992,000 or 0.68% of its outstanding loan portfolio at December 31, 1998. Imperial Capital Group, LLC ICG's pre-tax income increased to $2.5 million for 1999 as compared to a pre-tax loss of $3.9 million for 1998. ICG's net revenue primarily consists of investment banking and brokerage fees. The increase in pre-tax income for 1999 primarily resulted from increased trading gains and fees received for successful corporate finance transactions completed by ICG through private placements and a lower level of negative mark to market adjustments on trading securities. ICG raised total debt and equity proceeds of $137.3 million in 1999 and $190.0 million in 1998 for its corporate clients through private placement offerings. ICG's total expenses were $24.2 million for 1999 as compared to $22.3 million for 1998. Total expenses increased for 1999 as compared to 1998 primarily due to higher personnel, commission, telephone and other communications, and general and administrative expenses resulting from higher revenues received. ICG's FTE decreased to 79 FTE at December 31, 1999 compared to 93 FTE at December 31, 1998. Asset Management Activities AMA's net income (loss) were ($3,000) for 1999 as compared to $1.8 million for 1998. The average balance of assets under management increased to $1.3 billion for 1999 as compared to $1.1 billion for 1998. Through October 22, 1999, we managed a commercial mortgage and equity REIT (See--"Liquidity and Capital Resources--The ICCMIC Acquisition"), and for all of 1999, we managed a collateralized loan obligation fund, and two leveraged bank debt hedge funds. Total expenses from AMA activities were $9.8 million for 1999 as compared to $3.8 million for 1998. Total expenses increased for the period as compared to the same period last year due to increased management activities as a result of growth in the balance of assets under management in 1999 as compared to 1998. Total AMA FTE decreased to 13 FTE at December 31, 1999 compared to 20 FTE at December 31, 1998. 68 Other Core Operations For 1999, the net loss of OCO was $962,000, as compared to a net loss of $31.4 million for 1998. The net loss for 1999 includes a $4.0 million net gain from the early extinguishment of debt. The significant negative net revenues and net income for 1998 were primarily the result of impairment and mark-to- market charges relating to our investments in ICCMIC and IMH, and loan and leases held for sale. OCO includes but is not limited to interest and dividend income from parent company loans, equity investments, interest expense on our long-term debt, mark-to-market charges on the securities we invested in at our holding company, and the costs of our support functions. We provide support to our subsidiaries through executive management oversight and advice, accounting, audit, operations, legal services, merger and acquisitions advice, human resources administration, insurance programs, office services, premises administration, and management information systems support. For 1999 and 1998, OCO earned interest and dividend income of $20.0 million and $30.1 million and incurred interest expense of $30.8 million and $30.4 million, respectively. During 1999 the net revenues of other core operations includes a gain on sale of securities totaling $562,000 from the sale of 500,000 shares of ICCMIC common stock. At December 31, 1999, we owned 9.0% of ICCMIC's outstanding common stock and 100% of the company that managed ICCMIC's assets through October 22, 1999. (See--"Liquidity and Capital Resources--The ICCMIC Acquisition"). Total expenses of OCO were $10.8 million for 1999 as compared to $12.5 million for the prior year. Total expenses of OCO for 1998 included a provision for loan repurchases on former mortgage banking operations of $4.8 million; no such provision was needed in 1999. In addition, total expenses decreased for 1999 as compared to 1998 primarily due to lower personnel, telephone and other communications, and lower general and administrative expenses relating to reductions in personnel expense, partially offset by higher professional fees. OCO's FTE decreased to 53 FTE at December 31, 1999 as compared to 71 FTE at December 31, 1998. NON CORE BUSINESS LINES We also operate "non-core" businesses, which consist of businesses that we've decided to de-emphasize. We group these businesses into the following categories: . Equity Interests--Represents our equity investments in other publicly traded companies. Effective July 1, 1999, we began accounting for our equity investment in FMC under the cost method of accounting. Prior to July 1, 1999, we accounted for our investment in FMC under the equity method of accounting. From January 1, through October 31, 1999, we owned an equity interest of 38.3% in FMC. We changed our method of accounting for FMC since we determined that we did not have the ability to exercise significant influence over FMC, and the quarterly results of FMC were not made available to our company. In November 1999 we sold substantially all of our shares of the Bay View Capital Corporation ("Bay View") common stock we received in the FMC/Bay View merger resulting in a gain of approximately $30.1 million. This segment's source of revenue includes our common stock ownership percentage in the equity interests' reported net income or loss in addition to our gains on sales of the equity interests' stock; . De-emphasized/Discontinued/Exited Businesses--represents our business units we decided to either de-emphasize, discontinue, or exit. We decided to de-emphasize, discontinue or exit these business lines because they were not meeting our expectations for a variety of reasons. These reasons included: significant credit losses, insufficient loan production volumes, inadequate gross profit margins, and risks associated with international lending operations. We include the following significant operations in Exited Businesses: Auto Lending, Alternative Residential Mortgage, and Consumer Loan Divisions of SPB, and Credito Imperial Argentina ("CIA"), our residential loan production business in Argentina. Exited Businesses also includes our former mortgage banking operations, certain problem loan or securities portfolios, SPB's income property servicing operations, and any loan portfolios at SPB from businesses which are no longer originating new loans. Exited Businesses' principal sources of net revenue are interest earned on mortgage and consumer loans and mark to market valuations on loan portfolios. Exited Businesses' principal expenses are interest expense allocations incurred from deposits and inter-company borrowings, and general and administrative expenses. 69 Our exit from these non-core businesses will allow our management to focus on our core business lines that have proven to be our most profitable businesses. Equity Interests In 1999, our Equity Interests included our percentage ownership of the net income of FMC, as compared to 1998, which included FMC and Southern Pacific Funding Corporation ("SPFC"). For 1999, our Equity Interests generated net income of $18.5 million as compared to a net loss of ($38.2) million for 1998. The significant net loss for 1998 was primarily the result of impairment charges on our equity investment in SPFC. Equity Interest and Gain on sale of FMC During 1999 and 1998, equity in the net (loss) income of FMC was $(53,000) and $3.2 million, respectively. On November 1, 1999, the merger between FMC and Bay View was completed. We received $27.7 million in cash and 4.4 million shares of Bay View common stock from the sale and exchange of our 38.3% interest in FMC. On November 5, 1999, we announced the sale of 4,342,451 shares of the Bay View common stock we received from the FMC/Bay View merger. As a result of these transactions, we received approximately $86.3 million in total cash proceeds and we recorded a pre-tax gain from both transactions of $30.1 million. Equity Interest in SPFC On October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection under Federal bankruptcy laws in the U.S. Bankruptcy Court for the District of Oregon. As a result of SPFC declaring Chapter 11 bankruptcy and the corresponding decline in its common stock to below one dollar per share, and subsequent de-listing from the New York Stock Exchange, we wrote-off our total investment in and loan to SPFC. During 1999 and 1998 equity in the net income of SPFC was $0 and $12.7 million, respectively. De-emphasized/Discontinued/Exited Businesses The Exited Businesses' loss from operations was $18.5 million for 1999 as compared to $11.8 million for 1998. The Exited Businesses net revenue decreased for 1999 as compared to 1998 primarily as a result of a decline in net interest income, partially offset by a lower provision for loan losses. The Exited Businesses incurred negative mark-to-market charges of $28.3 million in 1999 and $31.6 million in 1998. Total expenses at our Exited Businesses decreased to $21.6 million for 1999 as compared to $32.8 million for 1998. The decrease in total expenses was primarily due to the closure of non-core businesses. Our non-core loans decreased to $143.9 million at December 31, 1999 as compared to $371.5 million at December 31, 1998. The remaining non-core portfolios primarily consist of lower risk single family mortgage loans of $104.0 million, franchise loans of $18.3 million, and consumer loans of $15.6 million. The following table reflects the ending outstanding balances of the loans from our Exited Businesses:
Loans and Leases Outstanding at December 31, ----------------- Exited Business Line 1999 1998 -------------------- -------- -------- (In thousands) Auto Lending Division of SPB............................... $ 5,991 $ 94,225 Alternative Residential Mortgage Division of SPB .......... 6,884 34,280 Consumer Lending Division of SPB........................... 15,639 42,565 Credito Imperial Argentina................................. -- 22,772 Single family loans........................................ 97,124 127,125 Franchise loans............................................ 18,277 50,520 -------- -------- Total loans and leases from exited businesses............ $143,915 $371,487 ======== ========
70 The above table does not include net outstanding loans from the discontinued operations of AMN which were $5.2 million and $15.2 million at December 31, 1999 and 1998, respectively. During 1999 we continued to sell loans from our exited businesses. We sold $45.3 million of auto loans, $33.4 million of single family loans, $11.7 million of consumer loans, and the remaining Argentine mortgage loan portfolio of $22.4 million, generating an aggregate net gain on sale of $321,000. Additionally, we reduced our sub-prime auto loan balances to $6.0 million at December 31, 1999 as compared to $94.2 million at December 31, 1998. At December 31, 1999, the remaining sub-prime auto loans are carried at 32.0% of the outstanding contractual balance. During 1999 we sold 1,887,110 shares of Impac Mortgage Holdings, Inc. ("IMH") stock resulting in a gain of $929,000. At December 31, 1999, we did not own any shares of IMH common stock. FTE at our Exited Businesses decreased to 5 FTE at December 31, 1999 as compared to 100 FTE at December 31, 1998. Liquidity and Capital Resources General We generate liquidity at our holding company from a variety of sources, including interest income from loans and investments, income tax payments received from our subsidiaries, dividends from subsidiary earnings, and sales of non-core assets and investments. An industrial bank such as SPB may declare dividends only in accordance with California Law and FDIC regulations, which impose legal limitations on the payment of dividends. Under the Regulatory Orders, the Bank is prohibited from paying cash dividends on its Common Stock without the prior approval of the DFI and the FDIC. Because cash dividends reduce the regulatory capital of the Bank, and because of the restrictions contained in the Regulatory Orders, it is unlikely that the Bank will pay cash dividends to us on our Common Stock in the near future and there is no assurance that the Bank will ever resume paying cash dividends to us. The continued prohibition against the Bank paying to us, unless approved in advance by the DFI and FDIC, cash dividends would adversely affect our ability to make required payments of interest and principal on our indebtedness. Our ability to make scheduled payments of the principal of, or to pay the interest on, our indebtedness will depend upon the ability of the Bank to obtain regulatory approvals necessary to permit it to pay us dividends on our Bank Common Stock and Bank Preferred Stock, as well as upon on our future performance and that of the Bank which, to a substantial extent, are subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. The ability of the Bank to comply with the Regulatory Orders also will impact its operations. Management believes that, based on current levels of operations, cash flows from operations and available borrowings, and assuming that the Bank is able to obtain the necessary regulatory approvals to pay us dividends, we will be able to fund our liquidity and capital expenditure requirements for the foreseeable future, including scheduled payments of interest and principal on our indebtedness. Our holding company's primary cash requirements include income tax payments and interest payments on outstanding debt obligations. We also use available cash to make loans to our operating companies and investments in subsidiaries. At December 31, 2000 we held $15.9 million of cash and interest bearing deposits at our holding company as compared to $46.2 million of cash and interest bearing deposits at December 31, 1999. The current amount of cash and interest bearing deposits held at our parent company is significantly less than the $219.6 million of outstanding Senior Notes and ROPES at December 31, 2000. The ability of our parent company to repay these obligations in accordance with their stated maturities is dependent on the cash flows generated by our parent company and other guarantor subsidiaries, in addition to future dividend payments from SPB to our parent company. SPB is unable to pay dividends at the present time. We have entered into agreements with the majority holders of our Senior Notes and ROPES to exchange these securities for new notes under a master recapitalization plan. See Item 7. "Management's Discussion and Analysis-- Recapitalization Transaction," for more information about the terms of the exchange offer. The completion of the master recapitalization is expected to improve our ability to service future debt obligations along with improving the 71 capital levels of SPB. The decrease in cash since December 31, 1999 was primarily attributed to investments in SPB, debt repurchases, common stock repurchases and interest payments on long term debt. On March 30, 2001, ICII exchanged $22.0 million of SPB's subordinated debt and contributed $14.0 million in cash in exchange for 36,000 shares of SPB's Series B noncumulative perpetual preferred and also made a common equity contribution of $7.2 million in cash to the Bank. Although such capital contributions resulted in the Bank's capital ratios being above that required by statute to be considered "adequately capitalized", the Bank does not meet the capital ratio targets specified by the Orders. An additional approximately $38 million would have had to be contributed to cause the Bank to meet the capital ratio targets specified by the Orders at March 31, 2001. We have an ongoing need for capital to finance our lending activities. This need is expected to increase as the volume of our loan and lease originations and acquisitions increases. Our primary cash requirements include the funding of (i) loan and lease originations and acquisitions, (ii) points and expenses paid in connection with the acquisition of wholesale loans, (iii) ongoing administrative and other operating expenses, (iv) the costs of our warehouse credit and repurchase facilities with certain financial institutions, and (v) over collateralization reserve account requirements and servicing advances in connection with loans and leases pooled and sold. We have historically financed our lending activities through warehouse lines of credit and repurchase facilities with financial institutions, equity and debt offerings in the capital markets, deposits or borrowings at SPB and securitizations. As a result of our company's recent financial performance, and based on guidance from Moody's and Standard and Poor's ratings services, we do not believe that the capital markets are currently efficient sources of funding capital. As such, we believe that our current sources of liquidity are limited to the deposits of SPB and FHLB advances to SPB. There can be no assurance that we will regain efficient access to the capital markets in the future or that financing will be available to satisfy our operating and debt service requirements or to fund our future growth. SPB obtains the liquidity necessary to fund its investing activities through FDIC insured deposits and, if necessary, through borrowings under lines of credit and from the FHLB. At December 31, 2000 and 1999, SPB had maximum FHLB borrowings available equal to $72.2 million and $35.7 million, respectively. These borrowings must be fully collateralized by qualifying mortgage loans and may be in the form of overnight funds or term borrowings at SPB's option. The highest balance of FHLB advances outstanding during the year ended December 31, 2000 was $65.0 million, with an average outstanding balance of $23.3 million. The outstanding balance of FHLB advances was $65.0 million at December 31, 2000. The FHLB advances are secured by certain real estate loans with a carrying value of $172.9 million and $56.5 million at December 31, 2000 and 1999, respectively. SPB's deposit portfolio, which consists primarily of certificate accounts remained relatively unchanged at $1.6 billion at December 31, 2000 and at December 31, 1999. SPB has been able to acquire new deposits through its local marketing strategies as well as domestic money markets. Under its regulatory orders, SPB may raise brokered deposits of no more than $92.3 million so long as SPB remains "Adequately Capitalized" as defined by banking regulations. As of December 31, 2000, SPB's outstanding balance of brokered deposits was $50.0 million. SPB maintains liquidity in the form of cash and interest-bearing deposits with financial institutions. SPB tracks on a daily basis all new loan applications by office and, based on historical closing statistics, estimates expected fundings. Cash management systems at SPB allow SPB to anticipate both funding and sales and adjust deposit levels and short-term investments against the demands of SPB's lending activities. In addition to warehouse lines of credit and SPB borrowings, we have also accessed the capital markets to fund our operations. 72 2000 Activity Our operating activities used cash of $32.3 million in 2000. The majority of this cash was used for the origination and acquisition of loans held for sale, net of sales and collections. We generated $23.4 million and $10.8 million from the sale and collections of real property and trading securities, respectively, at ICCMIC. Other operating cash was generated by the interest income from our loan and investment portfolios after paying interest expense on our deposits, borrowings, and long term debt. Our investing activities provided $21.7 million of cash in 2000. The most significant source of cash from our investing activities was a net redemption of $65.4 million of short-term interest bearing deposits. We received net cash proceeds of $11.5 million from the ICCMIC acquisition in March 2000. We also received proceeds of $21.6 million from the sale of AFG in June 2000 from the sale of our investment in preferred and common stock of AFG. Additionally, we used $16.6 million for net purchases of securities available for sale. Originations of loans held for investment, net of collections, resulted in net cash used of $64.8 million. Our financing activities provided $7.6 million of cash in 2000. We raised a net $17.9 million in deposits at SPB. During 2000, SPB borrowed $95.0 million from the FHLB and repaid $30.0 million in advances. We reduced other borrowings by $50.8 million. We used $4.1 million in cash to repurchase 1.1 million shares of our outstanding common stock for an average price of $3.62 under a share repurchase program approved in April 2000. Additionally, we also used $21.6 million of cash through financing activities to repurchase $27.3 million of our long term debt. The repurchase generated an extraordinary gain on the early extinguishment of debt of $3.5 million, net of income taxes. 1999 Activity Our operating activities produced cash of $151.6 million in 1999. The majority of this cash was generated by the interest income from our loan and investment portfolios after paying interest expense on our deposits, borrowings, and long term debt. Our investing activities used $202.9 million of cash in 1999. The most significant use of cash in our investing activities was a $246.8 million investment of available liquidity into short term interest bearing deposits. At December 31, 1999 our interest bearing deposits totaled $248.2 million. We also used cash to make net purchases of $21.9 million of securities available for sale. The most significant item of cash generation in our investing activities was from the proceeds we received on sales of stock we held in other publicly traded companies. In 1999, we received total proceeds from these sales of $100.6 million. These proceeds were primarily generated from the sales of our holdings in FMC and IMH. In 1999, we received cash and 4.4 million shares of Bay View common stock from the sale and exchange of our 38.3% interest in FMC. On November 5, 1999, we announced the sale of the Bay View common stock we received from the FMC/Bay View merger. As a result of these transactions, we received approximately $86.3 million in total cash proceeds. Also in 1999, we sold 1.9 million shares of our common stock investment in IMH generating net proceeds of $10.4 million. Additionally, in the second quarter of 1999, we sold 500,000 shares of common stock investment in ICCMIC, generating net proceeds of $5.4 million. Our financing activities used $212.6 million of cash in 1999. We used $99.5 million to repay deposits at SPB, $20.0 million to repay borrowings by SPB from the FHLB, and $28.0 million to repay other borrowings. On May 14, 1999, we entered into an agreement with our former parent Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP) to repurchase 10% or 3.7 million shares of our outstanding common stock for $8.00 per share for a total use of cash of $29.5 million. The repurchase from Imperial Bank was financed through the private issuance of $30.0 million of Series B 11.50% Mandatorily Redeemable Cumulative Preferred Stock to a group of independent investors. In November 1999, we repurchased and retired the $30.0 million of the Mandatorily Redeemable Cumulative Preferred Stock. The issuance and subsequent repurchase and retirement used a net $1.4 million of cash during 1999. We also used $34.1 million of cash through our financing activities to repurchase $43.1 million of our long term debt. The repurchase generated an extraordinary gain on the early extinguishment of debt of $4.0 million, net of income taxes. 73 1998 Activity Our operating activities used $37.1 million of cash in 1998. The majority of this cash was used in the operations of our discontinued businesses. Our investing activities used $175.0 million of cash in 1998. The most significant use of cash in our investing activities was a $276.6 million net investment in loans held for investment. The most dramatic increase in loans occurred in the portfolio of asset-based and cash stream loans generated by CBC, which increased $148.5 million in 1998. The most significant source of cash from our investing activities was the liquidation of interest bearing deposits of $102.3 million. Our financing activities generated $464.5 million of cash in 1998. The most significant source of cash from financing activities was the receipt of $555.3 million in increased net deposits at SPB. Our financing activities used $25.0 million to repay net borrowings from the FHLB and $42.6 million to repay other borrowings. Through our financing activities, we also repurchased 2.5 million shares of our outstanding common stock for $9.78 per share for a total use of cash of $24.3 million. Imperial Business Credit, Inc. Prior to ceasing lease originations, IBC primarily funded its lease originations through a permanent revolving securitization facility. The securitization facility utilizes a trust structure and has a five-year revolving period, which expires in November 2002, and a three and one-half year amortization period. The IBC Lease Receivables Trust 1997-2 ("1997-2 Trust") was created pursuant to a pooling and servicing agreement among IBC, as originator, IBC Funding Corp. ("IFC"), IBC's wholly-owned special purpose subsidiary, as seller, and Norwest Bank Minnesota, as trustee and back-up servicer. IBC sells its lease originations to IFC under a sale and contribution agreement ("IBC Agreement"), which simultaneously assigns its rights in the leases to the Trust in exchange for trust certificates. The Class A certificates are sold to Triple-A One Funding Corp., a special purpose corporation administered by Capital Markets Assurance Corporation ("CAPMAC"), which issues commercial paper to fund its acquisitions. As of December 31, 2000 and 1999, there was approximately $141.1 million and $218.6 million, respectively, of Class A Certificates outstanding. As a result of our recent credit downgrades by Moody's and Standard and Poor's ratings services, IBC is in technical default of the terms of the 1997- 2 Trust. As such, the insurer of the Class A certificates may cause the 1997-2 Trust to go into "Turbo" amortization. Under Turbo amortization, virtually all cash flows generated in the 1997-2 Trust would be used to pay down the outstanding balance of the Class A certificates, while the Class B and C Certificates, a majority of which are owned by IBC, would receive virtually no cash flows for principal and interest payments until the Class A Certificates are paid off in full. IBC received a waiver of this technical default in March 2001. The waiver is renewable monthly by the insurer, at its option. There can be no assurance given that the insurer will continue to grant the monthly waiver to IBC. If the waiver were not to be granted, IBC's monthly cash flow would decrease by approximately $1.0 million per month, and cash flow to our parent company would decrease by approximately $500,000 per month. IFC assigned all receivables acquired pursuant to the IBC Agreement to the 1997-2 Trust. The transactions were accounted for as sales for reporting purposes under generally accepted accounting principles ("GAAP") and as financings for tax purposes. IFC assigned all its rights, title and interest in the leases, together with a security interest in the underlying leased equipment, which ownership and security interests have been perfected under the Uniform Commercial Code. Payments of the purchase price are made directly from payments by lessees on the lease receivables. Multifamily and Commercial Mortgage Lending During the years ended December 31, 2000 and 1999, SPB did not securitize IPL multifamily and commercial mortgage loans. However, during the years ended December 31, 2000 and 1999, IPL sold for cash $141.7 million and $283.7 million of loans, respectively. 74 The ICCMIC Acquisition On March 28, 2000, we completed the acquisition of ICCMIC. We paid ICCMIC's stockholders (other than the 2,570,000 owned by ICII) approximately $11.57 per share in cash. The total purchase price paid by the company was approximately $300.1 million. The Company's basis in shares of ICCMIC common stock owned prior to the merger was $25.1 million. The total cost basis of $325.2 million, combined with other estimated costs of the acquisition of $19.7 million bring the total purchase price to $344.9 million. In addition to the costs of acquisition, the Company incurred total severance and incentive costs of $9.4 million. The merger was accounted for as a purchase and resulted in the generation of negative goodwill of $29.2 million. The negative goodwill generated by the acquisition is not subject to income taxes and increased the Company's tangible book value by $0.74 per share at December 31, 2000. The company is accreting the negative goodwill into income over five years, which is expected to result in annual net income of approximately $5.6 million, or $0.18 per share. At December 31, 1999 ICCMIC had total assets of $664.9 million, and total liabilities of $269.3 million. Inflation The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, nearly all of the assets and liabilities of our company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Inflation affects the Company primarily through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Asset Quality The provision for loan and lease losses for 2000 increased to $181.0 million as compared to $35.3 million for 1999 and $15.5 million for 1998. The increase in 2000 was primarily due to increased non-accrual loans and net charge-offs. Net charge-offs increased to $149.7 million for 2000 as compared to $30.2 million for 1999 and $17.5 million for 1998. The increase in charge- offs in 2000 primarily resulted from higher net charge-offs at CBC, LPIG and IWF. Net charge-offs at CBC were $88.9 million for 2000 as compared to $17.4 million for 1999 and $67,000 for 1998. Net charge-offs at LPIG were $32.2 million in 2000 compared to $3.9 million in 1999. LPIG did not have any net charge-offs in 1998. Total non-accrual loans increased to $78.5 million at December 31, 2000, as compared to $51.3 million at December 31, 1999 and $39.5 million at December 31, 1998. Total non-accrual loans as a percentage of loans and leases held for investment were 4.32% at December 31, 2000 as compared to 4.73% at December 31, 1999 and 2.92% at December 31, 1998. The increase in CBC's non-accrual loans and charge-offs at December 31, 2000 as compared to December 31, 1999 were the result of prior management's asset workout strategy which resulted in lending additional funds to problem borrowers in an attempt to rehabilitate the borrower. This strategy resulted in significant unsecured overadvances to CBC's borrowers. Additionally, CBC's customers have been negatively impacted by the economic slowdown in the technology and telecommunications industries. 75 The following table summarizes certain information regarding our allowance for loan and lease losses, charge-off activity by division and losses on OREO:
Years Ended December 31, ------------------------------------------------ 2000 1999 1998 1997 1996 --------- -------- -------- -------- ------- (In thousands) Beginning balance as of January 1,.................. $ 31,841 $ 24,880 $ 26,954 $ 19,999 $13,729 Provision for loan and lease losses...................... 180,975 35,340 15,450 20,975 9,773 Business acquisition and bulk loan purchases.............. 534 1,846 -- 578 4,500 Sale of leases............... -- -- -- (900) -- Deconsolidation of ICIFC..... -- -- -- (687) -- --------- -------- -------- -------- ------- 213,350 62,066 42,404 39,965 28,002 --------- -------- -------- -------- ------- Loans and Leases charged off--Core Business Lines: Multifamily and commercial loans....................... (353) (857) (918) (3,021) (1,560) Asset-based and cash stream loans....................... (89,732) (17,530) (112) (295) -- Loan Participations.......... (32,267) (3,882) -- -- -- Mortgage warehouse lines..... (17,050) (1,625) -- -- -- Entertainment loans.......... (1,939) -- -- -- -- Commercial and industrial loans....................... (810) -- -- -- -- Leases....................... (399) (2,217) (1,496) (4,860) (3,318) Autolend..................... (950) -- -- -- -- --------- -------- -------- -------- ------- (143,500) (26,111) (2,526) (8,176) (4,878) --------- -------- -------- -------- ------- Loans charged off--Non-Core Business: Franchise loans.............. (3,106) -- -- -- -- Single family residential.... (5,560) (2,960) (4,661) (2,164) (2,485) Consumer loans............... (580) (2,611) (15,487) (3,933) (963) --------- -------- -------- -------- ------- (9,246) (5,571) (20,148) (6,097) (3,448) --------- -------- -------- -------- ------- Total Charge-offs............ (152,746) (31,682) (22,674) (14,273) (8,326) --------- -------- -------- -------- ------- Recoveries on loans and leases previously charged off --Core Business: Multifamily and commercial loans....................... 115 55 142 29 -- Asset-based and cash stream loans....................... 831 163 45 -- -- Loan participations.......... 16 -- -- -- -- Mortgage warehouse lines..... 639 -- -- -- -- Leases....................... 222 1,086 1,721 900 176 --------- -------- -------- -------- ------- 1,823 1,304 1,908 929 176 --------- -------- -------- -------- ------- Net charge-offs--Core Business Lines.............. (141,677) (24,807) (618) (7,247) (4,702) --------- -------- -------- -------- ------- Recoveries on loans previously charged off--Non- Core Business: Franchise loans.............. 35 -- -- -- -- Single family residential.... 98 3 2,401 30 -- Consumer..................... 1,065 150 841 303 147 --------- -------- -------- -------- ------- 1,198 153 3,242 333 147 --------- -------- -------- -------- ------- Total recoveries............. 3,021 1,457 5,150 1,262 323 --------- -------- -------- -------- ------- Net charge-offs--Non-core business lines.............. (8,048) (5,418) (16,906) (5,764) (3,301) --------- -------- -------- -------- ------- Total net-charge-offs........ (149,725) (30,225) (17,524) (13,011) (8,003) --------- -------- -------- -------- ------- Balance as of December 31, .. 63,625 31,841 24,880 26,954 19,999 Loan loss allowance at AMN as of December 31,............. -- 30 857 11,093 -- --------- -------- -------- -------- ------- Total loan loss allowance.... $ 63,625 $ 31,871 $ 25,737 $ 38,047 $19,999 ========= ======== ======== ======== ======= OREO losses: OREO writedowns (recovery) and expenses.............. $ 771 $ 617 $ (1,498) $ 2,074 $ 4,171 Loss on sale of OREO....... 615 769 597 4,453 2,843 --------- -------- -------- -------- ------- Total OREO losses (gains).................. $ 1,386 $ 1,386 $ (901) $ 6,527 $ 7,014 ========= ======== ======== ======== =======
The percentage of the allowance for loan and lease losses to non-accrual loans will not remain constant due to the changing nature of our portfolio. We analyze the collateral for each non-performing loan to determine potential loss exposure, and in conjunction with other factors, this loss exposure contributes to the overall 76 assessment of the adequacy of the allowance for loan and lease losses. On an ongoing basis, we monitor the loan and lease portfolio and evaluate the adequacy of the allowance for loan and lease losses. In determining the adequacy of the allowance for loan and lease losses, we consider such factors as: . historical loss experience . underlying collateral values . evaluations made by bank regulatory authorities . assessment of economic conditions and . other appropriate data to identify the risks in the portfolio. Loans and leases that we believe are not collectible are charged to the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are credited to the allowance. Provisions for loan and lease losses are charged to expense and credited to the allowance in amounts we believe are appropriate based upon our evaluation of the known and inherent risks in the loan and lease portfolio. While we believe that the current allowance for loan and lease losses is sufficient, future additions to the allowance may be necessary. The allocation of the Company's allowance for loan and lease losses and the percentage of loans and leases by loan type to total gross loans and leases held for investment as of December 31, 2000 and 1999 is as follows:
2000 1999 -------------------------- -------------------------- Percentage of Percentage of Loans and Leases Loans and Leases to Total Gross to Total Gross Loans and Leases Loans and Leases Allocated Held for Allocated Held for Allowance Investment Allowance Investment --------- ---------------- --------- ---------------- Loans secured by real estate: One to four family.... $ 1,287 6.1% $ 4,034 7.3% Multifamily........... 2,252 3.6 228 2.7 Commercial............ 193 1.2 282 1.1 ------- ----- ------- ----- 3,732 10.9 4,544 11.1 Leases.................. 97 0.9 126 0.1 Consumer and auto loans.................. 85 0.3 812 0.6 Franchise loans......... 582 0.7 307 1.4 Asset-based and cash stream loans........... 39,757 63.9 15,018 58.2 Other commercial loans.. 14,557 23.3 9,498 28.6 ------- ----- ------- ----- 55,078 89.1 25,761 88.9 Unallocated............. 4,815 -- 1,536 -- ------- ----- ------- ----- $63,625 100.0% $31,841 100.0% ======= ===== ======= =====
Although the above table allocates the allowance for loan and lease losses by loan types, the total allowance is available to absorb losses on all loans and leases. The ratio of the allowance for loan and lease losses to total loans held for investment was 5.36%, 2.50%, and 1.85% at December 31, 2000, 1999, and 1998, respectively. The ratio of the allowance for loan losses to non-accrual loans was 81.02% at December 31, 2000 as compared to 62.18% at December 31, 1999 and 65.11% at December 31, 1999. We evaluate expected losses on non- accrual loans on a loan-by-loan basis and we believe that the allowance is adequate to cover both expected losses on non-accrual loans and inherent losses in the remainder of our loans and leases held for investment portfolio. The percentage of the allowance for loan and lease losses to non-accrual loans does not remain constant due to the changing nature of our loan portfolio. We analyze the collateral for each non-performing loan to determine our potential loss exposure, and in conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan and lease losses. On an ongoing basis, we monitor the loan portfolio and evaluate the adequacy of the allowance for loan and lease losses. 77 The following table sets forth the amount of non-performing assets attributable to our core lending activities and our Exited Businesses.
2000 1999 1998 1997 ---------------------- ---------------------- ---------------------- ---------------------- Core Core Core Core Lending Exited Lending Exited Lending Exited Lending Exited Activities Businesses Activities Businesses Activities Businesses Activities Businesses ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (In thousands) Non-accrual loans: IPL............. $ 1,650 $ -- $ 237 $ -- $ 992 $ -- $ 497 $ -- IWF............. 9,404 -- 7,757 -- 4,141 -- -- -- CBC............. 31,795 -- 22,173 -- 1,117 -- -- -- IBC............. 7 -- 77 -- 669 -- 981 -- Film and television production loans........... 246 -- -- -- -- -- -- -- LPIG............ 26,206 -- -- -- -- -- -- -- One to four family.......... -- 3,564 -- 16,926 -- 18,576 -- 34,447 Consumer loans.. -- 85 -- 633 -- 253 -- 250 Auto loans...... -- 716 -- 1,803 -- 5,476 -- 28,057 Other commercial...... -- 4,856 656 996 -- 8,305 192 6,207 ---------- ------- ---------- -------- ---------- -------- ---------- -------- Total non- accrual loans... 69,308 9,221 30,900 20,358 6,919 32,610 1,670 68,961 ---------- ------- ---------- -------- ---------- -------- ---------- -------- OREO: Acquired film and television assets.......... 7,752 -- 8,161 -- -- -- -- -- IPL............. -- -- 222 -- 197 -- 465 -- One to four family.......... -- 816 -- 3,220 -- 7,180 -- 8,326 Other commercial...... -- 188 -- 771 -- 1,307 -- 2,114 ---------- ------- ---------- -------- ---------- -------- ---------- -------- Total OREO...... 7,752 1,004 8,383 3,991 197 8,487 465 10,440 ---------- ------- ---------- -------- ---------- -------- ---------- -------- Loans with modified terms: One to four family.......... -- -- -- -- -- -- -- -- Other commercial...... -- -- -- -- -- -- -- -- ---------- ------- ---------- -------- ---------- -------- ---------- -------- Total OREO...... -- -- -- -- -- -- -- -- ---------- ------- ---------- -------- ---------- -------- ---------- -------- Repossessed property: IBC............. 2 -- 643 -- 702 -- 4,437 -- Auto Lending.... -- 82 -- 127 -- 5,169 -- 4,563 ---------- ------- ---------- -------- ---------- -------- ---------- -------- Total repossessed property........ 2 82 643 127 702 5,169 4,437 4,563 ---------- ------- ---------- -------- ---------- -------- ---------- -------- Total NPA's..... $ 77,062 $10,307 $ 39,926 $ 24,476 $ 7,818 $ 46,266 $ 6,572 $ 83,964 ========== ======= ========== ======== ========== ======== ========== ======== Total loans, OREO and repossessed property........ $1,479,924 $96,218 $1,431,996 $148,033 $1,310,283 $384,487 $1,023,007 $443,782 Total NPA's as a percentage of loans, OREO and repossessed property........ 5.21% 10.71% 2.79% 16.53% 0.60% 12.03% 0.64% 18.92% 1996 ---------------------- Core Lending Exited Activities Businesses ---------- ----------- Non-accrual loans: IPL............. $ -- $ -- IWF............. -- -- CBC............. -- -- IBC............. -- -- Film and television production loans........... -- -- LPIG............ -- -- One to four family.......... -- 44,639 Consumer loans.. -- -- Auto loans...... -- 152 Other commercial...... -- 5,318 ---------- ----------- Total non- accrual loans... -- 50,109 ---------- ----------- OREO: Acquired film and television assets.......... -- -- IPL............. -- -- One to four family.......... -- 10,147 Other commercial...... -- 2,067 ---------- ----------- Total OREO...... -- 12,214 ---------- ----------- Loans with modified terms: One to four family.......... -- 800 Other commercial...... -- 456 ---------- ----------- Total OREO...... -- 1,256 ---------- ----------- Repossessed property: IBC............. -- -- Auto Lending.... -- -- ---------- ----------- Total repossessed property........ -- -- ---------- ----------- Total NPA's..... $ -- $ 63,579 ========== =========== Total loans, OREO and repossessed property........ $953,809 $1,099,850 Total NPA's as a percentage of loans, OREO and repossessed property........ N/A 5.78%
Excludes non-accrual loans held for sale which we carried at the lower of cost or market, includes non-accrual loans and non-performing assets from the discontinued operations of AMN. Our policy is to place all loans 90 days or more past due on non-accrual unless the loan is in the process of collection. 78 The following table sets forth the amounts of and changes in non-performing assets attributable to our core lending activities:
Other CBC LPIG IWF IPLD LHO IBC Core Total -------- -------- -------- ------- ------- ---- ------- --------- December 31, 1999....... $ 22,173 $ -- $ 7,757 $ 237 $ -- $ 77 $ 656 $ 30,900 New non-accrual loans... 108,657 62,394 21,089 10,152 660 8 1,778 204,738 Gross charge-offs....... (89,732) (32,267) (17,050) (353) (1,939) -- (2,159) (143,500) Reinstatements and paydowns............... (9,303) (3,921) (2,392) (8,386) 1,525 (78) (275) (22,830) -------- -------- -------- ------- ------- ---- ------- --------- December 31, 2000....... $ 31,795 $ 26,206 $ 9,404 $ 1,650 $ 246 $ 7 $ -- $ 69,308 ======== ======== ======== ======= ======= ==== ======= ========= Number of non-accrual loans at December 31, 2000................... 11 5 9 12 1 1 -- 39 Principal balance of smallest non-accrual loan................... $ 487 $ 176 $ 52 $ 33 $ 246 $ 7 $ -- $ 7 Principal balance of largest non-accrual loan................... $ 9,541 $ 11,301 $ 1,551 $ 432 $ 246 $ 7 $ -- $ 11,301
Asset/Liability Management and Market Risk General The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or re-price within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest- earning assets maturing or re-pricing within a specific time period and the amount of interest-bearing liabilities maturing or re-pricing 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 re-pricing 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 re-price. In addition, a positive gap may not protect an institution with a large portfolio of ARM's from increases in interest rates for extended time periods as such instruments generally have periodic and lifetime interest rate caps. Our ARM's are predominantly tied to LIBOR. Interest rates and the resulting cost of funds increases in a rapidly increasing rate environment could exceed the cap levels on these loan products and negatively impact net interest income. We manage portfolio interest rate risk through the marketing and funding of adjustable rate loans, which generally re-price at least semi-annually and are generally indexed to Prime or LIBOR. As a result of this strategy, at December 31, 2000, our total interest-earning assets maturing or re-pricing within one year exceeded our total interest-bearing liabilities maturing or re-pricing in the same time by $287.6 million, representing a positive cumulative gap ratio of 119.0%. We closely monitor our interest rate risk as such risk relates to operational strategies. Our cumulative gap position is at a level satisfactory to management. However, there can be no assurances that we will maintain a positive gap position or that our strategies will not result in a negative gap position in the future. The level of the movement of interest rates, up or down, is an uncertainty and could have a negative impact on the earnings of our company. During the first quarter of 2001, the Federal Reserve lowered interest rates a total of 150bp from year-end levels. Given our gap position at December 31, 2000, this decrease in rates will have a negative impact on our earnings for the year ending December 31, 2001. We believe that our deposit portfolio should reprice in sufficient volumes by the end of the second quarter of 2001 to absorb the majority of the negative impact of this interest rate decrease. 79 Total Rate of Return Swaps The Company has total rate of return swap contracts for investment purposes with various counter parties, the provisions of which entitle our company to receive the total return on various commercial loans in exchange for a floating payment of one month LIBOR plus a spread. These contracts are off balance sheet instruments. As of December 31, 2000, 1999 and 1998, we were party to the LPIG total return swap with a total notional amount outstanding of $65.2 million, $83.6 million and $280.4 million, under which our company was obligated to pay one month LIBOR plus a weighted average spread of 0.88%. The weighted average remaining life of these contracts was 51.2 months, 60.0 months and 31.2 months as of December 31, 2000, 1999 and 1998. For the years ended December 31, 2000, 1999 and 1998, our company recognized income of $2.7 million, $2.9 million and $5.4 million on our total return swaps, respectively. For the years ended December 31, 2000, 1999 and 1998, our company recognized mark to market gains (losses) of ($3.8) million, $197,000 and $171,000 on the LPIG swaps, respectively. As a part of the Pacifica Partners I LP collateralized loan obligation ("CLO") fund launched by the Company in August 1998, the Company delivered subordinate bonds of approximately $51.3 million into a total rate of return swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of the swap entitle the Company to receive the total return on the subordinate bonds delivered and pay a floating payment of LIBOR plus a weighted average spread of 0.75% beginning in October 2000, and 1.36% from August 1998 to September 2000. The Company delivered cash and various equity securities to CIBC as collateral for the swap. At December 31, 2000 and 1999, $59.1 million and $38.1 million was outstanding and classified as Trading Securities on our consolidated balance sheet. Risk Management and Market Sensitive Instruments Interest rate risk is managed within a tight duration band, and credit risk is managed by maintaining diversified sector exposure within the securities and loan portfolios. In connection with our investment and risk management objectives, we also use financial instruments whose market value is at least partially determined by, among other things, levels of or changes in domestic interest rates (short-term or long-term), prepayment rates, equity markets or credit ratings/spreads. Using financial modeling and other techniques, we regularly evaluate the appropriateness of investments relative to management-approved investment guidelines and the business objective of the portfolios. We operate within these investment guidelines by maintaining a mix of loans and investments that diversifies our assets. The following discussion about our risk management activities includes "forward-looking statements" that involve risk and uncertainties. Set forth below are management's projections of hypothetical net losses in fair value of shareholders' equity of our market sensitive financial instruments if certain assumed changes in market rates and prices were to occur (sensitivity analysis). While we believe that the assumed market rate changes are reasonably possible in the near term, actual results may differ, particularly as a result of any management actions that would be taken to mitigate such hypothetical losses in fair value of shareholders' equity. Based on our overall exposure to interest rate risk and equity price risk, we believe that these changes in market rates and prices would not materially affect the consolidated near-term financial position, results of operations or cash flows of our company. Interest Rate Risk. Assuming immediate increases of 100 and 200 basis points in interest rates the net hypothetical increase in net income and the value of shareholders' equity related to financial and derivative instruments is estimated to be $3.6 million and $14.1 million (after tax), or 9.01% and 35.82%, of total shareholders' equity, respectively, at December 31, 2000. We believe that an interest rate shift of this magnitude represents a moderately advantageous scenario. Assuming immediate decreases of 100 and 200 basis points in interest rates the net hypothetical loss of net income and the value of shareholders' equity related to financial and derivative instruments is estimated to be $16.0 million and $18.1 million (after tax), or 40.5% and 45.8%, of total shareholders' equity, respectively, at December 31, 2000. The Company believes that an interest rate shift of this magnitude represents a moderately adverse scenario. Assuming immediate increases of 100 and 200 basis 80 points in interest rates the net hypothetical increase in net income and the value of shareholders' equity related to financial and derivative instruments is estimated to be $9.0 million and $17.7 million (after tax), or 4.38% and 8.61%, of total shareholders' equity, respectively, at December 31, 2000. We believe that an interest rate shift of this magnitude represents a moderately advantageous scenario. Assuming immediate decreases of 100 and 200 basis points in interest rates the net hypothetical loss in net income and the value of shareholders' equity related to financial and derivative instruments is estimated to be ($9.4) million and ($19.0) million (after tax), or 4.55% and 9.27%, of total shareholders' equity, respectively, at December 31, 2000. The Company believes that an interest rate shift of this magnitude represents a moderately adverse scenario. The effect of interest rate risk on potential near-term net income, cash flow and fair value was determined based on commonly used models. The models project the impact of interest rate changes on a wide range of factors, including duration, prepayment, put options and call options. Fair value was estimated based on the net present value of cash flows or duration estimates, using a representative set of likely future interest rate scenarios. 81 Re-pricing/Maturity of Interest-Earning Assets and Interest-Bearing Liabilities The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2000, which we anticipate to re-price or mature in each of the future time periods shown. The amount of assets and liabilities shown which re-price or mature during a particular period were determined in accordance with the earlier of term to re-pricing or the contractual terms of the asset or liability.
More than More than More than More than 3 Years Non- 3 Months 3 Months to 6 Months 1 Year to to 5 More than Interest or Less 6 Months to 1 Year 3 Years Years 5 Years Bearing Total ---------- ----------- --------- --------- --------- --------- -------- ---------- (Dollars in thousands) Interest-earning assets: Cash................... $ -- $ -- $ -- $ -- $ -- $ -- $ 30,938 $ 30,938 Interest earning deposits.............. 183,193 -- -- -- -- -- -- 183,193 Trading securities..... 164,050 -- -- -- -- -- -- 164,050 Securities available for sale.............. 54,468 660 1,187 3,373 1,894 2,102 -- 63,684 FHLB stock............. 4,148 -- -- -- -- -- -- 4,148 Loans, net of unearned discount and deferred loan fees(1)........... 1,124,966 158,309 108,790 55,362 48,682 76,479 -- 1,572,588 ---------- --------- --------- --------- -------- --------- -------- ---------- Total interest-bearing assets................ 1,530,825 158,969 109,977 58,735 50,576 78,581 30,938 2,018,601 Less: Allowance for loan losses................ -- -- -- -- -- -- (63,625) (63,625) ---------- --------- --------- --------- -------- --------- -------- ---------- Net interest-earning assets................ 1,530,825 158,969 109,977 58,735 50,576 78,581 (32,687) 1,954,976 Non-interest-earning assets................ -- -- -- -- -- -- 172,601 172,601 ---------- --------- --------- --------- -------- --------- -------- ---------- Total assets........... $1,530,825 $ 158,969 $ 109,977 $ 58,735 $ 50,576 $ 78,581 $139,914 $2,127,577 ========== ========= ========= ========= ======== ========= ======== ========== Interest-bearing liabilities: Deposits............... $ 351,833 $ 416,428 $ 636,830 $ 225,996 $ 1,617 $ -- $ -- $1,632,704 FHLB borrowings........ 65,000 -- -- -- -- -- -- 65,000 Other borrowings....... 42,118 -- -- -- -- 42,000 -- 84,118 Senior Notes........... -- -- -- -- 10,818 165,939 -- 176,757 ROPES.................. -- -- -- 42,885 -- -- -- 42,885 ---------- --------- --------- --------- -------- --------- -------- ---------- Total interest-bearing liabilities........... $ 458,951 $ 416,428 $ 636,830 $ 268,881 $ 12,435 $ 207,939 $ -- 2,001,464 Non-interest bearing liabilities........... -- -- -- -- -- -- 86,671 86,671 Shareholders' equity... -- -- -- -- -- -- 39,442 39,442 ---------- --------- --------- --------- -------- --------- -------- ---------- Total liabilities and shareholders' equity.. $ 458,951 $ 416,428 $ 636,830 $ 268,881 $ 12,435 $ 207,939 $126,113 $2,127,577 ========== ========= ========= ========= ======== ========= ======== ========== Interest rate sensitivity gap(2).... 1,071,874 (257,459) (526,853) (210,146) 38,141 (129,358) (32,687) (46,488) Cumulative interest sensitivity gap....... $1,071,874 $ 814,415 $ 287,562 $ 77,416 $115,557 $ (13,801) $(46,488) Cumulative interest sensitivity gap as a % of total assets....... 50.38% 38.28% 13.52% 3.64% 5.43% (0.65)% Cumulative net interest earning assets as a percentage of cumulative interest- bearing liabilities... 333.55% 193.04% 119.02% 104.35% 106.44% 99.31% 97.68%
- ------- (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 re-pricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM's, have features which restrict changes in interest rates on a short term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those reflected in the table. Finally, the ability of many borrowers to service their ARM's may decrease in the event of an interest rate increase. 82 Average Balance Sheet The following tables set forth certain information relating to our company for 2000, 1999 and 1998. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average month-end balances. Management does not believe that the use of average monthly balances instead of average daily balances has caused any material differences in the information presented. The average balance of loans receivable includes loans on which we have discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields.
Year Ended December 31, ----------------------------------------------------------------------------------- 2000 1999 1998 --------------------------- --------------------------- --------------------------- Yield/ Yield/ Yield/ Average Average Average Average Average Average Balance Interest Cost Balance Interest Cost Balance Interest Cost ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- (Dollars in thousands) ASSETS: ------- Interest-earning assets: Investments and interest-earning deposits.............. $ 351,032 27,847 7.93% $ 295,197 $ 25,520 8.65% $ 242,246 $ 28,674 11.84% FHLB stock............. 4,964 366 7.37 6,166 321 5.21 5,031 291 5.78 Loans held for sale and investment, net(1)................ 1,642,193 194,213 11.83 1,572,668 178,229 11.33 1,643,147 200,827 12.22 Retained interest and capitalized excess servicing fees receivable............ 11,010 2,399 21.79 24,926 3,368 13.51 31,956 6,048 18.93 ---------- -------- ----- ---------- -------- ----- ---------- -------- ------ Total interest- earning assets...... 2,009,199 224,825 11.19 1,898,957 207,438 10.92 1,922,380 235,840 12.27 ---------- -------- ----- ---------- -------- ----- ---------- -------- ------ Non interest-earning assets................. 243,752 268,728 361,593 Total assets......... $2,252,951 $2,167,685 $2,283,973 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: ---------------------- Interest-bearing liabilities: Deposits............... $1,698,566 $107,779 6.35% $1,579,605 $ 86,582 5.48% $1,512,057 $ 87,030 5.76% Borrowings from FHLB... 23,462 1,492 6.36 7,590 630 8.30 24,451 1,631 6.67 Other borrowings....... 59,772 6,872 11.50 69,306 3,920 5.66 69,844 4,150 5.94 Senior Notes........... 178,620 18,267 10.23 207,706 21,540 10.37 219,837 22,392 10.19 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company............... 51,582 5,803 11.25 66,192 7,390 11.16 70,000 7,903 11.29 Preferred Stock Series B..................... -- -- -- 11,539 1,545 13.39 -- -- -- ---------- -------- ----- ---------- -------- ----- ---------- -------- ------ Total interest-bearing liabilities........... 2,012,002 140,213 6.97 1,941,938 121,607 6.26 1,896,189 123,106 6.49 ---------- ----- ---------- -------- ----- ---------- -------- ------ Non interest-bearing liabilities............ 75,838 11,461 95,122 Shareholders' equity.... 165,111 214,286 292,662 ---------- ---------- ---------- Total liabilities and shareholders' equity................ $2,252,951 $2,167,685 $2,283,973 ========== ========== ========== Net interest rate spread................. $ 84,612 4.22% $ 85,831 4.66% $112,734 5.78% ======== ===== ======== ===== ======== ====== Net interest margin..... 4.21% 4.52% 5.86% Ratio of interest- earning assets to interest-bearing liabilities............ 99.86% 97.79% 101.38%
- ------- (1) Net of deferred income and the allowance for loan losses, includes nonaccrual loans. 83 Analysis of Net Interest Income Net interest income represents the difference between income on interest- earning assets and expense on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them, respectively. Rate/Volume Analysis The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our net interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), (iii) changes in interest due to both rate and volume and (iv) the net change.
Year Ended December 31, ------------------------------------------------------------------------------ 2000 Over 1999 1999 Over 1998 ------------------------------------- --------------------------------------- Volume Rate Rate/Volume Total Volume Rate Rate/Volume Total ------- ------- ----------- ------- ------- -------- ----------- -------- (In thousands) Increase/(decrease) in: Investments and interest-bearing deposits............. $ 4,830 $(2,125) $ (378) $ 2,327 $ 6,269 $ (7,728) $(1,695) $ (3,154) FHLB stock............ (63) 133 (25) 45 66 (29) (7) 30 Loans held for sale and investment, net.. 7,877 7,863 244 15,984 (8,613) (14,624) 639 (22,598) Retained interest and capitalized excess servicing fees receivable........... (1,880) 2,064 (1,153) (969) (1,331) (1,732) 383 (2,680) ------- ------- ------- ------- ------- -------- ------- -------- Total interest income............. 10,764 7,935 (1,312) 17,387 (3,609) (24,113) (680) (28,402) ------- ------- ------- ------- ------- -------- ------- -------- Deposits.............. 6,519 13,743 935 21,197 3,891 (4,234) (105) (448) FHLB borrowings....... 1,317 (147) (308) 862 (1,125) 399 (275) (1,001) Other borrowings...... (540) 4,047 (555) 2,952 (32) (196) (2) (230) Senior Notes.......... (3,016) (291) 34 (3,273) (1,236) 396 (12) (852) ROPES................. (1,630) 60 (17) (1,587) (430) (91) 8 (513) Mandatorily redeemable cumulative preferred stock................ (1,545) -- -- (1,545) -- -- 1,545 1,545 ------- ------- ------- ------- ------- -------- ------- -------- Total interest expense............ 1,105 17,412 89 18,606 1,068 (3,726) 1,159 (1,499) ------- ------- ------- ------- ------- -------- ------- -------- Change in net interest income................. $ 9,659 $(9,477) $(1,401) $(1,219) $(4,677) $(20,387) $(1,839) $(26,903) ======= ======= ======= ======= ======= ======== ======= ========
Recent Accounting Pronouncements The Company is affected by recent accounting pronouncements. For a description of these standards and the effect, if any, adoption has had or will have on the Company's consolidated financial statements, see "Note 3 of Notes to Consolidated Financial Statements." 84 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 7--"Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset/Liability Management and Market Risk." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report.............................................. 86 Consolidated Balance Sheets............................................... 87 Consolidated Statements of Operations and Comprehensive Income (Loss)..... 88 Consolidated Statements of Changes in Shareholders' Equity................ 90 Consolidated Statements of Cash Flows..................................... 91 Notes to Consolidated Financial Statements................................ 93
All supplemental schedules are omitted as inapplicable or because the required information is included in the consolidated financial statements or notes thereto. 85 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, 2000 and 1999, and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of Imperial Credit Industries, Inc. and subsidiaries' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Los Angeles, California March 30, 2001 86 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
December 31, ---------------------- 2000 1999 ---------- ---------- ASSETS ------ Cash................................................... $ 30,938 $ 33,898 Interest bearing deposits.............................. 183,193 248,182 Investment in Federal Home Loan Bank stock............. 4,148 6,960 Securities held for trading, at market (including securities pledged to creditors with the right to sell or re-pledge of $39.4 million and $67.0 million, respectively)......................................... 164,050 160,805 Securities available for sale, at market............... 63,684 74,374 Loans and leases held for sale, net.................... 386,469 289,398 Loans and leases held for investment, net of unearned income and deferred loan fees......................... 1,186,119 1,264,912 Less: allowance for loan and lease losses............ (63,625) (31,841) ---------- ---------- Loans and leases held for investment, net.............. 1,122,494 1,233,071 Real property.......................................... 53,198 -- Retained interest in loan and lease securitizations.... 6,330 10,220 Accrued interest receivable............................ 15,744 8,272 Premises and equipment, net............................ 10,433 13,576 Real estate and other assets owned, net................ 8,778 13,055 Goodwill............................................... 32,330 34,961 Other assets........................................... 28,158 37,351 Net assets of discontinued operations.................. 17,630 37,492 ---------- ---------- Total assets......................................... $2,127,577 $2,201,615 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Deposits............................................... $1,632,704 $1,614,758 Borrowings from Federal Home Loan Bank................. 65,000 -- Other borrowings....................................... 84,118 74,309 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES")................... 42,885 61,750 Senior Notes........................................... 176,757 185,185 Accrued interest payable............................... 18,992 18,811 Accrued income taxes payable........................... 20,522 16,101 Minority interest in consolidated subsidiaries......... 1,116 2,684 Goodwill............................................... 23,797 -- Other liabilities...................................... 22,244 22,637 ---------- ---------- Total liabilities.................................... 2,088,135 1,996,235 ---------- ---------- Shareholders' equity: Preferred stock, 8,000,000 shares authorized; none issued or outstanding................................. -- -- Common stock, no par value. Authorized 80,000,000 shares; 32,096,361 and 33,198,661 shares issued and outstanding at December 31, 2000 and 1999, respectively.......................................... 97,668 97,220 (Accumulated deficit) retained earnings................ (64,889) 98,437 Shares held in deferred executive compensation plan.... 5,745 7,107 Accumulated other comprehensive income--unrealized gain on securities available for sale, net................. 918 2,616 ---------- ---------- Total shareholders' equity........................... 39,442 205,380 ---------- ---------- Total liabilities and shareholders' equity........... $2,127,577 $2,201,615 ========== ==========
See accompanying notes to consolidated financial statements. 87 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (Dollars in thousands, except per share data)
Years Ended December 31, ----------------------------- 2000 1999 1998 --------- -------- -------- Interest Income: Interest on loans and leases................... $ 194,213 $178,229 $200,827 Interest on investments........................ 28,213 25,841 28,965 Interest on other finance activities........... 2,399 3,368 6,048 --------- -------- -------- Total interest income........................ 224,825 207,438 235,840 Interest Expense: Interest on deposits........................... 107,779 86,582 87,030 Interest on other borrowings................... 8,364 4,550 5,781 Interest on long term debt..................... 24,070 30,475 30,295 --------- -------- -------- Total interest expense....................... 140,213 121,607 123,106 --------- -------- -------- Net interest income.......................... 84,612 85,831 112,734 Provision for loan and lease losses............ 180,975 35,340 15,450 --------- -------- -------- Net interest (expense) income after provision for loan and lease losses................... (96,363) 50,491 97,284 --------- -------- -------- Fee and other income: Gain on sale of loans and leases............... (771) 6,480 14,888 Asset management fees.......................... 3,239 10,054 7,591 Investment banking and brokerage fees.......... 21,057 27,198 18,463 Loan servicing income.......................... 5,993 6,885 11,983 Gain (loss) on sale of securities.............. 12,988 32,742 (592) Equity in net income of Southern Pacific Funding Corporation........................... -- -- 12,739 Equity in net (loss) income of Franchise Mortgage Acceptance Company................... -- (53) 3,235 Equity in net income of Imperial Capital Group......................................... 479 -- -- Rental income.................................. 8,183 -- -- Mark to market on securities and loans held for sale...................................... (12,810) (28,641) (42,388) Loss on impairment of equity securities........ -- -- (120,138) Other income................................... 12,278 13,894 13,118 --------- -------- -------- Total fee and other income (loss)............ 50,636 68,559 (81,101) --------- -------- -------- Noninterest expenses: Personnel expense.............................. 43,679 50,034 52,003 Commission expense............................. 6,418 10,307 9,633 Amortization of servicing rights............... 529 4,223 1,486 Occupancy expense.............................. 5,446 5,658 5,750 Net expenses (income) of other real estate owned......................................... 1,386 1,386 (901) Legal and professional services................ 8,829 9,894 10,917 Lawsuit settlements (recoveries)............... 6,942 371 (69) Telephone and other communications............. 2,900 3,768 3,692 Amortization of goodwill....................... 1,431 14,506 2,686 Provision for loss on repurchase of former mortgage banking loans........................ -- -- 4,750 Real property expense.......................... 4,192 -- -- General and administrative expense............. 21,285 26,453 30,889 --------- -------- -------- Noninterest expense............................ 103,037 126,600 120,836 Merger costs................................... 9,397 -- -- --------- -------- -------- Total noninterest expense.................... 112,434 126,600 120,836 Loss from continuing operations before income taxes, minority interest and extraordinary item.......................................... (158,161) (7,550) (104,653) Income taxes................................... 2,356 (3,074) (44,064) Minority interest in income (loss) of consolidated subsidiaries..................... 1,125 1,474 (1,464) --------- -------- -------- Loss from continuing operations before extraordinary item............................ (161,642) (5,950) (59,125) Operating loss from discontinued operations of AMN (net of $4.2 million, $557,000 and $2.1 million of income taxes in 2000, 1999 and 1998, respectively)....................... (5,218) (899) (3,232) Loss on disposal of AMN including provision of $3.7 million for operating losses during phase-out period (net of $6.6 million of income taxes)................................. -- -- (11,276) --------- -------- -------- Loss before extraordinary item................. (166,860) (6,849) (73,633) Extraordinary item--gain on early extinguishment of debt, net of income taxes... 3,534 4,021 -- --------- -------- -------- Net loss..................................... $(163,326) $ (2,828) $(73,633) --------- -------- -------- Other comprehensive (loss) income: Unrealized (losses) gains on securities available for sale............................ (3,147) 7,890 (5,333) Reclassification adjustment for losses (gains) included in noninterest income................ 320 (1,492) (53) Income taxes................................... (1,129) 2,596 (2,274) --------- -------- -------- Other comprehensive (loss) income............ (1,698) 3,802 (3,112) --------- -------- -------- Comprehensive (loss) income.................. $(165,024) $ 974 $(76,745) ========= ======== ========
See accompanying notes to consolidated financial statements. 88 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)--(Continued) (Dollars in thousands, except per share data)
Years Ended December 31, ---------------------- 2000 1999 1998 ------ ------ ------ Basic loss per share: Loss from continuing operations before extraordinary item................................................ $(4.96) $(0.17) $(1.55) Loss from discontinued operations, net of income taxes............................................... (0.16) (0.02) (0.08) Loss on disposal of AMN, net of income taxes......... -- -- (0.30) Extraordinary item--gain on early extinguishment of debt, net of income taxes........................... 0.11 0.11 -- ------ ------ ------ Net basic loss per common share...................... $(5.01) $(0.08) $(1.93) ====== ====== ====== Diluted loss per share: Loss from continuing operations before extraordinary item................................................ $(4.96) $(0.17) $(1.55) Loss from discontinued operations, net of income taxes............................................... (0.16) (0.02) (0.08) Loss on disposal of AMN, net of income taxes......... -- -- (0.30) Extraordinary item--gain on early extinguishment of debt, net of income taxes........................... 0.11 0.11 -- ------ ------ ------ Net diluted loss per common share.................... $(5.01) $(0.08) $(1.93) ====== ====== ======
See accompanying notes to consolidated financial statements. 89 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Retained Shares Accumulated Common Earnings Held Other Total Shares Common (Accumulated in DEC Comprehensive Shareholders' Outstanding Stock Deficit) Plan Income (Loss) Equity ----------- -------- ------------ ------ ------------- ------------- (In thousands) Balance, December 31, 1997................... 38,791 $147,109 $ 174,898 $ -- $ 1,926 $ 323,933 Exercise of stock options................ 244 1,037 -- -- -- 1,037 Stock held in deferred compensation plan...... -- (3,833) -- 3,833 -- -- Issuance of common stock for Imperial Credit Lender Services, Inc. acquisition............ 236 5,000 -- -- -- 5,000 Unrealized depreciation on securities available for sale, net.......... -- -- -- -- (3,112) (3,112) Tax benefit from exercise of stock options................ -- 4,601 -- -- -- 4,601 Repurchase and retirement of stock and warrants............... (2,485) (24,305) -- -- -- (24,305) Net loss, 1998.......... -- -- (73,633) -- -- (73,633) ------ -------- --------- ------ ------- --------- Balance, December 31, 1998................... 36,786 $129,609 $ 101,265 $3,833 $(1,186) $ 233,521 Exercise of stock options................ 95 249 -- -- -- 249 Stock held in deferred compensation plan...... -- (3,274) -- 3,274 -- -- Unrealized gain on securities available for sale, net.......... -- -- -- -- 3,802 3,802 Tax benefit from exercise of stock options................ -- 96 -- -- -- 96 Repurchase and retirement of stock and warrants............... (3,682) (29,460) -- -- -- (29,460) Net loss, 1999.......... -- -- (2,828) -- -- (2,828) ------ -------- --------- ------ ------- --------- Balance, December 31, 1999................... 33,199 $ 97,220 $ 98,437 $7,107 $ 2,616 $ 205,380 Exercise of stock options................ 20 43 -- -- -- 43 Stock held in deferred compensation plan...... -- 1,362 -- (1,362) -- -- Unrealized loss on securities available for sale, net.......... -- -- -- -- (1,698) (1,698) Tax benefit from exercise of stock options................ -- 23 -- -- -- 23 Issuance of warrants in legal settlement....... -- 3,082 -- -- -- 3,082 Repurchase and retirement of stock.... (1,123) (4,062) -- -- -- (4,062) Net loss, 2000.......... -- -- (163,326) -- -- (163,326) ------ -------- --------- ------ ------- --------- Balance, December 31, 2000................... 32,096 $ 97,668 $ (64,889) $5,745 $ 918 $ 39,442 ====== ======== ========= ====== ======= =========
See accompanying notes to consolidated financial statements. 90 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------- 2000 1999 1998 --------- --------- --------- (In thousands) Cash flows from operating activities: Loss from continuing operations............. $(161,642) $ (5,950) $ (59,125) Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities: Cash used in discontinued operations...... -- (2,513) (1,824) Provision for loan and lease losses....... 180,975 35,340 15,450 Loss on impairment of equity securities... -- -- 120,138 Mark to market on securities and loans held for sale............................ 12,810 28,641 42,388 Provision for loss on repurchase of former mortgage banking loans................... -- -- 4,750 Depreciation.............................. 4,749 4,394 3,714 Amortization of goodwill.................. 1,431 14,506 2,686 Amortization of servicing rights.......... 529 4,223 1,486 Accretion of discount..................... (5,765) (3,368) (6,048) Loss (gain) on sale of loans and leases... 771 (6,480) (14,888) (Gain) loss on sale of securities......... (12,988) (32,742) 592 Equity in net earnings of SPFC............ -- -- (12,739) Equity in net loss (income) of FMC........ -- 53 (3,235) Equity in net income of ICG............... (479) -- -- Loss on sale of OREO...................... 131 769 597 Writedowns (recovery) on other real estate owned.................................... 943 287 (2,075) Provision (benefit) for deferred income taxes.................................... 3,690 38,408 (55,540) Originations of loans held for sale....... (310,792) (466,000) (660,000) Sales and collections on loans held for sale..................................... 228,002 540,672 673,426 Sales and collections of real property.... 23,404 -- -- Purchase of trading securities............ (97,387) (71,997) (146,187) Sales and collections of trading securities............................... 81,951 100,469 113,819 Net change in retained interest........... 4,520 -- -- Issuance of warrants...................... 3,082 -- -- Other, net................................ 9,815 (27,090) (54,520) --------- --------- --------- Net cash (used in) provided by operating activities................................... (32,250) 151,622 (37,135) --------- --------- --------- Cash flows from investing activities: Net decrease (increase) in interest bearing deposits................................... 65,447 (246,767) 102,323 Proceeds from sale of other real estate owned...................................... 6,616 10,351 13,743 Purchase of securities available for sale... (50,000) (26,757) (17,551) Sales and collections of securities available for sale......................... 33,386 4,875 8,818 Net change in loans held for investment..... (64,845) (27,241) (276,629) Purchases of premises and equipment......... (3,298) (7,767) (7,833) Proceeds from sale of securities............ 22,495 100,558 867 Net cash received in ICCMIC acquisition..... 11,524 -- -- Purchases of Federal Home Loan Bank stock... -- (1,983) -- Redemption of stock in Federal Home Loan Bank....................................... 3,179 -- 1,280 Cash utilized for acquisitions.............. (2,822) (8,132) -- --------- --------- --------- Net cash provided by (used in) investing activities................................... 21,682 (202,863) (174,982) --------- --------- ---------
(Continued) 91 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years Ended December 31, ----------------------------- 2000 1999 1998 -------- --------- -------- (In thousands) Cash flows from financing activities: Net increase (decrease) in deposits........... $ 17,946 $ (99,494) $555,306 Advances from Federal Home Loan Bank.......... 95,000 30,000 44,500 Repayments of advances from Federal Home Loan Bank......................................... (30,000) (50,000) (69,500) Net decrease in other borrowings.............. (50,830) (27,961) (42,571) Proceeds from issuance of mandatorily redeemable cumulative preferred stock........ -- 30,000 -- Repurchase and retirement of mandatorily redeemable cumulative preferred stock........ -- (31,353) -- Repurchase of Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES")............................ (15,060) (6,628) -- Repurchase and retirement of common stock and warrants..................................... (4,062) (29,460) (24,305) Repurchase of Senior Notes.................... (6,498) (27,453) -- Net change in minority interest............... 1,069 (533) 43 Proceeds from exercise of stock options....... 43 249 1,037 -------- --------- -------- Net cash provided by (used in) financing activities..................................... 7,608 (212,633) 464,510 -------- --------- -------- Net change in cash.............................. (2,960) (263,874) 252,393 Cash at beginning of year....................... 33,898 297,772 45,379 -------- --------- -------- Cash at end of year............................. $ 30,938 $ 33,898 $297,772 ======== ========= ========
See accompanying notes to consolidated financial statements. 92 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000, 1999 and 1998 1. Organization Imperial Credit Industries, Inc., is a diversified commercial lending, financial services, and investment banking company that was incorporated in 1991 in the State of California. The consolidated financial statements include Imperial Credit Industries, Inc. ("ICII"), and its wholly or majority owned consolidated subsidiaries (collectively, the "Company"). The wholly-owned subsidiaries include but are not limited to Southern Pacific Bank ("SPB" or the "Bank"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Lender Services, Inc. ("ICLS") formerly Statewide Documentation, Inc., and Imperial Credit Asset Management, Inc. ("ICAM"). We own approximately 38.5% of Imperial Capital Group, LLC ("ICG"), which had been a majority-owned consolidated subsidiary up until the end of third quarter 2000. Prior to November 1, 1999, we held a significant equity interest in a publicly traded company--Franchise Mortgage Acceptance Company ("FMC") (See "Franchise Mortgage Acceptance Company"). During 2000, we acquired 100% of the common stock of Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC"). Through October 22, 1999, a wholly owned subsidiary of ours, Imperial Credit Commercial Asset Management Corp. ("ICCAMC"), managed the assets and operations of ICCMIC. All material inter-company balances and transactions with consolidated subsidiaries have been eliminated. 2. Operating Activities General Business Activities In 1995, the Company began to diversify away from the conforming residential mortgage lending business, the Company's traditional focus, and into other select lending businesses. The Company expanded several existing businesses and commenced several new businesses, including commercial mortgage banking, business lending and consumer lending. The Company's loans and leases by operating segments consist primarily of the following: commercial mortgage loans, income producing property loans and business lending--equipment leasing, asset-based and cash stream lending, film and television production loans, and participations in syndicated commercial loans. The Company solicits loans and leases from brokers on a wholesale and portfolio basis and originates loans directly with borrowers. The majority of the Company's loans and leases are funded by FDIC insured deposits at SPB. Coast Business Credit Coast Business Credit ("CBC"), a division of SPB, was acquired from Coast Federal Bank in 1995. CBC is the asset-based and cash stream lending division of our principal subsidiary SPB, that makes revolving lines of credit and term loans available to growth companies in manufacturing, distribution, technology, service, telecommunications and retail industries. CBC is headquartered in Los Angeles, California, and conducts its lending throughout the United States. At December 31, 2000 CBC had total commitments of $1.4 billion and gross loans outstanding of $752.9 million, respectively. At December 31, 1999 CBC had total commitments of $1.4 billion and gross loans outstanding of $748.1 million, respectively. Imperial Warehouse Finance, Inc. In October 1997, the Company's wholly-owned subsidiary, SPB, acquired substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and PrinCap Mortgage Backed, L.P. (collectively, "PrinCap") and contributed such assets to a subsidiary. The acquisition was accounted for as a purchase, and the purchase price of $123.7 million was allocated to the net assets acquired based on their fair value resulting in goodwill of $6.8 million. In 1999, PrinCap changed its name to Imperial Warehouse Finance, Inc. ("IWF"). IWF's primary provides nationwide short-term repurchase lines of credit to Mortgage Lenders ("Sellers"), who are in search of a reliable Warehouse Lender. IWF's repurchase lines of credit provide Sellers with the ability to do same day closings and sell such residential mortgage loans in the secondary market. 93 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 2000 IWF had total commitments and gross loans outstanding of $154.9 million and $50.6 million, respectively. At December 31, 1999 IWF had total commitments and gross loans outstanding of $300.4 million and $78.1 million, respectively. Loan Participation and Investment Group The Loan Participation and Investment Group ("LPIG") was formed by SPB in September 1995. This Group invested in and purchased senior secured debt of other companies (referred to as a "participations") in the secondary market. We stopped originating any new commitments for LPIG in the third quarter of 1999 since we believe that the capital that is currently being deployed at SPB to support LPIG's business could be more profitably used in other core businesses. As such, we anticipate that the current outstanding balance of LPIG's loans will decrease over time as this portfolio runs-off. At December 31, 2000, LPIG had total commitments and gross outstanding loans of $289.1 million and $123.5 million, respectively, as compared to $459.5 million and $217.0 million, respectively at December 31, 1999. The Lewis Horwitz Organization On October 1, 1999, we purchased from Imperial Bank substantially all of the assets and assumed certain liabilities of The Lewis Horwitz Organization ("LHO"). The acquisition was accounted for as a purchase, and the purchase price of $31.5 million was allocated to the net assets acquired based on their fair values resulting in goodwill of $17.3 million. LHO lends to independent producers of film and television, many of which are located in California. LHO, however, has borrowing clients based all over the world. Independent producers tend to be those producers that do not have major studio distribution outlets for their product. Large film and television studios generally maintain their own distribution outlets and finance their projects with internally generated financing. In addition to funding production loans against a number of distribution contracts, LHO has pioneered a conservative valuation of selected unsold rights to cover a portion of the production budget (gap). At December 31, 2000, LHO had total commitments and gross outstanding loans of $101.4 million and $83.7 million, respectively, as compared to $23.1 million and $15.8 million, respectively at December 31, 1999. Imperial Business Credit, Inc. Imperial Business Credit, Inc. ("IBC") is a wholly owned subsidiary located in San Diego, California. The focus of IBC's lease activities had historically been equipment lease financing to small and medium-sized businesses. During the first quarter of 2000, defaults on leases originated through IBC's broker and small-ticket lease programs continued at a high level. It was determined that IBC could not make the returns necessary to continue in business as an originator of new leases and the origination offices were closed or sold. IBC is continuing as a lease portfolio servicing entity by servicing its existing portfolio and a new portfolio originated by Southern Pacific BanCapital ("SPBC"), an affiliated company. IBC, SPB and SPBC are parties to a master servicing agreement that enumerates the responsibilities and obligations of IBC in servicing the leases originated by SPBC. In general, SPBC originates leases that are funded by SPB and IBC is contracted as the servicer. The servicer duties include: generation of invoices, tax compliance, cash application, accounting, reporting and collection activity. In exchange for services performed, IBC receives a fee of 0.40% per annum based on the gross receivables of the lease portfolio being serviced for SPBC and 1.15% per annum for the leases previously funded through IBC's securitization facility. In addition, IBC is generally entitled to receive all late fees and other miscellaneous fees related to the entire serviced portfolio. IBC's lease originations were $30.9 million and $125.2 million, and it securitized and sold $43.6 million and $132.4 million during the years ended December 31, 2000, and 1999, respectively. At December 31, 2000 and 1999, IBC serviced a total of $170.8 million and $243.5 million of leases, respectively. 94 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Income Property Lending Division The Income Property Lending Division ("IPL") of SPB was formed in February 1994 to expand our apartment and commercial property lending business. As of December 31, 2000, it had 6 loan origination offices in California, Illinois, Utah and Florida. At December 31, 2000 and 1999, IPL's gross loans outstanding were $364.2 million and $254.1 million, respectively. For the year ended December 31, 2000 and 1999, IPL originated $235.9 million and $339.7 million of loans, respectively. Imperial Credit Lender Services, Inc. In July 1998, ICII acquired the assets of Imperial Credit Lender Services, Inc. ("ICLS") formerly Statewide Documentation, Inc., for a purchase price of $5.0 million worth of ICII common stock. ICLS initially began its operations in 1981. Its primary business is providing loan documentation preparation and loan closing services nationwide. Additionally, ICLS provides national notary and recording services. During 2000, we wrote off $4.1 million of goodwill attributable to ICLS, and in February of 2001, the Company disposed of ICLS for its remaining net book value. Imperial Credit Asset Management, Inc. Imperial Credit Asset Management, Inc. ("ICAM") was formed in April 1998. ICAM manages Pacifica Partners I L.P., Cambria Investment Partnership I, L.P., and Catalina Investment Partnership I, L.P. Pacifica Partners I is a collateralized loan obligation fund the Company launched in August 1998. Pacifica Partners I's assets consist of nationally syndicated bank loans and high yield bonds. Cambria is a hedge fund that invests in syndicated bank loans. Imperial Credit Commercial Asset Management Corp. In October 1997, Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") completed its initial public offering and sold approximately 34.5 million shares of common stock at $15.00 per share resulting in net proceeds of approximately $481.2 million. The Company purchased 2,970,000 shares of ICCMIC common stock in the offering and an additional 100,000 shares in December 1997 for a total of $43.0 million. In 1999, we sold 500,000 shares of ICCMIC common stock at $10.88 per common share, generating net proceeds of $5.4 million, resulting in a gain on sale of securities totaling $562,000. As of December 31, 1999, the Company owned 9.0% of the common stock of ICCMIC. ICCAMC, a wholly-owned subsidiary, managed the day to day operations ICCMIC through October 22, 1999, an investment trust which invested primarily in performing multifamily and commercial real estate loans and mortgage-backed securities. For the year ended December 31, 1999, ICCAMC earned $5.9 million and $6.3 million, respectively, in gross management fees from ICCMIC. In addition, the Company has received cash dividends of $3.1 million and $3.6 million during the years ended December 31, 1999 and 1998, respectively. During the third quarter of 1998 the market value of the Company's equity holdings in ICCMIC declined substantially to $9.75 per common share as compared to the Company's book value of $13.98 per common share. In the third quarter of 1998, we recorded an impairment charge of $13.0 million due to the other-than-temporary decline in the value of our ICCMIC stock. On March 28, 2000, we completed the acquisition of ICCMIC. We paid ICCMIC's stockholders (other than the 2,570,000 shares already owned by ICII) approximately $11.57 per share in cash. The total purchase price paid by the company was approximately $300.1 million. The Company's basis in shares of ICCMIC common stock owned prior to the merger was $25.1 million. The total cost basis of $325.2 million, combined with other estimated costs of the acquisition of $19.7 million, bring the total purchase price to $344.9 million. In addition to the costs of acquisition, the Company incurred total severance and incentive costs of approximately $9.4 million. We acquired gross assets at ICCMIC of $443.7 million and assumed liabilities of $69.6 million. The merger was accounted for as a purchase and resulted in the generation of negative goodwill of $29.2 million. 95 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The negative goodwill generated by the acquisition is not subject to income taxes and increased the Company's tangible book value by $0.74 per share at December 31, 2000. The company is accreting the negative goodwill into income over five years. Imperial Capital Group, LLC In 1996, the Company acquired a 1% interest in Dabney/Resnick/Imperial LLC ("DRI"), an investment banking firm located in Beverly Hills, California and purchased a warrant to acquire an additional 48% ownership. During the fourth quarter of 1997, the Company formed a new subsidiary, ICG, which includes a registered broker/dealer and an asset management company offering individual and corporate investors a wide range of financial products and services. During the year ended December 31, 2000 and 1999, ICG raised $337.6 million and $137.3 million for corporate clients through private placement debt and equity offerings generating investment banking and brokerage fees of $30.0 million and $27.2 million, respectively. During the fourth quarter of 2000, the Company reduced its ownership percentage in ICG from 63.2% to 38.5% through the sale of a part of its equity interest directly to ICG and to certain management members of ICG. The Company generated gross proceeds from the sale of $2.7 million, and received $885,000 in cash and $1.8 million in the form of a short-term note. The Company's investment in and income from ICG is accounted for by the equity method of accounting beginning with the quarter ended December 31, 2000. Franchise Mortgage Acceptance Company On March 11, 1999, FMC and Bay View Capital Corporation ("Bay View") announced that they had executed a definitive merger agreement providing for the merger of FMC with Bay View. This agreement included selling our 38.3% ownership in FMC to Bay View. In accordance with the terms of the definitive agreement, Bay View acquired all of the common stock of FMC. Each share of FMC common stock was converted into, at the election of the holder, either $9.80 in cash, or .5444 shares of Bay View's common stock. On November 1, 1999, the merger between FMC and Bay View was completed. We received $27.7 million in cash and 4.4 million shares of Bay View common stock from the sale and exchange of our 38.3% interest in FMC. On November 5, 1999, we announced the sale of 4,342,451 shares of our Bay View common stock. As a result of these transactions, we received approximately $86.3 million in total cash proceeds and recorded a gain on sale of $30.1 million. Southern Pacific Funding Corporation In 1996, a substantial portion of the Company's operations were conducted through its sub-prime residential lending subsidiary, Southern Pacific Funding Corporation ("SPFC"). In June 1996, SPFC completed an initial public offering of its common stock pursuant to which ICII was a selling shareholder. On October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection under the Federal bankruptcy laws in the U.S. Bankruptcy Court for the District of Oregon. As a result of SPFC declaring Chapter 11 bankruptcy and the resultant decline in its common stock to below one dollar per share, the Company wrote-off its total investment in and loan to SPFC. The write-off was $82.6 million for the year ended December 31, 1998. 3. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent liabilities as of the dates of the balance sheets and revenues and expenses for the periods presented. Significant balance sheet items which could be materially affected by such estimates include: 96 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the allowance for loan and lease losses, securities held for sale or available for sale, the deferred tax asset and the carrying value of the Company's trading securities, securitization related assets and loans held for sale. Actual results could differ significantly from management's estimates. Prior years' consolidated financial statements have been reclassified to conform to the 2000 presentation. The deconsolidation of ICG in the fourth quarter of 2000 affects the comparability of financial statements between periods. Investment Securities The Company classifies investment securities as trading or available for sale. Securities held for trading are reported at fair value with unrealized gains and losses included in operations, and securities available for sale are reported at fair value with unrealized gains and losses, net of related income taxes, included as a separate component of shareholders' equity in accumulated other comprehensive income. Realized gains and losses on investment securities are included in income and are derived using the specific identification method for determining the cost of securities sold. Premiums and discounts are amortized over the life of the securities by use of the interest method. When a decline in value of a security is judged to be other than temporary, it is written down to fair value by a charge to earnings. Loans and Leases Held for Sale Loans and leases held for sale are carried at the lower of aggregate cost or market, which is based on sale commitments, discounted cash flow analysis or prices for similar products. Loans and leases which are ineligible for sale, generally those 90 days past due, are transferred to loans held for investment at the lower of cost or market on the date of transfer. Loans and Leases Held for Investment Loans and leases held for investment are recorded at the contractual amounts owed by borrowers adjusted for unamortized discounts, premiums, unearned income, undisbursed funds, deferred loan fees and the allowance for loan and lease losses. Interest income is recorded on the accrual basis in accordance with the terms of receivables, except that interest accruals are discontinued when the payment of principal or interest is 90 or more days past due or when repayment of principal and interest in full is doubtful. In general, payments received on non-accrual loans are applied to the principal outstanding until the loan is restored to accrual status. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The measurement of impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (ii) the observable market price of the impaired loan or (iii) the fair value of the collateral. If the recorded investment of the loan exceeds the measure of impairment, a valuation allowance is recorded in the amount of the excess. For all loans secured by real estate, the Company measures impairment by utilizing the fair value of the collateral; for other loans, discounted cash flows are used to measure impairment. The Company's income recognition policies for impaired loans are consistent with those on non-accrual loans. All loans designated as impaired are either placed on non-accrual status or are designated as restructured. Payments received on impaired loans are applied to the principal outstanding until the loan is returned to accrual status. On an ongoing basis, management monitors the loan and lease portfolio and evaluates the adequacy of the allowance for loan and lease losses. In determining the adequacy of the allowance for loan and lease losses, management considers such factors as historical loss experience, underlying collateral values, known problem loans, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate 97 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) data to identify the risks in the loan and lease portfolio. The amount of the allowance for loan and lease losses is based on estimates and ultimate losses may vary from current estimates. Loans deemed by management to be uncollectible are charged to the allowance for loan and lease losses. Recoveries on loans previously charged off are credited to the allowance for loan losses. Provisions for loan and lease losses are charged to expense and credited to the allowance for loan and lease losses in amounts that satisfy regulatory requirements and are deemed appropriate by management based upon its evaluation of the known and inherent risks in the portfolio. Management believes that the allowance for loan and lease losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the SPB allowance for loan losses. Such agencies may require SPB to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Servicing Assets Servicing assets are recorded when the Company sells or securitizes loans or leases and retains the servicing rights. The total cost of the mortgage loans is allocated to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. Purchased servicing rights represent the cost of acquiring the rights. Servicing rights are amortized in proportion to, and over the period of, estimated future net servicing income. The Company assesses the servicing rights portfolio for impairment based on the fair value of those rights with any impairment recognized through a valuation allowance. In order to determine the fair value of the loan servicing assets, the company uses market prices under comparable servicing sales contracts, when available. Alternatively, it uses a valuation model that calculates the present value of future cash flows. Assumptions used in the valuation model include market discount rates, estimated default rates and estimated prepayment speeds. Prepayment speeds and default estimates are based on the actual prepayment and default histories of the underlying loan or lease pool. Retained Interest in Loan and Lease Securitizations Securitization interests retained by the Company as a result of securitization transactions are held as either available for sale or trading. The Company may create retained interests in loan and lease securitizations as a result of the sale of loans and leases into securitization trusts. Loan and lease securitizations have specific credit enhancement requirements in the form of over collateralization 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 over collateralization requirement specified in each securitization. This over collateralization amount is carried on the balance sheet as retained interest in loan and lease securitizations. After the over collateralization requirement and the other requirements specified in the pooling and servicing agreement have been met, the Company begins to receive the cash flows from any subordinated bonds or residual interests retained on a monthly basis. Retained interest in loan and lease securitizations is classified as a trading asset. To the extent that the future performance results are less than the Company's initial performance estimates, the Company's retained interest in loan and lease securitizations will be written down through a charge to operations. Accretion of income under the interest method on retained interest in securitizations is included in the caption "Interest on other finance activities" in the accompanying consolidated statements of operations and comprehensive income (loss). In determining the estimated fair values of the retained interest in loan and lease securitizations, the Company estimates the cash flows received by the Company after being released by the respective trust and discounts such cash flows at interest rates determined by management to be rates market participants would use in similar circumstances. 98 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Loan and Lease Sales and Related Gain or Loss Loans and leases are sold through either securitizations with servicing retained by the Company or whole loan sales. Securitizations typically require credit enhancements in the form of cash reserves or over collateralization that are reflected as retained interest in loan and lease securitizations on the consolidated balance sheet. Sales are recognized when the transaction settles, the risks and rewards of ownership are determined to have been passed to the purchaser and consideration, other than beneficial interests in the assets sold, is received. Gain is recognized to the extent that the selling prices exceed the carrying value of the loans sold based on the estimated relative fair values of the assets transferred, assets obtained and liabilities incurred. The assets obtained in a sale include, generally, retained interest in loan and lease securitizations, loan servicing assets, and call options. Liabilities incurred in a sale include, generally, recourse obligations, put options, and servicing liabilities. In the securitizations completed to date, the Company retained call options giving it the right to repurchase loans sold when the outstanding amount of such loans is 1% to 10% or less of the original amount sold, depending on the terms of the related securitization. As these call options are equivalent to a cleanup call, the Company has ascribed no value to them. The securitizations completed to date had no put option features. Loan Origination Fees Origination fees received on loans held for sale, net of direct costs related to the origination of the loans, are deferred until the time of sale and are included in the computation of the gain or loss on the sale of the related loans. Commitment fee income is deferred until each loan is funded and sold, and recorded as a part of the gain on sale of the loan in the same percentage as such loan is to the total commitment. Any remaining deferred commitment fee income is recognized at expiration of the commitment. When exercise of such commitment is deemed remote, the fee is recognized over the remaining commitment period. Origination fees on loans held for investment, net of direct costs related to the origination of the loans, are deferred and amortized over the contractual lives of the related loans using the interest method. When a loan is classified as a non-accrual loan, the related net deferred origination fees are no longer accreted to income. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation on premises and equipment is recorded using the straight-line method over the estimated useful lives of individual assets (3 to 7 years). Leasehold improvements are amortized over the terms of their related leases or the estimated useful lives of improvements, whichever is shorter. Interest Bearing Deposits Interest bearing deposits consist of time certificates, investment in federal funds and money market accounts. Amounts are carried at cost which approximates market value. Real Estate and Other Assets Owned Foreclosed real estate is transferred from the loan portfolio at the lower of the carrying value of the loan or net fair value of the property less estimated selling costs and is classified as other real estate owned ("OREO"). The excess carrying value, if any, of the loan over the estimated fair value of the collateral based on appraisal or broker opinion of value less estimated selling costs is charged to the allowance for loan losses. Any subsequent impairments in value are recognized through a valuation allowance. Gains and losses from sales of OREO, provisions for losses on OREO, and net operating expenses of OREO are recorded in operations and included in the caption "net expenses of other real estate owned" in the accompanying consolidated statements of operations and comprehensive income (loss). 99 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Income Taxes The Company files a combined California franchise tax return and a consolidated Federal income tax return with all of its operating subsidiaries except ICG. The Company accounts for income taxes using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Goodwill Goodwill is amortized on a straight-line basis over its estimated useful life of 15 years. Negative goodwill is amortized over 5 years. Goodwill is reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. Impairment is measured by discounting operating income of the related entity at an appropriate discount rate. Impairment charges of $11.3 million in 1999 and $4.1 million in 2000 related to goodwill at IBC and ICLS, respectively are classified as amortization of goodwill. At December 31, 2000 and 1999, Goodwill is presented net of accumulated amortization of $23.3 million and $21.9 million, respectively. Debt Issue Costs Capitalized debt issue costs are included in Other Assets and are amortized to interest expense over the life of the related debt using the interest method. Total Rate of Return Swaps During 2000, 1999 and 1998, we entered into total rate of return swap contracts for investment purposes with various counter parties, the provisions of which entitle our company to receive the total return on various commercial loans in exchange for a floating payment of one month LIBOR plus a spread. These contracts are off balance sheet instruments. The deposits on these instruments along with the mark-to-market balances are classified as trading securities and are carried at estimated fair value. As of December 31, 2000, 1999 and 1998, we were party to total rate of return swap contracts with a total notional amount of $65.2 million, $83.6 million and $280.4 million, respectively, under which our company was obligated to pay one month LIBOR plus a weighted average spread of 0.88%. The weighted average remaining life of these contracts was 51.2 months, 60.0 months and 31.2 months as of December 31, 2000, 1999 and 1998. For the years ended December 31, 2000 and 1999, we recognized $2.7 million and $2.9 million in interest income on these total return swaps and ($3.8) million and $197,000 in net mark-to-market gains or (losses), respectively. The cash flows from these swaps are generated by investments in nationally syndicated bank loans which have experienced high default rates in the year ended December 31, 2000. Additionally, credits in the swaps are subject to market price risk, and as such could result in significant gains or losses to our company. We invested in the subordinated and equity interests of Pacifica Partners I through a total return swap. The provisions of the swap entitle the Company to receive the total return on the subordinate bonds delivered and pay a floating payment of LIBOR plus a weighted average spread of 0.075% as of December 31, 2000. The recoverability of this asset is dependent upon the future cash flows from Pacifica Partners I. These cash flows come from investments in nationally syndicated bank loans and high yield bonds which have experienced high default rates in the year ended December 31, 2000. At December 31, 2000 and 1999, $59.1 million and $38.2 million was outstanding and classified as Trading Securities on the consolidated balance sheet. 100 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's cash collateral held by the counter parties is included in trading securities. Net income or expense on these contracts is included in interest income, and the contracts are carried at their estimated fair values. Equity Investments Equity investments are carried under the equity method of accounting. Accordingly, the Company records as a part of its earnings its ownership percentage of the equity investment's net income. Dividends received from such subsidiaries, if any, are credited to the investment balance and not recorded as earnings. The Company records gains from the sale of stock in subsidiaries carried under the equity method based on the difference between the Company's equity ownership after the sale and such equity ownership prior to the sale, using the Company's respective ownership percentages. Deferred income tax liabilities on such gains are accrued at the time such gains are recognized. During the third quarter of 1999, the Company determined that we did not have the ability to exercise significant influence over FMC, and therefore, we changed to the cost method of accounting for this investment. Stock Based Compensation As permitted by SFAS No. 123, "Accounting for Stock Based Compensation", the Company accounts for stock based employee compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company provides the pro forma and plan disclosures as set forth in SFAS 123. Comprehensive Income Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. Comprehensive income generally includes net income, foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on investments in certain debt and equity investments (i.e., securities available for sale). Loss Per Share Loss per share for 2000, 1999 and 1998 was calculated using the weighted average number of shares outstanding for the respective year end periods. The following table reconciles the number of shares used in the computations of basic and diluted loss per share for the years ended December 31:
2000 1999 1998 ---------- ---------- ---------- Weighted-average common shares outstanding during the year used to compute basic and diluted loss per share................... 32,573,119 34,517,165 38,228,325
Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities", which amends SFAS No. 133. This statement is expected to primarily impact the Company's investments in total return swaps. See Footnote 3. "Summary of Significant Accounting Policies--Total Rate of Return Swaps." On January 1, 2001, the Company implemented this statement without a material impact on the Company. 101 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In September 2000, the FASB issued SFAS no. 140, "Accounting for transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," establishes accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of financial-components approach that focuses on control. SFAS No. 140 requires a debtor to (a) reclassify financial assets pledged as collateral and report those assets in its statement of financial condition separately from those assets not so encumbered if the secured party has the right by contract or custom to sell or repledge the collateral and (b) disclose assets pledged as collateral that have been reclassified and separately reported in the statement of financial condition. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitizations and collateral for fiscal years ending after December 15, 2000. Disclosures about securitizations and collateral accepted need not be reported for periods on or before December 15, 2000, for which financial statements are presented for comparative purposes. Adoption is not expected to have a material impact on the Company. 4. Bank Regulatory Matters Southern Pacific Bank (the "Bank") is subject to federal and state regulation and periodic examinations by the DFI and the FDIC. The Bank's ability to pay dividends is subject to prior approval of the FDIC and the DFI, as more fully explained below. California Regulations The Bank is subject to the general limitations on the payment of dividends applicable to corporations under the California Corporations Code. The California Financial Code authorizes the Commissioner of the DFI to set capital requirements for industrial banks. Failure to meet minimum capital requirements of the DFI can lead to certain restrictions similar to those described below, including imposition of a receivership or conservatorship. FDIC Regulations The Bank also is subject to capital requirements set by the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by the FDIC that, if undertaken, could have a direct material effect on the Bank's consolidated financial statements. Under risk-based capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the FDIC with respect to components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, set forth in the table below, of total risk-based capital, risk-based tier-1 capital to risk-weighted assets and risk-based tier-1 capital to average assets. The prompt corrective action regulations of the FDIC define specific capital categories based on a bank's capital ratios. The capital categories, in declining order, are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Banks such as SPB categorized as "undercapitalized" or worse are subject to certain restrictions, including the requirement to file a capital plan with the primary federal regulator, prohibitions on the payment of dividends and management fees, restrictions on executive compensation, and increased supervisory monitoring, among other things. Other restrictions may be imposed on the bank either by its primary regulator or by the FDIC, including requirements to raise additional capital, sell assets, or sell the entire bank. Once a bank becomes "critically undercapitalized" it must generally be placed in receivership or conservatorship within 90 days. 102 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) To be considered "adequately capitalized," a bank must generally have a leverage ratio of at least 4%, a Tier 1 risk-based capital ratio of at least 4%, and a total risk-based capital ratio of at least 8%. An institution is deemed to be "critically undercapitalized" if it has a tangible equity ratio of 2% or less. At December 31, 2000, the Bank was "undercapitalized" according to the FDIC's regulatory framework. The following table sets forth the capital categories and the Bank's ratios as of December 31, 2000:
Risk-based Capital Risk-based Capital Category Ratio Tier I Capital Ratio FDIC Leverage Ratio ---------------- --------------------- -------------------- -------------------- Well capitalized........ (greater than or =)10% (greater than or =)6% (greater than or =)5% Adequately capitalized.. (greater than or =)8% (greater than or =)4% (greater than or =)4% Undercapitalized........ < 8% < 4% < 4% Significantly undercapitalized....... < 6% < 3% < 3% --------------------- -------------------- -------------------- Southern Pacific Bank, at December 31, 2000... 6.59% 3.54% 3.46% ===================== ==================== ====================
The Bank's actual capital amounts and ratios are summarized as follows:
At December 31, 2000 ---------------------------------------------- Adequately Well Capitalized Capitalized Actual requirement requirement -------------- -------------- -------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (Dollars in thousands) Risk-based Capital.......... $121,833 6.59% $149,474 8.00% $186,842 10.00% Risk-based Tier 1 Capital... $ 65,497 3.54% $ 74,737 4.00% $112,105 6.00% FDIC Leverage Ratio......... $ 65,497 3.46% $ 75,802 4.00% $ 94,752 5.00% At December 31, 1999 ---------------------------------------------- Adequately Well Capitalized Capitalized Actual requirement requirement -------------- -------------- -------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (Dollars in thousands) Risk-based Capital.......... $219,278 10.67% $164,445 8.00% $205,557 10.00% Risk-based Tier 1 Capital... $160,018 7.78% $ 82,223 4.00% $123,334 6.00% FDIC Leverage Ratio......... $160,018 8.94% $ 71,610 4.00% $ 89,512 5.00%
Regulatory Actions The Bank, in December 2000, consented to the issuance by the FDIC of an order (the "FDIC Order") to cease and desist from what the FDIC alleges to be certain unsafe and unsound practices relating to the Bank's operations. The Bank also has consented to the DFI's similar, though not identical, order (the "DFI Order" and together with the FDIC Order, the "Orders"). The Bank has not admitted or denied the claimed basis of the FDIC or DFI for the Orders, but intends to comply fully with their respective requirements. The Orders set forth certain requirements with which the Bank must comply, including the following: . The Bank is required to have and maintain qualified management, including a chief executive officer and other persons experienced in lending, collection and improving asset quality and earnings. Further, during the effectiveness of the Orders the Bank must obtain the prior approval of the FDIC and DFI to the appointment of any new director or senior executive officer for the Bank, and the DFI has the right to determine whether present members of the Bank's management are acceptable. 103 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) . Under the FDIC Order, the Bank must increase its equity capital by $19 million by March 31, 2001, and by an additional $20 million in stages through December 31, 2001. The Bank must also attain a total risk based capital ratio of 10.50% and a Tier 1 capital ratio of 8.00% by March 31, 2001 and must increase those ratios, in stages through December 31, 2001, to 12.00% and 9.00%, respectively. Under the DFI Order, the Bank is required by March 31, 2001 to increase its adjusted tangible shareholder's equity by $29 million and by an additional $15 million through June 30, 2001. Also, by March 31, 2001, the Bank must attain an adjusted tangible shareholder's equity of at least 7.00% of its adjusted tangible total assets, and must increase this ratio by 0.50% each quarter to 8.50% at December 31, 2001. The DFI Order would limit the maximum amount of the Bank's deferred tax assets that may be included in the adjusted tangible shareholder's equity calculation to the lesser of (x) the amount of deferred tax assets that are dependent upon future taxable income expected to be received within one year or (y) 10% of adjusted tangible shareholder's equity existing before any disallowed deferred tax assets. The Bank was not in compliance with this requirement at March 31, 2001. . The required increases in capital may be accomplished through capital contributions by ICII to the Bank, the sale of common stock or noncumulative perpetual preferred stock of the Bank, the exchange of Bank debt held by ICII for such preferred stock, or any other means acceptable to the FDIC and the DFI. The Bank must adopt and implement a capital plan acceptable to the FDIC and the DFI to achieve and maintain these capital requirements. . Within 10 days of the effective dates of the Orders, the Bank must eliminate all assets that were classified as "Loss" and one-half the assets classified "Doubtful" as of March 31, 2000, or as of June 26, 2000 under the FDIC Order, and reduce by March 31, 2001 its assets that were classified as "Substandard" or "Doubtful", as of June 26, 2000 to not more than $90 million. The Bank has already satisfied the requirements of March 31, 2001 by charging off or collecting certain of those assets. The Bank also must reduce by June 30, 2001 and September 30, 2001 its assets that were classified "Substandard" or "Doubtful" as of June 26, 2000 to not more than $70,000,000 and $50,000,000, respectively. . Under the FDIC Order, the Bank may not extend additional credit to any borrower that has a loan or other credit from the Bank that has been charged off or classified "Loss" or "Doubtful", in whole or part, and is uncollected. With certain exceptions, the Bank is restricted from extending additional credit to any borrower with a Bank loan or other credit that has been charged off or classified "Substandard", in whole or part, and is uncollected. . The Bank must revise, adopt and implement policies acceptable to the FDIC and the DFI regarding its lending and loan review procedures, transactions with insiders and affiliates, and its requirements for reporting lending practices and other strategies to the Bank's chief executive officer. The Bank's Board must also review the adequacy of the Bank's allowances for loan and lease losses and adopt a policy for regularly determining the adequacy of such allowances. . The Bank must develop and adopt a detailed business plan acceptable to the FDIC and the DFI to control overhead and other expenses and restore the Bank to a sound condition. . The Bank must provide quarterly progress reports to the FDIC and DFI regarding its actions to comply with the Orders. . The Bank may not pay any cash dividends, make any other shareholder distributions or pay bonuses to its executive officers without the prior approval of its regulators, nor may it engage in any new lines of business without the prior approval of the FDIC and the DFI. 104 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Bank and ICII already have taken a number of actions that are intended to enable the Bank to comply with the requirements of the Orders. However, these actions may not succeed in enabling the Bank to comply with such requirements and the Bank's ability to comply may be subject to events outside the control of the Bank and ICII, such as capital market trends and general economic conditions. The actions undertaken include: . ICII exchanged $9.0 million of SPB's subordinated debt and contributed $5.0 million in cash in exchange for 50,000 shares of the Bank's Series A noncumulative perpetual preferred stock. . ICII and the Bank have developed a capital plan intended to achieve the FDIC and DFI capital requirements by selling certain non-core assets of the Bank and ICII, reducing the assets of the Bank, exchanging additional Bank subordinated debt held by ICII for noncumulative perpetual preferred stock of the Bank, and the making by ICII of additional capital contributions to the Bank. . In order to assist SPB in meeting the requirements of the Orders with the FDIC and the DFI, ICII has retained financial advisors to evaluate capital raising alternatives that may be available to ICII and the Bank, and to assist in the implementation of the Bank's capital plan. . The Bank has made changes in its management to address the requirements of the Orders and contemplates further changes as required, including the employment of additional experienced credit administration personnel. . The Bank has adopted and implemented new policies and procedures in its lending, credit administration and lending review areas. . The Bank has developed detailed business plans which address marketing, asset diversification, credit administration, management oversight, non- accrual and classified assets and operating efficiencies among other items. ICII and the Bank are in the process of revising their capital plan that was submitted to the FDIC and the DFI. Such capital plan has not yet been approved by the FDIC and the DFI. The plan indicates that the Bank will not meet any of the above cited capital ratio targets at the indicated dates. However, the preliminary revised plan does indicate that the Bank's capital ratios at December 31, 2001, will qualify it to be categorized as "well capitalized" at that time. At this time, the financial impact, if any, of regulatory actions that may result from the failure of the Bank to meet the minimum capital requirements of the orders cannot be determined. Although such capital infusions and conversions caused the Bank's capital ratios to be above those required by statute to be considered "adequately capitalized," the Bank does not meet the capital ratio targets specified by the Orders. An additional approximately $38 million would have had to be contributed to cause the Bank to meet the capital ratio targets specified by the Orders at March 31, 2001. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Achievement of the capital plan depends on future events and circumstances, the outcome of which cannot be assured. Nevertheless, management believes, at this time, that the Bank will meet all the provisions of the preliminary revised capital plan and that the Bank will qualify to be classified as "well capitalized" at December 31, 2001. The preliminary revised capital plan includes the following elements determined by management to be necessary to meet the regulatory capital requirements cited above: . Cash capital contributions by ICII; . Conversion of Bank subordinated debt owned by ICII into preferred stock; . Restoration of a portion of the Bank's deferred tax asset as allowed by regulations; . Reductions in problem assets and related loan loss provisions; and . Return to profitable operations. 105 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On March 30, 2001, SPB's parent company ICII contributed $21.2 million in cash, all of which was in the form of Tier 1 capital. Additionally, ICII converted $22.0 million of SPB's subordinated debt into non cumulative perpetual preferred stock of SPB. These capital infusions and conversions, in addition to earnings at SPB subsequent to December 31, 2000 (unaudited), restored SPB's capital to amounts above the "adequately capitalized" minimums of 4% and 8%, respectively, as defined by banking regulations. Each regulatory agency has available various remedies, including enforcement actions and sanctions. Among other sanctions, if the Bank is unable to meet its regulatory capital requirements, or is determined to have other serious regulatory or supervisory problems, the FDIC and/or the DFI could place the Bank in conservatorship or receivership. 5. Investment in FHLB Stock As a member of the FHLB system, the Company's wholly owned subsidiary, SPB, is required to maintain an investment in the capital stock of the FHLB in an amount at least equal to the greater of either 1% of residential mortgage assets or 5% of outstanding borrowings (advances). FHLB stock and loans are pledged to secure FHLB advances. The Bank was in compliance with this requirement with an investment in FHLB stock at December 31, 2000 and 1999 of $4.1 million and $7.0 million, respectively. FHLB stock is recorded at historical cost. 6. Trading Securities The following table provides a summary of trading securities as of December 31, 2000 and 1999:
2000 1999 -------- -------- (In thousands) U.S. Treasury Securities.................................. $ 39,438 $ 66,997 FLRT 1996-A interest-only securities...................... 3,971 6,349 SPTL 1997 C-1 interest-only securities.................... 4,457 3,351 SPTL 1996 C-1 subordinate bonds........................... 11,995 -- SPTL 1996 C-1 interest-only securities.................... 1,591 2,279 IBC 1997-2 B-1 and C-1 securities......................... 8,978 12,201 Mortgage-backed securities................................ 489 2,214 Investment in total return swap--Pacifica Partners I LP... 59,129 38,151 Collateral for total return swap--syndicated loans........ 33,667 18,750 Other..................................................... 335 10,513 -------- -------- $164,050 $160,805 ======== ========
Gross unrealized gains and losses on trading securities included in income were $3.8 million and ($12.9) million; $14.6 million and $1.9 million; and $0 and $13.6 million for the years ended December 31, 2000, 1999 and 1998 respectively. The Company also recorded write-downs of retained interests of $1.8 million, $15.0 million and $4.4 million during the years ended December 31, 2000, 1999 and 1998, respectively. During the first quarter of 2001, the Company sold one of the FLRT 1996-A securities, all of the SPTL 1996 C-1 subordinate bonds, and all of the SPTL 1996 C-1 interest-only securities at prices approximating book value. 106 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Securities Available for Sale The following table provides a summary of securities available for sale with a comparison of amortized cost and fair values as of December 31, 2000 and 1999:
Gross Gross Amortized Unrealized Unrealized Fair December 31, 2000 Cost Gains Losses Value ----------------- --------- ---------- ---------- ------- (In thousands) Cambria Investment Partnership leveraged bank debt.............. $ 5,507 $ 862 $ -- $ 6,369 On Stage Entertainment common stock............................ 715 730 -- 1,445 On Stage Entertainment warrants... 200 122 -- 322 Avalon total return fund.......... 362 -- -- 362 GNMA II MBS....................... 1,561 5 -- 1,566 FNMA MBS.......................... 5,945 -- (69) 5,876 GNMA I MBS........................ 4,317 -- (31) 4,286 GNMA REMIC MBS.................... 42,160 -- (102) 42,058 Other............................. 1,400 -- -- 1,400 ------- ------ ------- ------- $62,167 $1,719 $ (202) $63,684 ======= ====== ======= ======= Gross Gross Amortized Unrealized Unrealized Fair December 31, 1999 Cost Gains Losses Value ----------------- --------- ---------- ---------- ------- (In thousands) ICCMIC common stock............... $25,058 $4,176 $ -- $29,234 Cambria Investment Partnership leveraged bank debt.............. 10,000 1,581 -- 11,581 Preferred Stock--Auction Finance Group............................ 6,500 -- -- 6,500 Avalon total return fund.......... 2,164 -- (834) 1,330 Residential mortgage-backed securities....................... 13,407 83 (662) 12,828 IBC 1997-2 Class A-2 securities... 12,000 -- -- 12,000 Other............................. 901 -- -- 901 ------- ------ ------- ------- $70,030 $5,840 $(1,496) $74,374 ======= ====== ======= =======
Gross realized gains and (losses) on the sale of available for sale securities were $507,000 and ($827,000) $100,000 and ($1.6) million and $0 and ($592,000) for the years ended December 31, 2000, 1999 and 1998, respectively. 8. Loans and Leases Held for Sale Loans and leases held for sale, at the lower of cost or market, consisted of the following at December 31, 2000 and 1999:
2000 1999 -------- -------- (In thousands) Loans secured by real estate: One to four family...................................... $ 5,184 $ 10,095 Multifamily and commercial.............................. 376,116 252,944 -------- -------- 381,300 263,039 Installment loans......................................... 5,169 14,058 Leases.................................................... -- 12,301 -------- -------- $386,469 $289,398 ======== ========
107 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 2000 and 1999, loans held for sale were net of a $512,000 and $500,000 lower of cost or market valuation allowance, respectively. Non- accrual loans are presented in the table above at the lower of cost or market value. 9. Loans and Leases Held for Investment, net Loans and leases held for investment consisted of the following at December 31, 2000 and 1999:
2000 1999 ---------- ---------- (In thousands) Loans secured by real estate: One to four family................................. $ 72,502 $ 93,914 Multifamily........................................ 42,695 35,249 Commercial......................................... 14,025 14,022 ---------- ---------- 129,222 143,185 Leases............................................... 10,431 1,125 Consumer and auto loans.............................. 3,480 7,072 Franchise loans...................................... 8,797 18,277 Asset-based and cash stream loans.................... 752,883 748,122 Loan participations.................................. 123,471 216,961 Mortgage warehouse lines............................. 50,639 78,068 Film and television productions loans................ 83,688 15,824 Commercial loans..................................... 18,223 48,853 ---------- ---------- 1,180,834 1,277,487 Loans in process..................................... 11,860 (5,472) Unamortized premium.................................. 1,341 1,389 Deferred loan fees................................... (7,916) (8,492) ---------- ---------- 1,186,119 1,264,912 Allowance for loan and lease losses.................. (63,625) (31,841) ---------- ---------- $1,122,494 $1,233,071 ========== ==========
The Company's loans and leases held for investment are primarily comprised of first and second lien mortgages secured by residential and income producing real property in California, leases secured by equipment, Asset-based and cash stream loans to middle market companies mainly in California participations in nationally syndicated commercial loans in addition to entertainment loans. As a result, the loan portfolio has a high concentration in the same geographic region. Although the Company has a diversified portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economy of California. The Company's film and television production loans may carry inherent currency risks to the degree that underlying distribution contracts are denominated in foreign currency. The Company may enter into foreign currency hedge contracts to minimize these risks. At December 31, 2000, the Company did not have any loans secured by distribution rights denominated in a foreign currency. 108 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Activity in the allowance for loan and lease losses was as follows:
For the Years Ended December 31, ----------------------------- 2000 1999 1998 --------- -------- -------- (Dollars in thousands) Beginning balance as of January 1.............. $ 31,841 $ 24,880 $ 26,954 Provision for loan and lease losses............ 180,975 35,340 15,450 Business acquisitions.......................... 534 1,846 -- --------- -------- -------- 213,350 62,066 42,404 --------- -------- -------- Loans and Leases charged off--Core Business Lines: Multifamily and commercial loans............... (353) (857) (918) Asset-based and cash stream loans.............. (89,732) (17,530) (112) Loan participations............................ (32,267) (3,882) -- Mortgage warehouse lines....................... (17,050) (1,625) -- Entertainment loans............................ (1,939) -- -- Commercial and industrial loans................ (810) -- -- Leases......................................... (399) (2,217) (1,496) Autolend....................................... (950) -- -- --------- -------- -------- (143,500) (26,111) (2,526) --------- -------- -------- Loans charged off--Non-Core Business: Franchise loans................................ (3,106) -- -- Single family residential...................... (5,560) (2,960) (4,661) Consumer loans................................. (580) (2,611) (15,487) --------- -------- -------- (9,246) (5,571) (20,148) --------- -------- -------- Total Charge-offs.............................. (152,746) (31,682) (22,674) --------- -------- -------- Recoveries on loans and leases previously charged off--Core Business: Multifamily and commercial loans............... 115 55 142 Asset-based and cash stream loans.............. 831 163 45 Loan participations............................ 16 -- -- Mortgage warehouse lines....................... 639 -- -- Leases......................................... 222 1,086 1,721 --------- -------- -------- 1,823 1,304 1,908 --------- -------- -------- Net charge-offs--Core Business Lines........... (141,677) (24,807) (618) --------- -------- -------- Recoveries on loans previously charged off-- Non-Core Business: Franchise loans................................ 35 -- -- Single family residential...................... 98 3 2,401 Consumer....................................... 1,065 150 841 --------- -------- -------- 1,198 153 3,242 --------- -------- -------- Total recoveries............................... 3,021 1,457 5,150 --------- -------- -------- Net charge-offs--Non-core business lines....... (8,048) (5,418) (16,906) --------- -------- -------- Total net charge-offs.......................... (149,725) (30,225) (17,524) --------- -------- -------- Balance as of December 31...................... 63,625 31,841 24,880 Allowance for loan and lease losses at AMN as of December 31................................ -- 30 857 --------- -------- -------- $ 63,625 $ 31,871 $ 25,737 ========= ======== ========
109 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 2000, 1999 and 1998, non-accrual and impaired loans totaled $78.5 million, $59.4 million, and $39.5 million, respectively. Interest income foregone on non-accrual loans was $9.0 million, $4.4 million, and $2.2 million, for the years ended December 31, 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, impaired loans and the related allowance for loan and lease losses were as follows:
2000 1999 ------------------------------ ----------------------------- Specific Specific Allowance Recorded Allowance Carrying Recorded for Carrying Investment for Losses Value Investment Losses Value ---------- ---------- -------- ---------- --------- -------- (In thousands) Continuing operations... $77,813 $(30,169) $47,644 $57,823 $(5,278) $52,545 Discontinued operations of AMN................. 716 -- 716 1,596 -- 1,596 ------- -------- ------- ------- ------- ------- Total impaired loans.. $78,529 $(30,169) $48,360 $59,419 $(5,278) $54,141 ======= ======== ======= ======= ======= =======
Impaired loans averaged $87.4 million, $57.5 million and $27.3 million during 2000, 1999 and 1998, respectively. 10. Retained Interests The changes in retained interests in loan and lease securitizations are as follows:
Year Ended December 31, ----------------- 2000 1999 ------- -------- (In thousands) Beginning Balance....................................... $10,220 $ 27,011 Retained interest received in loan and lease securitizations........................................ 3,688 4,036 Cash distributions received from trust.................. (2,730) (8,993) Sales of retained interest.............................. (1,790) (1,797) Accretion............................................... 1,611 5,009 Mark to market adjustments.............................. (4,669) (15,046) ------- -------- Ending balance.......................................... $ 6,330 $ 10,220 ======= ========
Key economic assumptions used in measuring the fair value of retained interest at the date of securitization are as follows:
Year Ended December 31, ----------- 2000 1999 ---- ----- (In thousands) Prepayment speed (annual rate)................................... 5.0% 4%-8% Weighted-average life (in years)................................. 3.8 3.8 Expected gross credit losses (annual)............................ 9.0% 5%-8% Retained interest discounted at (per annum)...................... 15% 15%
110 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Key economic assumptions used in measuring retained interest are as follow:
Year Ended December 31, ----------------------- 2000 1999 ----------- ----------- (In thousands) Prepayment speed (annual rate)....................... 5.0%-35.0% 4.0%-40.0% Weighted-average life (in years)..................... 2.4-4.2 2.8-6.8 Expected gross credit losses (annual)................ 1.0%-13.0% 0.05%-9.0% Retained interest discounted at (per annum).......... 15.0%-28.0% 15.0%-28.0%
At December 31, 2000, the sensitivity of the current fair value of retained interest to immediate 10 percent and 20 percent adverse changes to assumptions are as follows: Balance sheet carrying value of retained interest................... $6,330 Prepayment speed assumptions Impact on fair value of 10% adverse change.......................... (132) Impact on fair value of 20% adverse change.......................... (269) Expected credit losses Impact on fair value of 10% adverse change.......................... (941) Impact on fair value of 20% adverse change.......................... (1,868) Residual cash flows discount rate Impact on fair value of 10% adverse change.......................... (265) Impact on fair value of 20% adverse change.......................... (514)
The sensitivities noted above are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumptions; in reality, changes in one factor may result in changes in another which might magnify or counteract the sensitivities. The following table presents retained interest by securitization, delinquencies and current period net credit loss for the year ended December 31, 2000 (in thousands):
Net Delinquent Credit losses Principal receivables over net of Securitized portfolio securitized outstanding 90 days recoveries --------------------- ----------- ----------- ---------- ------------- IBC 1997-2................ $520,983 $160,316 $2,442 $10,731 Prudential 1994-6......... 45,501 4,281 655 449 -------- -------- ------ ------- Total securitized portfolio................ $566,484 $164,597 $3,097 $11,180 ======== ======== ====== =======
111 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Servicing Rights Changes in servicing rights were as follows:
Year Ended December 31, ----------------------- 2000 1999 1998 ----- ------- ------- (In thousands) Beginning Balance................................... $ 802 $ 4,329 $ 4,731 Additions........................................... 327 1,061 1,084 Sales of servicing rights........................... -- (365) -- Amortization........................................ (529) (4,223) (1,486) ----- ------- ------- Ending balance...................................... $ 600 $ 802 $ 4,329 ===== ======= =======
The balance of servicing rights is recorded in other assets on the consolidated balance sheet. The servicing portfolio associated with servicing rights at December 31, 2000 and 1999 was $103.0 million and $106.0 million, respectively. 12. Premises and Equipment, net Premises and equipment consisted of the following at December 31, 2000 and 1999:
2000 1999 -------- -------- (In thousands) Premises and equipment................................... $ 16,202 $ 18,146 Leasehold improvements................................... 5,296 5,863 -------- -------- 21,498 24,009 Less accumulated depreciation and amortization........... (11,065) (10,433) -------- -------- $ 10,433 $ 13,576 ======== ========
13. Discontinued Operations Auto Marketing Network ("AMN") As of July 31, 1998 (measurement date), management determined to cease operations at Auto Marketing Network, Inc. Accordingly, a disposal plan was formulated, whereby daily operations of AMN were terminated in two months. Losses from AMN's discontinued operations, net of tax, were as follows:
Disposition Period from Year Ended Year Ended Period from January 1, 1998 December 31, December 31, August 1, 1998 to to July 31, 2000 1999 December 31, 1998 1998 ------------ ------------ ----------------- --------------- (In thousands) Loss from discontinued operations............. $5,218 $899 $ -- $3,232 Loss on disposal of AMN.................... -- -- 11,276 -- ------ ---- ------- ------ Net loss from discontinued operations............. $5,218 $899 $11,276 $3,232 ====== ==== ======= ======
For 2000, AMN incurred losses of $5.2 million primarily as a result of valuation reserves for income taxes, legal expenses and mark-to-market adjustments on AMN securities. During 1999, AMN incurred additional 112 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) operating losses of $899,000, net of income taxes, primarily related to legal expenses and mark-to-market adjustments on AMN securities. The loss on disposal of AMN in 1998 included charges (net of taxes) for the following items: $5.6 million for securities and retained interest valuation, $1.2 million for the disposition of furniture and equipment, $5.6 million for estimated future servicing obligations to a third party servicer, $1.3 million in liquidation allowances for non-accrual loans and repossessed autos, $2.1 million in severance pay, occupancy and general and administrative expenses. The charges in 1998 were partially offset by the estimated net interest income on loans and securities for the next year (disposition period) of $4.5 million. The net assets of AMN's discontinued operations were as follows:
At December 31, --------------- 2000 1999 ------- ------- (In thousands) Loans held for sale......................................... $ 2,310 $ 5,207 Securities held for sale.................................... -- 8,685 Retained interests.......................................... 14,002 12,436 Income tax asset............................................ -- 8,971 Other net assets............................................ 1,318 2,193 ------- ------- $17,630 $37,492 ======= =======
Total non-accrual AMN loans were $716,000 and $1.6 million as of December 31, 2000 and 1999, respectively. 14. Business Segments Business segment financial information is reported on the basis that is used internally by management in making decisions related to resource allocation and segment performance. The company's reportable segments are operated and managed as strategic business units and are organized based on products and services. Business units operated at different locations are aggregated for reporting purposes when their products and services are similar. The Company's operations are divided into eleven business segments as follows: 1. Coast Business Credit 6. Income Property Lending Division 2. Imperial Warehouse Finance, Inc. (formerly 7. Asset Management Activities PrinCap Mortgage Warehouse, Inc.) 8. Imperial Capital Group, LLC 3. Loan Participation and Investment Group 9. Other Core Operations 4. The Lewis Horwitz Organization 10. Equity Interests 5. Imperial Business Credit, Inc. 11. De-emphasized/Discontinued/Exited Businesses
For a description of our business segments, see Footnote 2. "Operating Activities." 113 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following represents the operating results and selected financial data by major business segments for 2000,1999 and 1998:
At or for the Year Ended December 31, 2000 --------------------------------------------------------------------------------------- Loan Participation Imperial Income Imperial Coast Imperial and The Lewis Business Property Asset Capital Business Warehouse Investment Horwitz Credit, Lending Management Group, Other Core Equity Credit Finance, Inc. Group Organization Inc. Division Activities LLC Operations Interests -------- ------------- ------------- ------------ -------- -------- ---------- -------- ---------- --------- (Dollars in thousands) Total loans, net............. $707,488 $ 61,935 $112,197 $ 81,284 $ 89 $374,423 $ 30 $ -- $ 62,515 $ -- Total assets.... 851,337 92,480 169,092 120,480 29,954 440,893 477 -- 333,833 -- Total deposits.. 743,666 85,602 158,428 94,515 -- 386,339 -- -- 6,592 -- Interest income.......... 113,937 6,105 18,589 11,843 2,819 37,639 1 85 13,960 -- Interest expense......... 53,619 5,306 13,011 6,736 512 25,524 -- 424 24,543 -- Provision for loan and lease losses.......... 113,533 18,920 39,291 558 80 2,209 -- -- 263 -- External revenue......... (43,515) (17,878) (40,293) 4,705 3,865 12,406 3,243 20,927 (789) 479 Inter-company revenue......... -- -- -- -- 20 -- -- -- 343 -- Inter-company expense......... -- -- -- -- -- -- 235 -- -- -- Mark to market on securities and loans held for sale........ (801) (70) (3,960) (92) (5,037) (422) -- -- (1,771) -- Equity in net income of ICG... -- -- -- -- -- -- -- -- -- 479 Total revenue... (43,515) (17,878) (40,293) 4,705 3,885 12,406 3,008 20,927 (446) 479 Depreciation.... 2,111 445 112 135 199 493 479 251 712 -- Amortization of goodwill........ 1,113 453 -- 924 -- -- -- 71 -- -- Amortization of servicing rights.......... -- -- -- -- 529 -- -- -- -- -- Income taxes.... 745 (4,586) (6,824) 645 1,517 2,480 (2,510) -- 11,787 (399) Net income (loss) from continuing operations...... $(72,094) $(17,706) $(35,070) $ 104 $(5,727) $ 1,582 $(6,994) $ 2,775 $(27,089) $ 878 De- emphasized/ Discontinued/ Exited Businesses Eliminations Consolidated ------------- ------------ ------------ Total loans, net............. $151,002 $ (42,000) $1,508,963 Total assets.... 261,607 (172,576) 2,127,577 Total deposits.. 157,562 -- 1,632,704 Interest income.......... 26,156 (6,309) 224,825 Interest expense......... 16,847 (6,309) 140,213 Provision for loan and lease losses.......... 6,121 -- 180,975 External revenue......... 11,123 -- (45,727) Inter-company revenue......... -- -- 363 Inter-company expense......... 128 -- 363 Mark to market on securities and loans held for sale........ (657) -- (12,810) Equity in net income of ICG... -- -- 479 Total revenue... 10,995 -- (45,727) Depreciation.... 508 -- 5,445 Amortization of goodwill........ (1,130) -- 1,431 Amortization of servicing rights.......... -- -- 529 Income taxes.... (499) -- 2,356 Net income (loss) from continuing operations...... $ (1,298) $ (1,003) $ (161,642)
114 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At or for the Year Ended December 31, 1999 --------------------------------------------------------------------------------------- Loan Imperial Participation Imperial Income Imperial Coast Warehouse and The Lewis Business Property Asset Capital Business Finance, Investment Horwitz Credit, Lending Management Group, Other Core Equity Credit Inc. Group Organization Inc. Division Activities LLC Operations Interests -------- --------- ------------- ------------ -------- -------- ---------- -------- ---------- --------- (In thousands) Total loans, net............. $726,066 $ 78,396 $211,292 $13,034 $ 12,649 $252,492 $ -- $ -- $ 49,778 $ -- Total assets.... 876,219 105,680 272,444 36,103 28,440 299,842 (832) 14,245 568,370 -- Total deposits.. 767,242 93,255 238,025 15,881 -- 273,449 -- -- (11,341) -- Interest income.......... 92,318 11,976 22,547 2,278 4,162 22,625 7 (82) 19,837 -- Interest expense......... 38,308 7,883 14,188 1,286 1,814 13,419 -- 437 30,829 -- Provision (recovery) for loan and lease losses.......... 24,724 1,190 6,982 351 (350) 142 -- -- -- -- External revenue......... 37,479 4,421 3,409 768 1,322 12,026 10,011 26,729 2,866 30,038 Inter-company revenue......... -- -- -- -- -- -- -- -- 288 -- Inter-company expense......... -- -- -- -- 1,284 -- 262 -- -- -- Mark to market on securities and loans held for sale........ 189 43 268 -- (11,901) 62 (38) -- 11,016 -- Equity in net loss of FMC..... -- -- -- -- -- -- -- -- -- (53) Total revenue... 37,479 4,421 3,409 768 37 12,026 9,748 26,729 3,155 30,038 Depreciation.... 1,579 84 80 7 263 304 300 452 595 -- Amortization of goodwill........ 1,113 453 -- 200 12,279 -- -- 87 -- -- Amortization of servicing rights.......... -- -- -- -- 259 -- -- -- -- -- Income taxes.... 5,289 718 815 3 (8,858) 1,326 (2) 628 (1,661) 12,015 Net income (loss) from continuing operations...... $ 7,933 $ 1,078 $ 1,222 $ 4 $(13,286) $ 1,990 $ (3) $ 942 $ (3,874) $18,023 De- emphasized/ Discontinued/ Exited Businesses Eliminations Consolidated ------------- ------------ ------------ Total loans, net............. $227,768 $ (49,006) $1,522,469 Total assets.... 320,209 (319,105) 2,201,615 Total deposits.. 238,247 -- 1,614,758 Interest income.......... 39,068 (7,298) 207,438 Interest expense......... 18,215 (4,772) 121,607 Provision (recovery) for loan and lease losses.......... 2,301 -- 35,340 External revenue......... (7,492) (2,527) 119,050 Inter-company revenue......... 1,258 -- 1,546 Inter-company expense......... -- -- 1,546 Mark to market on securities and loans held for sale........ (28,280) -- (28,641) Equity in net loss of FMC..... -- -- (53) Total revenue... (6,233) (2,527) 119,050 Depreciation.... 730 -- 4,394 Amortization of goodwill........ 374 -- 14,506 Amortization of servicing rights.......... 3,964 -- 4,223 Income taxes.... (12,336) (1,011) (3,074) Net income (loss) from continuing operations...... $(18,457) $ (1,522) $ (5,950)
115 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At or for the Year Ended December 31, 1998 ------------------------------------------------------------------------------------------ Loan De- Imperial Participation Imperial Income Imperial emphasized/ Coast Warehouse And Business Property Asset Capital Discontinued/ Business Finance, Investment Credit, Lending Management Group, Other Core Equity Exited Credit Inc. Group Inc. Division Activities LLC Operations Interests Businesses -------- --------- ------------- -------- -------- ---------- -------- ---------- --------- ------------- (In thousands) Total loans, net............. $623,748 $179,284 $221,030 $ 7,413 $144,573 $ -- $ -- $ 47,907 $ 1,162 $455,339 Total assets.... 628,636 186,257 241,854 44,899 146,250 3,831 6,774 331,578 60,098 813,931 Total deposits.. 674,956 196,410 222,009 -- 162,939 -- -- (2,403) -- 460,341 Interest income.......... 76,916 16,747 21,569 5,823 13,336 19 (185) 28,295 83 77,650 Interest expense......... 34,299 9,817 13,249 1,353 6,659 -- 124 30,395 -- 31,623 Provision (recovery) for loan and lease losses.......... 3,523 704 (391) 1,300 (345) -- -- -- -- 10,659 External revenue......... 42,869 8,533 8,877 10,538 17,471 7,143 18,411 (43,991) (66,496) 12,998 Inter-company revenue......... -- -- -- -- -- -- -- 1,770 -- -- Inter-company expense......... -- -- -- 910 -- 121 -- -- -- 739 Mark to market on securities and loans held for sale........ (904) (263) (2,104) (2,305) (178) -- -- (4,993) -- (31,641) Loss on impairment of equity securities...... -- -- -- -- -- -- -- (37,538) (82,600) -- Equity in net income of SPFC.. -- -- -- -- -- -- -- -- 12,739 -- Equity in net income of FMC... -- -- -- -- -- -- -- -- 3,235 -- Total revenue... 42,869 8,533 8,877 9,628 17,471 7,022 18,411 (42,221) (66,496) 12,259 Depreciation.... 779 99 96 141 299 33 473 1,157 -- 637 Amortization of goodwill........ 1,113 453 -- 950 -- -- 36 134 -- -- Amortization of servicing rights.......... -- -- -- -- -- (365) -- -- -- 1,851 Income taxes.... 9,267 2,352 2,819 (716) 2,476 1,360 (1,012) (23,372) (28,449) (8,789) Net income (loss) from continuing operations...... $ 12,435 $ 3,157 $ 3,783 $ (960) $ 3,323 $1,825 $(1,358) $(31,368) $(38,169) $(11,793) Eliminations Consolidated ------------ ------------ Total loans, net............. $(41,300) $1,639,156 Total assets.... (46,925) 2,417,183 Total deposits.. -- 1,714,252 Interest income.......... (4,413) 235,840 Interest expense......... (4,413) 123,106 Provision (recovery) for loan and lease losses.......... -- 15,450 External revenue......... (170) 16,183 Inter-company revenue......... -- 1,770 Inter-company expense......... -- 1,770 Mark to market on securities and loans held for sale........ -- (42,388) Loss on impairment of equity securities...... -- (120,138) Equity in net income of SPFC.. -- 12,739 Equity in net income of FMC... -- 3,235 Total revenue... (170) 16,183 Depreciation.... -- 3,714 Amortization of goodwill........ -- 2,686 Amortization of servicing rights.......... -- 1,486 Income taxes.... -- (44,064) Net income (loss) from continuing operations...... $ -- (59,125)
116 15. Deposits Certificates of deposits of $100,000 and over totaled approximately $409.7 million, $324.3 million and $459.6 million at December 31, 2000, 1999 and 1998, respectively. Interest expense associated with certificates of deposit of $100,000 and over was approximately $28.1 million, $18.2 million, and $24.2 million, for the years ended December 31, 2000, 1999, and 1998, respectively. SPB's customer deposit account balances are summarized as follows:
At December 31, -------------------------------------------------------------------------------------- 2000 1999 1998 ---------------------------- ---------------------------- ---------------------------- Weighted Weighted Weighted % of Average % of Average % of Average Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate ---------- -------- -------- ---------- -------- -------- ---------- -------- -------- (Dollars in thousands) Savings accounts........ $ 56,150 3.4% 4.94% $ 66,415 4.1% 4.79% $ 57,249 3.3% 4.27% Money market accounts... 25,020 1.5 5.74 -- -- -- -- -- -- Time certificates less than $100,000.......... 1,147,201 70.0 6.66 1,235,468 76.0 5.82 1,199,825 69.9 5.61 Time certificates $100,000 and greater... 409,712 25.1 6.79 324,271 19.9 5.49 459,614 26.8 5.62 ---------- ----- ---- ---------- ----- ---- ---------- ----- ---- Time certificates..... 1,556,913 95.1 6.68 1,559,739 95.9 5.75 1,659,439 96.7 5.61 ---------- ----- ---- ---------- ----- ---- ---------- ----- ---- Total................. $1,638,083 100.0% 6.62% $1,626,154 100.0% 5.71% $1,716,688 100.0% 5.57% ========== ===== ==== ========== ===== ==== ========== ===== ====
The following table sets forth the dollar amounts of time deposits as of December 31, 2000 maturing in the periods indicated:
Over Three Over Six Three Months Months through Months through More than or Less Six Months Twelve Months Twelve months Total ------------ -------------- -------------- ------------- ---------- (In thousands) Contractual interest rate: 0.000%-5.0%............. $ -- $ 4 $ -- $ -- $ 4 5.001%-5.5%............. 17,843 4,459 5,995 3,654 31,951 5.501%-6.0%............. 37,242 15,633 31,403 1,058 85,336 6.001%-6.5%............. 137,857 22,264 70,006 33,927 264,054 Over 6.5%............... 228,742 359,673 488,047 99,106 1,175,568 -------- -------- -------- -------- ---------- Total................. $421,684 $402,033 $595,451 $137,745 $1,556,913 ======== ======== ======== ======== ==========
16. Borrowings from Federal Home Loan Bank SPB is approved as a member of the Federal Home Loan Bank ("FHLB") to borrow up to a maximum of 10% of the assets of SPB. These borrowings must be fully collateralized by qualifying mortgage loans and may be in the form of overnight funds or term borrowings up to one year at SPB's option. The FHLB advances are secured by the investment in stock of the FHLB and certain real estate mortgage loans with a carrying value of $172.9 million, $56.5 million and $49.9 million at December 31, 2000, 1999 and 1998, respectively. The bank had additional borrowings available from FHLB in the amount of $72.2 million, $35.8 million and approximately $14.9 million at December 31, 2000, 1999 and 1998, respectively. 117 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 2000, 1999 and 1998, FHLB borrowings are summarized as follows:
2000 1999 1998 ------- ------- ------- (Dollars in thousands) Balance at year end............................... $65,000 $ -- $20,000 Maximum outstanding at any month end.............. 65,000 30,000 45,000 Average balance during the year................... 23,462 7,603 24,451 Weighted average rate during the year............. 6.42% 8.30% 6.67% Weighted average rate at year end................. 6.73% N/A 5.93%
The advances from FHLB at December 31, 2000 are short term fixed and variable rate borrowings and are due to mature on or before December 31, 2001. Interest expense on borrowings from the FHLB was $1.5 million, $631,000, and $1.6 million for the years ended December 31, 2000, 1999 and 1998, respectively. 17. Other Borrowings Other borrowings primarily consist of repurchase facilities and mortgage loans to fund the Company's and its subsidiaries' lending activities and real property. At December 31, 2000, approximately $39.4 million in securities were pledged as collateral for the borrowings from Lehman Brothers. The Imperial Bank, Cap Mark Services, and Orix Real Estate Capital loans outstanding at December 31, 2000 are secured by real property. ICII and its subsidiaries other borrowings consist of the following at December 31, 2000 and 1999:
Interest Index December 31, 2000 Rate Commitment Outstanding (basis points) Expiration Date ----------------- -------- ---------- ----------- -------------- ------------------ (Dollars in thousands) Lehman Brothers (Corona Film Finance Fund)..... 6.60% $39,044 $39,044 Fixed rate January 5, 2001 Imperial Bank (ICII).... 10.00% 10,000 10,000 Prime plus 100 June 18, 2001 Cap Mark Services (ICCMIC)............... 8.50 10,508 10,508 Fixed rate December 11, 2027 Orix Real Estate Capital (ICCMIC)............... 7.37 23,346 23,346 Fixed rate January 2, 2013 Other notes payable (ICII)................. 8.00 -- 1,220 Fixed rate None ------- ------- $82,898 $84,118 ======= ======= Interest Index December 31, 1999 Rate Commitment Outstanding (basis points) Expiration Date ----------------- -------- ---------- ----------- -------------- ------------------ (Dollars in thousands) Lehman Brothers (Corona Film Finance Fund)..... 5.50% $66,398 $66,398 Fixed rate January 13, 2000 Imperial Bank (ICII).... 9.25 6,691 6,691 Prime plus 100 September 29, 2000 Other notes payable (ICII)................. 8.00 -- 1,220 Fixed rate None ------- ------- $73,089 $74,309 ======= =======
Interest expense on other borrowings was $6.9 million, $4.0 million, and $4.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. 18. Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES") During the second quarter of 1997, Imperial Credit Capital Trust I ("ICCTI"), a wholly-owned subsidiary of the Company organized for the sole purpose of issuing trust securities, issued $70.0 million of 10.25% Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES") due June 14, 2002 at par. The ROPES are secured by resettable rate debentures which are general unsecured obligations 118 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) of the Company, are and can be redeemed at par upon their maturity or remarketed as 30 year capital instruments at the Company's option. Under current tax law, the interest payments on these securities are tax-deductible. The proceeds from the offering were used for capital contributions to subsidiaries, strategic acquisitions, investments and general corporate purposes. During 2000, the Company repurchased and extinguished $18.9 million of ROPES debt resulting in an extraordinary gain of $2.4 million, net of income taxes. During 1999, the Company repurchased and extinguished $8.3 million of ROPES debt resulting in an extraordinary gain of $921,000, net of income taxes. At December 31, 2000 and 1999, the Company had ROPES debt of $42.9 million and $61.8 million, respectively. Interest expense on the ROPES was $5.3 million, $7.4 million and $7.8 million for the years ended December 31, 2000, 1999 and 1998. The Trust Indenture for the ROPES includes provisions which limit the ability of the Company to incur additional indebtedness or issue certain stock of the Company, to make certain investments, engage in certain transactions with affiliates, create restrictions on the ability of subsidiaries to pay dividends or certain other distributions, create liens and encumbrances, or allow its subsidiaries to issue certain classes of stock. As of December 31, 2000 and 1999, the Company was in compliance with the debt covenants related to the ROPES. See Footnote 34. "Subsequent Events," for a description of the recapitalization agreement entered into during the first quarter of 2001. 19. Senior Notes
December 31, 2000 ----------------------------- Face Unamortized Carrying Value Discount Value -------- ----------- -------- (In thousands) 9.75% Senior Notes due 2004................... $ 10,932 $(114) $ 10,818 9.875% Senior Notes due 2007.................. 165,939 -- 165,939 -------- ----- -------- $176,871 $(114) $176,757 ======== ===== ======== December 31, 1999 ----------------------------- Face Unamortized Carrying Value Discount Value -------- ----------- -------- (In thousands) 9.75% Senior Notes due 2004................... $ 13,074 $(171) $ 12,903 9.875% Senior Notes due 2007.................. 172,282 -- 172,282 -------- ----- -------- $185,356 $(171) $185,185 ======== ===== ========
During the first quarter of 1997, the Company successfully completed a $200.0 million offering of 9.875% Senior Notes due 2007 (the "9.875% Senior Notes"). A portion of the proceeds from the offering was used to repurchase $69.8 million of the outstanding 9.75% Senior Notes due 2004 (the "9.75% Senior Notes") on which the Company recorded an extraordinary after-tax loss of $4.0 million. The remaining proceeds were used to make capital contributions to subsidiaries, strategic acquisitions, investments, and for general corporate purposes. The effective interest rate on the tendered notes was approximately 10.8% after the amortization of original issue discount and capitalized debt issue costs. The effective interest rate on the new notes is approximately 10.4% after the amortization of capitalized debt issue costs. The 9.875% Senior Notes may be redeemed after January 15, 2002 at the option of the Company until maturity at a declining premium, plus accrued interest. The 9.875% Senior Notes are general unsecured obligations of the Company ranking pari passu with all senior indebtedness of the Company, but are effectively subordinated to the liabilities of SPB. The Indenture for the 9.875% Senior Notes includes provisions which limit the ability of the Company to incur additional indebtedness or issue certain stock of the Company, to make certain investments, engage in certain transactions with affiliates, create restrictions on the ability of subsidiaries 119 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, 2000, the Company was in compliance with the debt covenants related to the 9.875% Senior Notes. In January 1994, the Company issued $90.0 million of 9.75% Senior Notes due 2004. At December 31, 2000, and 1999, $10.9 million and $13.1 million of the 9.75% Senior Notes were outstanding. The 9.75% Senior Notes may be redeemed after January 15, 1999 at the option of the Company until maturity at a declining premium, plus accrued interest. The 9.75% Senior Notes are unsecured and rank pari passu with all other senior unsecured indebtedness of the Company, but are effectively subordinated to the deposits of SPB. During 2000, the Company repurchased and extinguished $6.3 million of 9.875% Senior Notes due 2007 and $2.1 million of 9.75% Senior Notes due 2004 resulting in a extraordinary gain of $1.1 million, net of income taxes. During 1999, the Company repurchased and extinguished $27.7 million of 9.875% Senior Notes due 2007 and $7.1 million of 9.75% Senior Notes due 2004 resulting in a extraordinary gain of $4.2 million, net of income taxes. Total interest expense on the Senior Notes for the years ended December 31, 2000, 1999 and 1998 was $18.2 million, $21.5 million and $22.5 million, respectively. See Footnote 34. "Subsequent Events," for a description of the recapitalization agreement entered into during the first quarter of 2001. 20. The ICCMIC Acquisition On March 28, 2000, we completed the acquisition of ICCMIC. We paid ICCMIC's stockholders (other than ICII) approximately $11.57 per share in cash. The total purchase price paid by the company was approximately $300.1 million. The Company's basis in shares of ICCMIC common stock owned prior to the merger was $25.1 million. The total cost basis of $325.2 million, combined with other estimated costs of the acquisition of $19.7 million bring the total purchase price to $344.9 million. In addition to the costs of acquisition, the Company incurred total severance and incentive costs of $9.4 million. The merger was accounted for as a purchase and resulted in the generation of negative goodwill of $29.2 million. The negative goodwill generated by the acquisition is not subject to income taxes and increased the Company's tangible book value by $0.74 per share at December 31, 2000. The company is accreting the negative goodwill into income over five years, which is the anticipated life of the assets acquired. At December 31, 1999 ICCMIC had total assets of $664.9 million, and total liabilities of $269.3 million. The following table reflects the activity in ICCMIC goodwill for the year ended December 31, 2000 (in thousands): Beginning negative goodwill........................................ $ 40,143 Purchase accounting adjustments.................................... (10,910) Accretion.......................................................... (5,436) -------- Ending negative goodwill......................................... $ 23,797 ========
Proforma total revenues, net (loss) income and diluted net (loss) income per share are as follows, assuming the merger consummated at the beginning of each period:
For the Year Ended December 31, ------------------- (In thousands, except per share data) 2000 1999 --------- -------- Total revenues.......................................... $ (37,202) $185,375 Net (loss) income....................................... $(152,590) $ 18,009 Diluted (loss) income per share......................... $ (4.68) $ 0.52
120 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 21. Preferred and Common Stock The Company has authorized 8,000,000 shares of Preferred Stock. The Board has the authority to issue the preferred stock in one or more series, and to fix the designations, rights, preferences, privileges, qualifications and restrictions, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the Common Stock. On May 14, 1999, the Company entered into an agreement with its former parent Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP). On May 17, 1999, the Company repurchased 10% or 3,682,536 shares of its outstanding common stock for $8.00 per share or $29.5 million. The repurchase from Imperial Bank was financed through the private issuance of $30.0 million Series B 11.50% Mandatorily Redeemable Cumulative Preferred Stock to a group of independent investors. During the fourth quarter of 1999, the Company repurchased and extinguished the $30.0 million Series B 11.50% Mandatorily Redeemable Cumulative Preferred Stock, incurring an extraordinary loss of $1.1 million, net of income taxes. Interest expense from date of issuance to date of extinguishment was $1.5 million. We have undertaken the repurchase of our common stock under several share repurchase programs. During 1998, 1999, and 2000 we repurchased 2,485,684, 3,682,536 and 1,122,300 shares of common stock at an average cost per share of $9.65, $8.00, and $3.62 in each year, respectively. Since beginning share repurchases, we have repurchased a total of 7,315,520 shares of common stock at an average price of $7.92 per share. All of our repurchases effected under our stock repurchase programs were effected in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. On October 12, 1998, the Company distributed preferred share purchase rights as a dividend to its shareholders of record at the rate of one right for each outstanding share of its common stock. The rights are attached to the Company's common stock and will only be exercisable and trade separately if a person or group acquires or announces the intent to acquire 15% or more of the Company's common stock (25% or more for any person or group currently holding 15% or more of the Company's common stock). Each right will entitle shareholders to buy one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $40. If the Company is acquired in a merger or other transaction after a person has acquired 15 percent or more of the Company's outstanding common stock (25% or more for any person or group currently holding 15% or more of the Company's common stock), each right will entitle the shareholder to purchase, at the right's then-current exercise price, a number of the acquiring company's common shares having a market value of twice such price. The acquiring person would not be entitled to exercise these rights. In addition, if a person or group acquires 15% or more of the Company's common stock, each right will entitle the shareholder (other than the acquiring person) to purchase, at the right's then-current exercise price, a number of shares of the Company's common stock having a market value of twice such price. Following the acquisition by a person of 15% or more of the Company's common stock and before an acquisition of 50 percent or more of the Company's common stock, the Company's board of directors may exchange the rights (other than the rights owned by such person) at an exchange ratio of one share of common stock per right. Before a person or group acquires beneficial ownership of 15 percent (or 25% as applicable) or more of the Company's common stock, the rights are redeemable for $.0001 per right at the option of the Company's board of directors. The rights will expire on October 2, 2008 unless redeemed prior to that date. The Company's board is also authorized to reduce the ownership thresholds referred to above to not less than 10%. The rights are intended to enable all of the Company's shareholders to realize the long-term value of their investment in the Company. 121 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 22. Income Taxes Income taxes (tax benefit) are included in the accompanying consolidated statements of operations and comprehensive income as follows:
Year Ended December 31, ------------------------ 2000 1999 1998 ------ ------- -------- (In thousands) Income taxes from: Continuing operations............................ $2,356 $(3,074) $(44,064) Discontinued operations.......................... 4,159 (557) (8,675) Extraordinary item............................... 2,356 3,446 -- ------ ------- -------- Total.......................................... $8,871 $ (185) $(52,739) ====== ======= ========
The Company's income taxes from continuing operations for the years ended December 31, 2000, 1999 and 1998 were as follows:
Year Ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- (In thousands) Current: Federal..................................... $ (165) $(32,162) $ 6,140 State....................................... (39) (11,868) 2,019 -------- -------- -------- Total current taxes....................... (204) (44,030) 8,159 -------- -------- -------- Deferred: Federal..................................... (44,197) 27,979 (39,701) State....................................... (15,405) 10,429 (15,839) Change in valuation reserve................. 63,292 -- -- -------- -------- -------- Total deferred taxes...................... 3,690 38,408 (55,540) -------- -------- -------- Taxes credited to shareholders' equity........ (1,130) 2,548 3,317 -------- -------- -------- Taxes on income from continuing operations.... $ 2,356 $ (3,074) $(44,064) ======== ======== ========
The Company had current income taxes payable from continuing operations of approximately $0.7 million at December 31, 2000, and current income taxes receivable of $0 at December 31, 1999. Included in Southern Pacific Bank's 2000 current receivable was $4.5 million due from the Internal Revenue Service for the 1999 tax year. Included in the net assets of discontinued operations were income taxes receivable of $0 and $9.0 million at December 31, 2000 and 1999, respectively. The Company had federal net operating loss carryforwards of $22.5 million that expire in 2019 and $111.8 million that expire in 2020. Due to recurring losses, management established a deferred tax asset valuation allowance of $63.3 million during the fourth quarter. The recognition of a net deferred tax asset is dependent upon a "more likely than not" expectation of the realization of the deferred tax asset, based upon the analysis of the available evidence. A valuation allowance is required to sufficiently reduce the deferred tax asset to the amount that is expected to be realized through future realization of profits on a "more likely than not" basis. The analysis of available evidence is performed each quarter utilizing the "more likely than not" criteria to determine the amount, if any, of the deferred tax asset to be realized. Adjustments to the valuation allowance are made accordingly. There can be no assurance that the Company will recognize additional portions of the deferred tax asset in future periods of that additional valuation allowances may not be recorded in the future periods. 122 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Deferred income taxes arise from differences in the timing of recognition of income and expense for tax and financial reporting purposes. The following table shows the primary components of the Company's net deferred tax liability at December 31, 2000 and 1999.
2000 1999 -------- -------- (In thousands) Deferred tax assets: REMIC Income......................................... $ 4,348 $ 7,433 Allowances for loan and lease losses................. 24,076 1,706 Mark to market on securities and loans held for sale................................................ 1,753 -- Leases............................................... 1,205 1,258 State taxes.......................................... -- 1,970 Executive stock options.............................. 419 419 Unrealized loss on securities available for sale..... 653 1,862 Basis differences in fixed assets.................... 242 -- Deferred compensation................................ 2,122 1,718 Other financing activities........................... 204 -- NOL carry forward.................................... 52,020 7,073 Other................................................ -- 945 -------- -------- Total deferred tax assets before valuation allowance......................................... 87,042 24,384 Valuation allowance.................................. (63,292) -- -------- -------- Total.............................................. 23,750 24,384 -------- -------- Deferred tax liabilities: Sales/investments in equity securities............... (38,277) (33,935) Servicing rights..................................... (627) (835) Mark to market on securities and loans held for sale................................................ -- (2,891) Deferred loan fees................................... (1,390) (1,390) State taxes.......................................... (789) -- Basis difference in fixed assets..................... (96) (284) Other................................................ (1,371) -- FHLB stock dividends................................. (1,027) (1,186) -------- -------- Total.............................................. (43,577) (40,521) -------- -------- Net deferred tax liability............................. $(19,827) $(16,137) ======== ========
A reconciliation of the statutory Federal corporate income tax rate of 35% to the effective income tax rate on income or loss from continuing operations is as follows:
Year Ended December 31, ------------------- 2000 1999 1998 ----- ---- ---- Statutory U.S. federal income tax rate............... 35.0 % 35.0 % 35.0 % Increase (reduction) in rate resulting from: State income taxes, net of Federal benefit......... 5.0 5.0 8.9 Preferred stock dividends classified as interest expense........................................... -- (6.8) -- Deferred tax asset valuation allowance............. (40.3) -- -- Other, net......................................... (1.2) 0.9 (1.2) ----- ---- ---- Effective income tax rate............................ (1.5)% 34.1 % 42.7 % ===== ==== ====
Our federal income tax returns for 1996 through 1999 are currently being audited by the Internal Revenue Service and our California tax returns for 1995 and 1996 are being audited by the California Franchise Tax 123 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Board. We believe that we have recorded sufficient reserves for accounting purposes to cover any proposed deficiencies that may occur. The California auditors have proposed to include with our income that of two of our former affiliates, which would increase our total tax by approximately $2 million, of which approximately $1.5 million is expected to be assessed to one of such former affiliates. We intend to protest our portion of any such assessment. 23. Supplemental Disclosure of Cash Flow Information The following information supplements the statements of cash flows:
Year Ended December 31, --------------------------- 2000 1999 1998 -------- -------- -------- (In thousands) Cash paid (received) during the period for: Interest........................................ $140,032 $128,217 $119,169 Income taxes.................................... (4,123) 817 5,884 Significant non-cash activities: Loans transferred from held for investment to held for sale.................................. 18,524 63,829 197,518 Loans transferred to OREO or repossessed assets......................................... 5,571 11,834 10,046 Loans to facilitate the sale of OREO............ -- -- 1,011 Retained interest in loan and lease securitizations capitalized.................... 3,688 4,036 7,182 Change in unrealized gain (loss) on securities available for sale............................. (1,698) 3,802 (3,112) Issuance of warrants............................ 3,082 -- -- Purchase of Imperial Credit Lender Services, Inc.: Assets acquired, including goodwill of $5,000... -- -- 5,050 Liabilities assumed............................. -- -- 50 Common stock issued............................. -- -- 5,000 Purchase of Lewis Horwitz Organization: Assets acquired, including goodwill of $5.3 million and $12.0 million for 2000 and 1999, respectively................................... 7,676 19,380 -- Liabilities assumed............................. 4,854 11,248 -- Cash paid....................................... 2,822 8,132 -- Deconsolidation of Imperial Capital Group, LLC Decrease in trading securities.................. 11,839 -- -- Decrease in goodwill............................ 1,063 -- -- Decrease in other assets........................ 2,150 -- -- Decrease in other liabilities................... 4,910 -- -- Purchase of Imperial Credit Commercial Mortgage Investment Corp: Assets acquired................................. 98,274 -- -- Net cash received............................... 11,524 -- -- Liabilities assumed, including negative goodwill....................................... 109,798 -- --
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 $284,000, $334,000, and $457,000, for the years ended December 31, 2000, 1999 and 1998, respectively. 124 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Any additional Company contribution may be made at the discretion of the Company. Should a discretionary contribution be made, the contribution would first be allocated to those employees deferring salaries in excess of 4%. The matching contribution would be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. Should discretionary contribution funds remain following the allocation outlined above, any remaining Company matching funds would be allocated as a 50% match of employee contributions on the first 4% of the employee's deferrals. No discretionary contributions were charged to operations for the years ended December 31, 2000, 1999 and 1998. Company matching contributions are made as of December 31st each year. 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 525,366 and 734,268 stock options were outstanding at December 31, 2000 and 1999, respectively. The 1992 Stock Option Plan provides for the grant of "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options ("NQSOs") to employees, officers, directors and consultants of the Company. Incentive stock options may be granted only to employees. The 1992 Stock Option Plan is administered by the Board of Directors or a committee appointed by the Board, which determines the terms of options granted, including the exercise price, the number of shares subject to the option, and the option's exercisability. The exercise price of all options granted under the 1992 Stock Option Plan must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the 1992 Stock Option Plan is 10 years. With respect to any participant who owns stock representing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price of any option must be at least equal to 110% of the fair market value on the date of grant. 1996 Stock Option Plan A total of 3,000,000 shares of the Company's Common Stock has been reserved for issuance under the Company's 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. A total of 2,971,562 and 2,635,580 stock options were outstanding at December 31, 2000 and 1999, respectively. 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. 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. 125 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 option holder, 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 under the 1992 and 1996 Stock Option Plans follows:
Year Ended December 31, -------------------------------------------------- 2000 1999 1998 ---------------- ---------------- ---------------- Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price ------ -------- ------ -------- ------ -------- (In thousands, except per share data) Options outstanding, January 1.............. 3,370 $ 9.72 2,806 $10.62 2,536 $11.41 Options granted......... 907 2.16 969 6.84 1,093 11.52 Options exercised....... (20) 2.09 (96) 2.80 (177) 5.26 Options canceled........ (760) 9.09 (309) 11.12 (646) 16.70 ----- ------ ----- ------ ----- ------ Options outstanding, December 31............ 3,497 7.94 3,370 9.72 2,806 10.62 ===== ====== ===== ====== ===== ====== Options Exercisable..... 1,407 10.65 1,279 10.25 911 9.20
The range of exercise price for outstanding and exercisable options at December 31, 2000 were $1.00 to $18.63, and $2.09 to $18.63, respectively. There were 381,843 options available for future grants at December 31, 2000. Effective January 1, 1996, the Company adopted the disclosure requirements of SFAS 123, and continued to measure its employee stock-based compensation arrangements under the provisions of APB 25. Accordingly, no compensation expense has been recognized for the stock option plans. Had compensation expense for the Company's stock option plans been determined based on the fair value at the grant date for awards after 1994 126 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) consistent with the provisions of SFAS 123, the Company's net loss and loss per share would have increased to the pro forma amounts indicated below:
Year Ended December 31, ---------------------------- 2000 1999 1998 --------- ------- -------- (In thousands, except per share data) Net loss: As reported................................. $(163,326) $(2,828) $(73,633) Pro forma................................... (164,717) (4,935) (74,996) Basic loss per share: As reported................................. $ (5.01) $ (0.08) $ (1.93) Pro forma................................... (5.13) (0.14) (1.96) Diluted loss per share: As reported................................. $ (5.01) $ (0.08) $ (1.93) Pro forma................................... (5.13) (0.14) (1.96)
The effects of applying SFAS 123 for disclosing compensation cost may not be representative of the effects on reported net loss for future years. The weighted average fair value at date of grant of options granted during 2000, 1999 and 1998 was $1.61, $3.85, and $4.79 per option, respectively. The fair value of options at the date of grant was estimated using the Black- Scholes model with the following weighted average assumptions:
Year Ended December 31, -------------------- 2000 1999 1998 ------ ----- ----- Expected life (years)................................. 5.02 5.01 5.11 Interest rate......................................... 4.98% 6.34% 4.54% Volatility............................................ 133.03 66.86 66.81 Dividend yield........................................ 0.00% 0.00% 0.00%
Deferred Executive Compensation Plans Effective July 1, 1998, the Company adopted our Deferred Executive Compensation Plan (the "DEC Plan 1") and the Deferred Executive Compensation Plan 2 (the "DEC Plan 2", and together with the DEC Plan 1, the "DEC Plans"). The DEC Plans are each administered by a committee appointed by the board of directors. Any employee who has an annual base salary of at least $100,000 or who had an annual base salary of at least $100,000 in the prior year and directors may elect to participate in the DEC Plans. A participant's annual base salary includes all cash compensation excluding bonuses, commissions, employee benefits, stock options, relocation expenses, incentive payments, non-monetary awards, automobile and other allowances. Participants in the DEC Plans may defer up to 50% of their annual base salary and commissions and/or up to 100% of their annual bonus payments. Benefits accrued under the DEC Plans will be paid to all participants, other than participants who have voluntarily resigned their positions, in the form of a lifetime annuity issued by a life insurance company. DEC Plan benefits accrue through retirement so long as the participant remains employed by our company. Participants who voluntarily resign prior to retirement will be paid all of their vested benefits under the DEC Plans. If the Company terminates the DEC Plans, the Company may elect to pay participants in a lump sum, or in a lifetime annuity. Deferred compensation contributed to DEC Plan 1 is invested in the Company's common stock. In 1999 the Company matched contributions to the DEC Plan 1, to be paid in our common stock, on a dollar-for-dollar basis up to $50,000 per participant. The Company ceased matching contributions in 2000. The Company also reserves the right to make discretionary matches, to be paid in its common stock, in any year. Matching contributions vest 50% a year, commencing one year from the date of the matching contribution. Matching contributions vest completely if a participating employee retires, becomes permanently disabled, or dies. 127 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Deferred compensation contributed to DEC Plan 2 may be invested in certain mutual and money market funds. The Company will not make matching contributions to the DEC Plan 2. All DEC Plan 2 contributions are completely vested immediately. The Company incurred $1.1 million and $1.5 million in expense for matching contributions to DEC Plan 1 during the years ended December 31, 2000 and 1999, respectively. DEC Plan 1 owned a total of 826,509 and 852,072 shares of ICII common stock at December 31, 2000 and 1999. 25. Executive Compensation Employment Agreements On January 1, 1997, the Company entered into a five-year employment contracts with H. Wayne Snavely, Chairman of the Board, President and Chief Executive Officer, which provide for minimum annual aggregate compensation of $450,000, subject to adjustment for inflation, plus an annual bonus approved by the Company's Board of the Directors based on the attainment of performance objectives, including the Company's return on equity, income per share and increase in the price of the Company's common stock. Termination Agreements In January 1999, we entered into individual termination agreements with our Chief Executive Officer, Chief Financial Officer and General Counsel. The agreements provide for severance payments to these senior executives in the event of a change in control of the Company (as defined in the agreements) and their voluntary departures at the end of one year or the termination of any one of these senior executives within three years of the change in control for any reason. The senior executives will receive a lump sum payment of three times their respective base salaries and their highest bonus earned in any of the last three fiscal years preceding the change in control and a percentage of their respective bonuses for the year in which the change of control occurs. The recapitalization transactions to be completed pursuant to the Master Recapitalization Agreement described in their proxy statement will constitute a change in control under the foregoing definition. In addition, we will continue to provide these senior executives with medical, dental, life insurance, disability and accidental death and dismemberment benefits until the third anniversary of the termination unless the executive becomes employed by another employer, in which case these coverages will be secondary to those provided by the new employer. All deferred compensation in respect of each senior executive will also become fully vested and we will pay in cash all such deferred compensation and any unpaid portion of the executive's bonus. Any amounts payable to an executive will include additional amounts to cover certain taxes resulting from those payments. However, in Mr. Snavely's case any benefits or payments provided under his termination agreement will be reduced by any benefits or payments he receives under his employment agreement as a result of his termination. Stock Options On January 1, 1992, options were granted to three senior officers of the Company to purchase a total of 2,292,628 shares, adjusted for stock dividends and splits, of the Company's Common Stock. The exercise price of these options is $0.89 per share of common stock for one-half of the options, with the other half exercisable at $1.40 per share. These options became exercisable in September 1995 (vesting was accelerated from January 1, 1997). These options expire on December 1, 2001 and are not covered by the Company's 1992 or 1996 Stock Option Plans. Compensation expense relating to these options was recorded in the Company's consolidated financial statements over a four year period which ended December 31, 1995 for an amount representing the difference between the exercise price of the options and the market price of the Company's stock at the grant date. The aggregate amount of compensation expense recognized on these stock options since their grant date was $2.2 million. 128 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 counter parties 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. The Company has total rate of return swap contracts for investment purposes with various counter parties, the provisions of which entitle our company to receive the total return on various commercial loans in exchange for a floating payment of one month LIBOR plus a spread. These contracts are off balance sheet instruments. As of December 31, 2000, 1999 and 1998, the Bank was party to total rate of return swap contracts with a total notional amount of $65.2 million, $83.6 million and $280.4 million, under which our company was obligated to pay one month LIBOR plus a weighted average spread of 0.88%. The weighted average remaining life of these contracts was 51.2 months, 60.0 months and 31.2 months as of December 31, 2000, 1999 and 1998. For the years ended December 31, 2000, 1999 and 1998, our company recognized income of $2.7 million, $2.9 million and $5.4 million on our total return swaps, respectively. For the years ended December 31, 2000, 1999 and 1998, our company recognized mark to market gains (losses) of ($3.8) million, $197,000 and $171,000 million on our total return swaps, respectively. At December 31, 2000 and 1999, $33.7 million and $18.8 million was outstanding and classified as Trading Securities on the consolidated balance sheet. As a part of the Pacifica Partners I LP collateralized loan obligation ("CLO") fund launched by the Company in August 1998, the Company delivered subordinate bonds of approximately $51.3 million into a total rate of return swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of the swap entitle the Company to receive the total return on the subordinate bonds delivered and pay a floating payment of LIBOR plus a weighted average spread of .075% at December 31, 2000. The Company delivered cash and various equity securities to CIBC as collateral for the swap. At December 31, 2000 and 1999, $59.1 million and $38.2 million was outstanding and classified as Trading Securities on the consolidated balance sheet. Since most of the outstanding off balance-sheet derivatives are classified as Trading Securities and carried at fair value, the impact of adopting FAS 133 was not material to the Company. 27. Commitments and Contingencies Loan Servicing As of December 31, 2000 and 1999 the Company was servicing loans and leases for others, directly and through sub-servicing arrangements, totaling approximately $103.0 million and $106.0 million, respectively. Related fiduciary funds held in trust for investors in non-interest bearing accounts totaled $0 and $520,000 at December 31, 2000 and 1999, respectively. These funds are segregated in special bank accounts and are held as deposits at SPB. The Company is a guarantor of certain performances and lease servicing by IBC. The Company is a guarantor for AMN's performance with regards to the Auto Trust 1997-A securitization. Sales of Loans and Servicing Rights In the ordinary course of business, the Company is exposed to liability under representations and warranties made to purchasers and insurers of leases and mortgage loans and the purchasers of servicing rights. Under certain circumstances, the Company is required to repurchase mortgage loans if there has been a breach of representations or warranties. At December 31, 2000 and 1999, the related repurchase liability totaled $0 and $638,000. 129 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During the years ended December 31, 2000 and 1999, respectively, the Company retained servicing rights on $0 and $25.1 million of mortgage loans sold through traditional secondary market channels and $0 and $132.4 million on loans and leases sold through securitizations. Additionally, during the year ended December 31, 2000 and 1999, respectively, the Company released servicing rights to the purchasers on $0 and $258.5 million of mortgage loans sold. Loan Commitments As of December 31, 2000 and 1999, the Company had unfunded open loan commitments amounting to $851.5 million and $1.1 billion, respectively, to fund loans. There is no exposure to credit loss in this type of commitment until the loans are funded. Interest rate risk is mitigated by the use of variable rate loan contracts. Lease Commitments Minimum rental commitments under all non-cancelable operating leases net of aggregate sublease payments of $4.1 million at December 31, 2000 were as follows:
(In thousands) -------------- 2001.......................................................... $ 3,562 2002.......................................................... 2,887 2003.......................................................... 2,546 2004.......................................................... 2,528 2005.......................................................... 1,488 Thereafter.................................................... 4,830 ------- Total....................................................... $17,841 =======
Rent expense excluding AMN discontinued operations for the years ended December 31, 2000, 1999 and 1998 was $4.8 million, $5.2 million, and $5.3 million, respectively. Waiver of Default on IBC Securitization Facilities As a result of the recent credit downgrades of the Company's Senior Notes by Moody's and Standard and Poor's ratings services, IBC is in technical default of the terms of the 1997-2 Trust. As such, the insurer of the Class A certificates may cause the 1997-2 Trust to go into "Turbo" amortization. Under Turbo amortization, virtually all cash flows generated in the 1997-2 Trust would be used to pay down the outstanding balance of the Class A certificates, while the Class B and C Certificates, a majority of which are owned by IBC, would receive virtually no cash flows for principal and interest payments until the Class A certificates have been paid in full. IBC received a waiver of this technical default in March 2001. The waiver will be renewed monthly by the insurer, at its option. There can be no assurance given that the insurer will continue to grant the monthly waiver to IBC. If the waiver were not to be granted, IBC's monthly cash flow would decrease by approximately $1.0 million per month, and cash flow to our parent company would decrease by approximately $500,000 per month. Legal Proceedings Our company is a defendant in a consolidated federal securities class action, In re Southern Pacific Funding Corporation Securities Litigation, Lead Case No. CV98-1239-MA, in the United States District Court for the District of Oregon. This action was initially filed in October 1998. Plaintiffs allege that SPFC failed to properly mark down the value of its residual interests, failed to properly reflect increased levels of prepayments and actual prepayment and default rates on its loans and made false and misleading public statements concerning its financial condition. Plaintiffs allege claims against our company and two of our directors (and others) under 130 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the Securities Act of 1933. On July 21, 1999, the Court certified a class of persons who purchased the securities of SPFC during the period October 7, 1997 through October 1, 1998. On December 8, 1999, the Court set a pretrial conference for October 31, 2000 and trial for November 6, 2000. On July 31, 2000, all parties in the case (other than our company) reached a tentative settlement of the action. That settlement, which does not require payment of any consideration by our company, is subject to court approval. Subsequently, agreement was reached on October 10, 2000 to settle all remaining claims against our company, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 15 of the Securities Act of 1933, for a cash payment by our company of $3 million and issuance of warrants to purchase three million shares of ICII common stock, at an exercise price of $3 per share, to members of the class. The warrants, which expire in seven years, will be freely tradable. The warrants were valued using the Black-Scholes option pricing model and have an estimated value of $1.03 per warrant. The issuance of the warrants resulted in a charge to operations, and a credit to shareholders' equity of $3.1 million. The settlement, which was subject to court approval, was set for hearing by the Court on February 21, 2001. On February 21, 2001, the Court approved all of the settlements and dismissed the action with prejudice. Our company and three of our directors are defendants in a consolidated federal securities class action, In re Imperial Credit Industries, Inc. Securities Litigation, Case No. 98-8842 SVW, in the United States District Court for the Central District of California. This action, purportedly filed on behalf of a class of persons who purchased our company's securities during the period January 29, 1998 through October 1, 1998, was originally filed in November 1998. Plaintiffs allege that defendants made false and misleading statements and omitted to reveal the truth concerning the value of Imperial Credit Industries, Inc.'s investments in SPFC, resulting in an artificial inflation of the price of our securities. On defendants' motions, the Court dismissed, with leave to amend, plaintiffs' original complaint and their consolidated amended class action complaint. On February 22, 2000, the Court denied defendants' motion to dismiss plaintiffs' second amended consolidated class action complaint. On March 9, 2000, defendants answered the second amended consolidated class action complaint and asserted a number of affirmative defenses. On March 21, 2000, plaintiffs moved for class certification. On August 7, 2000, the Court granted plaintiffs' motion for class certification. The Court has set the pretrial conference for April 30, 2001 and trial for May 8, 2001. On February 9, 2001, the Court granted plaintiffs leave to file a third amended complaint, in which plaintiffs added a new defendant KPMG LLP, our company's independent auditor. On March 6, 2001, defendants answered the third amended complaint and asserted a number of affirmative defenses. Our company is a defendant in Steadfast Insurance Company v. Auto Marketing Network Inc. and Imperial Credit Industries, Inc. ("ICII"), filed on August 12, 1997 in the Northern District of Illinois, Case No. 97-C-5696. The plaintiff is seeking damages in the amount of $27 million allegedly resulting from the fraudulent inducement to enter into, and the subsequent breach of, a motor vehicle collateral enhancement insurance policy. In May 1998, we filed a counterclaim against the plaintiff for $54 million in damages based on the allegation that the underlying claim was filed in bad faith. In January 1999, the Court entered a preliminary injunction which enjoined us from transferring assets of Auto Marketing Network, Inc., in amounts that would cause the total assets of Auto Marketing Network to be less than $20 million in value. The injunction has since been removed. We moved to dismiss ICII from the lawsuit and, on April 17, 2000, the Court granted ICII's motion in part and found that ICII is not liable for any of Steadfast's losses arising from payments for defaulted loans. The Court has pending a motion for partial summary judgment, filed by the plaintiff, and a motion for summary judgment filed by ICII on its counterclaim against Steadfast. Steadfast also has counter-moved for summary judgement on ICII's counterclaim, and the parties have filed motions seeking the exclusion of each other's expert witnesses. The court cancelled a March 12, 2001 hearing on all pending motions and has not rescheduled or indicated when a written order could be expected. ICCMIC and three of its directors, one of whom is a director and one a former director of ICII, are defendants in a putative class action lawsuit filed on March 17, 2000, by John Huston in the United States District Court for the Central District of California, Case No. CV00-02751 ABC. The complaint alleges that ICCMIC's prospectus issued in connection with its initial public offering in October 1997 contained material omissions and 131 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) misrepresentations concerning (1) the expenses to be incurred by ICCMIC, (2) ICCMIC's ability to reduce the base management fee paid to ICCMIC's management company, (3) the management agreement termination fee payable to ICCMIC's management company in the event that ICCMIC terminated the management agreement, and (4) certain conflicts of interest. The complaint alleges a claim under Section 11 of the Securities Act of 1933 and seeks the certification of a class of shareholders of ICCMIC who purchased shares of ICCMIC at any time between October 22, 1997 and October 21, 1999. On April 4, 2000, defendants moved to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. On June 9, 2000, the Court issued an order denying defendants' motion to dismiss. On June 23, 2000, defendants answered the complaint and asserted a number of affirmative defenses. On July 31, 2000, plaintiff moved for class certification. On October 17, 2000, the Court stayed all proceedings and certified for interlocutory appeal to the Ninth Circuit Court of Appeals its order denying defendants' motion to dismiss. On January 12, 2001, the Ninth Circuit Court of Appeal denied defendants' petition for permission to appeal. On March 26, 2001, the District Court struck plaintiffs motion for class certification and ordered plaintiff to take further action to give proper notice to potential class members. Our company and two of our directors, among others, are defendants in an adversary proceeding filed by the liquidating trustee of the Southern Pacific Funding Corp. liquidating trust on October 5, 2000, in the U.S. Bankruptcy Court for the District of Oregon, In re Southern Pacific Funding Corp. Case No. 398-37613-elp 11, Beck v. Imperial Credit Industries, Inc., et al, Adv. Proc. No. 00-03337-elp. The trustee seeks to recover damages in excess of $238.5 million for losses alleged to have been incurred by SPFC in connection with its sub-prime lending and securitization program during the years 1995- 1998. The trustee alleges that the losses were caused by defendants' breaches of fiduciary duties and negligence. In addition, the trustee seeks equitable re-characterization of certain ICII claims against the SPFC bankruptcy estate and also asserts a right of setoff against all defendants' various claims against the bankruptcy estate for the wrongs alleged in the breach of fiduciary duties and negligence claims. The Company and its two directors moved to dismiss the adversary proceedings for lack of subject matter jurisdiction and failure to state a claim. These motions were heard by the Bankruptcy Court on December 20, 2000. By orders entered January 18, 2001, the Bankruptcy Court denied the motion to dismiss for lack of subject matter jurisdiction but granted, with leave to amend, the motion to dismiss for failure to state a claim. The trustee has until April 18, 2001 to file an amended complaint. We intend to vigorously defend all of the above lawsuits. 28. Fair Value of Financial Instruments Financial instruments include securities, loans receivable, deposits and borrowings, and various off-balance sheet items. Because no market exists for a portion of the Company's loans held for investment and securitization related assets, fair value estimates are based on judgments regarding credit risk, investor expectation of future economic conditions, normal cost of administration and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates presented do not include the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Financial Assets The carrying values of cash, interest bearing deposits, FHLB stock, and accrued interest receivable are considered to approximate fair value. The carrying values of securities held for trading and available for sale approximate fair value. Such market value is determined by reference to quoted market prices. When quoted market prices are not available, fair value is estimated by reference to market values for similar securities or by discounting cash flows at an appropriate risk rate. The fair value of loans and leases held for sale is based on sale commitments, discounted cash flow analysis or prices for similar products. The fair value of loans held for investment is estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices for similar instruments, taking into consideration the varying degrees of credit risk. 132 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Financial Liabilities The carrying amounts of deposits due on demand and accrued interest payable is considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar maturities. The fair value of debt is based on rates currently available to the Company for debt with similar terms and remaining maturities. Off-Balance Sheet Financial Instruments The fair value of lending commitments is estimated using the fees currently charged to enter into similar agreements; such estimated fair value is not material. The fair value of interest rate swaps, forward treasury contracts, interest rate futures and interest rate swaps is based on quoted market prices. Total rate of return swaps are carried in securities held for trading at their fair value. The estimated fair values of the Company's financial instruments at December 31, 2000 and 1999 are as follows:
2000 1999 --------------------- --------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------- ---------- ---------- ---------- (In thousands) Assets: Cash............................. $ 30,938 $ 30,938 $ 33,898 $ 33,898 Interest bearing deposits........ 183,193 183,193 248,182 248,182 Investment in Federal Home Loan Bank stock...................... 4,148 4,148 6,960 6,960 Securities held for trading...... 164,050 164,050 160,805 160,805 Securities available for sale.... 63,684 63,684 74,374 74,374 Loans and leases held for sale... 386,469 396,865 289,398 289,638 Loans and leases held for investment, net................. 1,122,494 1,122,642 1,223,071 1,222,338 Retained interest in loan and lease securitizations........... 6,330 6,330 10,220 10,220 Accrued interest receivable...... 15,744 15,744 8,272 8,272 Liabilities: Deposits......................... $1,632,704 $1,636,622 $1,614,758 $1,613,143 Borrowings from Federal Home Loan Bank............................ 65,000 65,000 -- -- Other borrowings................. 84,118 84,118 74,309 74,309 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES")....................... 42,885 24,445 61,750 47,717 Senior notes..................... 176,757 74,022 185,185 144,444 Accrued interest payable......... 18,992 18,992 18,811 18,811
133 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 per share data) 2000 Interest income............. $ 53,360 $ 60,999 $ 57,429 $ 53,037 Net interest income(1)...... 21,107 25,591 20,284 17,630 Other income(2)............. 10,463 27,479 7,655 5,039 Provision for loan and lease losses..................... 24,019 63,156 27,500 66,300 Other expenses(3)........... 25,466 23,899 33,450 20,222 Merger expenses............. 9,397 -- -- -- Net loss.................... (15,923) (18,779) (23,998) (104,626) Comprehensive loss.......... (17,881) (18,995) (24,185) (103,963) Loss per share: Basic..................... $ (0.48) $ (0.58) $ (0.75) $ (3.26) Diluted................... $ (0.48) $ (0.58) $ (0.75) $ (3.26) 1999 Interest income............. $ 56,564 $ 48,749 $ 49,478 $ 52,648 Net interest income......... 25,251 20,368 19,082 21,130 Other income(4)............. 17,813 (11,438) 19,297 42,887 Provision for loan and lease losses..................... 2,200 22,255 3,675 7,210 Other expenses.............. 30,788 29,906 25,233 40,673 Net income (loss)........... 6,762 (25,901) 8,243 8,068 Comprehensive income (loss)..................... 7,904 (24,018) 8,595 8,493 Income (loss) per share: Basic..................... $ 0.18 $ (0.74) $ 0.25 $ 0.24 Diluted................... $ 0.18 $ (0.74) $ 0.24 $ 0.24
- -------- (1) Interest income increased in the quarter ended June 30, 2000 as a result of an increase in the prime rate of interest and an increase in the outstanding balance of loans (2) Other income includes gain on sale of securities. (3) Other expenses includes litigation settlement costs. (4) Other income includes negative mark-to-market and loss on impairment charges. 134 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 30. Selected Financial Information of Subsidiaries and Equity Investment The following represents summarized financial information with respect to the operations of SPB, a significant wholly-owned subsidiary of ICII.
Year Ended December 31, ---------------------------------- Southern Pacific Bank 2000 1999 1998 --------------------- ---------- ---------- ---------- (In thousands) Total assets............................. $1,844,185 $1,846,992 $1,976,055 Deposits................................. 1,638,083 1,626,153 1,716,688 Borrowings from Federal Home Loan Bank... 65,000 -- 20,000 Subordinated debt........................ 42,000 35,000 35,000 Shareholder's equity..................... 81,555 169,962 179,022 Interest income.......................... 204,647 183,052 197,325 Interest expense......................... 115,345 92,162 95,647 Other noninterest income (expense)....... 5,054 (10,033) 2,738 Noninterest expense...................... 50,664 57,202 63,548 Provision for loan and lease losses...... 168,755 31,930 12,500 (Loss) income before taxes............... (125,063) (8,275) 28,368 Net (loss) income........................ (117,636) (4,969) 16,393 Comprehensive (loss) income.............. (117,407) (5,316) 16,393
31. Condensed Consolidating Financial Information The following represents condensed consolidating financial information as of December 31, 2000 and December 31, 1999, and for the years ended December 31, 2000, 1999 and 1998, with respect to the financial position, results of operations and cash flows of the Company and its wholly-owned and majority- owned subsidiaries. On January 17, 1997, the Company sold $200 million of 9.875% Senior Notes due 2007. As of December 31, 2000, the 9.875% Senior Notes are guaranteed by five of the Company's wholly-owned subsidiaries, IBC, ICAI, ICCAMC, Imperial Credit Worldwide ("ICW") and AMN (the "Guarantor Subsidiaries"). As of December 31, 2000, the non-guarantor subsidiaries are SPB, ICG and ICCTI. FMC was a guarantor subsidiary through September 30, 1997. Each of the guarantees is full and unconditional and joint and several. The summarized consolidated financial information is presented in lieu of separate financial statements and other related disclosures of the wholly-owned subsidiary guarantors as management has determined that such information is not material to investors. None of the subsidiary guarantors is restricted from making distributions to the Company. 135 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED BALANCE SHEET As of December 31, 2000
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) ASSETS ------ Cash.................... $ 2,975 $ 4,128 $ 29,214 $ (5,379) $ 30,938 Interest bearing deposits............... 12,965 -- 170,228 -- 183,193 Investments in Federal Home Loan Bank stock... -- -- 4,148 -- 4,148 Securities available for sale and trading....... 40,378 52,449 148,907 (14,000) 227,734 Loans held for sale..... 885 -- 385,584 -- 386,469 Loans held for investment, net........ 51,888 1,984 1,110,622 (42,000) 1,122,494 Real property........... -- 53,198 -- -- 53,198 Retained interest in loan and lease securitizations........ -- 6,330 -- -- 6,330 Investment in subsidiaries........... 116,576 -- -- (116,576) -- Goodwill................ 16,154 -- 16,176 -- 32,330 Other assets............ 20,029 15,198 32,378 (4,492) 63,113 Net assets of discontinued operations............. 29,753 (12,123) -- -- 17,630 -------- -------- ---------- --------- ---------- Total assets.......... $291,603 $121,164 $1,897,257 $(182,447) $2,127,577 ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Deposits................ $ -- $ -- $1,638,083 $ (5,379) $1,632,704 Borrowings from FHLB.... -- -- 65,000 -- 65,000 Other borrowings........ 1,220 43,854 81,044 (42,000) 84,118 ROPES................... 44,211 -- (1,326) -- 42,885 Senior notes............ 176,757 -- -- -- 176,757 Minority interest in consolidated subsidiaries........... -- 3 -- 1,113 1,116 Goodwill................ -- 23,797 -- -- 23,797 Other liabilities....... 29,973 21,082 15,196 (4,493) 61,758 -------- -------- ---------- --------- ---------- Total liabilities..... 252,161 88,736 1,797,997 (50,759) 2,088,135 -------- -------- ---------- --------- ---------- Shareholders' equity: Preferred stock......... -- 1,009 14,000 (15,009) -- Common stock............ 97,668 107,565 122,792 (230,357) 97,668 (Accumulated deficit) retained earnings...... (64,889) (82,402) (37,414) 119,816 (64,889) Shares held in deferred executive compensation plan................... 5,745 5,745 -- (5,745) 5,745 Accumulated other comprehensive income (loss)................. 918 511 (118) (393) 918 -------- -------- ---------- --------- ---------- Total shareholders' equity............... 39,442 32,428 99,260 (131,688) 39,442 -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity............... $291,603 $121,164 $1,897,257 $(182,447) $2,127,577 ======== ======== ========== ========= ==========
136 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS Year Ended December 31, 2000
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Interest income......... $ 17,565 $ 8,837 $ 204,732 $ (6,309) $ 224,825 Interest expense........ 26,885 4,048 115,589 (6,309) 140,213 --------- -------- --------- -------- --------- Net interest (expense) income................. (9,320) 4,789 89,143 -- 84,612 Provision for loan and lease losses........... 167 12,053 168,755 -- 180,975 --------- -------- --------- -------- --------- Net interest expense after provision for loan and lease losses............... (9,487) (7,264) (79,612) -- (96,363) --------- -------- --------- -------- --------- Gain (loss) on sale of loans and leases....... -- 563 (1,334) -- (771) Asset management fees... -- 3,239 -- -- 3,239 Investment banking and brokerage fees......... -- -- 21,057 -- 21,057 Loan servicing income... (160) 4,583 1,570 -- 5,993 Gain on sale of equity securities............. 11,871 -- 1,117 -- 12,988 Equity in net income of ICG.................... 479 -- -- -- 479 Rental income........... -- 8,183 -- -- 8,183 Mark to market on securities and loans held for sale.......... (1,721) (5,058) (6,031) -- (12,810) Other income............ (432) 2,810 9,900 -- 12,278 --------- -------- --------- -------- --------- Total fee and other income............... 10,037 14,320 26,279 -- 50,636 --------- -------- --------- -------- --------- Personnel expense....... 3,198 7,640 39,259 -- 50,097 Amortization of servicing rights....... -- 529 -- -- 529 Occupancy expense....... 313 709 4,424 -- 5,446 Net expenses of other real estate owned...... 169 858 359 -- 1,386 Professional services... 9,040 2,394 4,337 -- 15,771 Amortization of goodwill, net.......... 924 (1,130) 1,637 -- 1,431 General, administrative and other expense...... 2,180 7,388 18,809 -- 28,377 --------- -------- --------- -------- --------- Total expenses........ 15,824 18,388 68,825 -- 103,037 --------- -------- --------- -------- --------- Merger expenses......... -- 9,397 -- -- 9,397 Loss from continuing operations before income taxes, minority interest, deferred inter-company expense and extraordinary item................... (15,274) (20,729) (122,158) -- (158,161) Income taxes............ 12,725 (2,708) (7,661) -- 2,356 Minority interest in income (loss) of consolidated subsidiaries........... -- 130 (9) 1,004 1,125 --------- -------- --------- -------- --------- Loss from continuing operations before equity in undistributed income of subsidiaries........... (27,999) (18,151) (114,488) (1,004) (161,642) Equity in undistributed (loss) income of subsidiaries........... (138,861) -- -- 138,861 -- --------- -------- --------- -------- --------- (Loss) income from continuing operations.. (166,860) (18,151) (114,488) 137,857 (161,642) Loss from discontinued operations............. -- (5,218) -- -- (5,218) --------- -------- --------- -------- --------- (Loss) income before extraordinary item..... (166,860) (23,369) (114,488) 137,857 (166,860) Extraordinary item--gain on early extinguishment of debt, net of income taxes.................. 3,534 -- -- -- 3,534 --------- -------- --------- -------- --------- Net (loss) income available for common shares................. $(163,326) $(23,369) $(114,488) $137,857 $(163,326) ========= ======== ========= ======== =========
137 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Year Ended December 31, 2000
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Net cash (used in) provided by operating activities............. $(119,081) $ 10,672 $(41,687) $ 117,846 $(32,250) --------- -------- -------- --------- -------- Cash flows from investing activities: Net change in interest bearing deposits..... 22,084 1,116 42,247 -- 65,447 Sales and collections of securities available for sale... 10,180 939 19,768 2,499 33,386 Purchase of securities available for sale... -- -- (50,000) -- (50,000) Net change in loans held for investment.. 10,189 6,441 (85,588) 4,113 (64,845) Proceeds from sale of securities........... 22,495 -- -- -- 22,495 Net cash received in ICCMIC acquisition... -- 11,524 -- -- 11,524 Investment in SPB subordinated debt.... (24,000) -- -- 24,000 -- Investment in SPB noncumulative perpetual preferred stock................ (5,000) -- 5,000 -- -- Net change in investment in subsidiaries......... 123,446 -- -- (123,446) -- Other, net............ (3,130) 1,294 5,511 -- 3,675 --------- -------- -------- --------- -------- Net cash provided by (used in) investing activities............. 156,264 21,314 (63,062) (92,834) 21,682 --------- -------- -------- --------- -------- Cash flows from financing activities: Net change in deposits............. -- (2,050) 11,929 8,067 17,946 Advances from Federal Home Loan Bank....... -- -- 95,000 -- 95,000 Repayments of advances from Federal Home Loan Bank............ -- -- (30,000) -- (30,000) Net change in other borrowings........... (6,691) (25,241) 7,290 (26,188) (50,830) Repurchase of Senior Notes................ (6,498) -- -- -- (6,498) Repurchase of ROPES... (15,060) -- -- -- (15,060) Repurchase of common stock................ (4,062) -- -- -- (4,062) Proceeds from exercise of stock options..... 43 -- -- -- 43 Capital contribution.. (15,000) -- 15,000 -- -- Other, net............ 1,950 (1,949) (108) 1,176 1,069 --------- -------- -------- --------- -------- Net cash used in financing activities... (45,318) (29,240) 99,111 (16,945) 7,608 --------- -------- -------- --------- -------- Net change in cash.... (8,135) 2,746 (5,638) 8,067 (2,960) Cash at beginning of period............... 11,110 1,382 34,852 (13,446) 33,898 --------- -------- -------- --------- -------- Cash at end of period............... $ 2,975 $ 4,128 $ 29,214 $ (5,379) $ 30,938 ========= ======== ======== ========= ========
138 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED BALANCE SHEET As of December 31, 1999
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) ASSETS ------ Cash.................... $ 11,110 $ 1,382 $ 34,852 $ (13,446) $ 33,898 Interest bearing deposits............... 35,049 -- 213,133 -- 248,182 Investments in Federal Home Loan Bank stock... -- -- 6,960 -- 6,960 Securities available for sale and trading....... 74,827 41,460 132,042 (13,150) 235,179 Loans held for sale..... 1,441 12,300 275,657 -- 289,398 Loans held for investment, net........ 55,721 17,105 1,211,862 (51,617) 1,233,071 Retained interest in loan and lease securitizations........ -- 10,220 -- -- 10,220 Investment in subsidiaries........... 255,024 -- -- (255,024) -- Goodwill................ 11,778 4,306 18,877 -- 34,961 Other assets............ 26,230 12,488 27,300 6,236 72,254 Net assets of discontinued operations............. 44,396 (6,904) -- -- 37,492 -------- -------- ---------- --------- ---------- Total assets.......... $515,576 $ 92,357 $1,920,683 $(327,001) $2,201,615 ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY --------------------- Deposits................ $ -- $ 2,050 $1,626,154 $ (13,446) $1,614,758 Other borrowings........ 7,911 8,456 103,323 (45,381) 74,309 ROPES................... 63,915 (2,165) -- -- 61,750 Senior notes............ 185,185 -- -- -- 185,185 Minority interest in consolidated subsidiaries........... 103 2 155 2,424 2,684 Other liabilities....... 53,082 4,341 126 -- 57,549 -------- -------- ---------- --------- ---------- Total liabilities..... 310,196 12,684 1,729,758 (56,403) 1,996,235 -------- -------- ---------- --------- ---------- Shareholders' equty: Preferred stock......... -- 14,150 -- (14,150) -- Common stock............ 97,220 120,551 110,977 (231,528) 97,220 Retained earnings (accumulated deficit).. 98,437 (64,641) 80,295 (15,654) 98,437 Shares held in deferred executive compensation plan................... 7,107 7,107 -- (7,107) 7,107 Accumulated other comprehensive income (loss)................. 2,616 2,506 (347) (2,159) 2,616 -------- -------- ---------- --------- ---------- Total shareholders' equity............... 205,380 79,673 190,925 (270,598) 205,380 -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity............... $515,576 $ 92,357 $1,920,683 $(327,001) $2,201,615 ======== ======== ========== ========= ==========
139 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS Year Ended December 31, 1999
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Interest income......... $ 21,521 $ 9,639 $183,576 $(7,298) $207,438 Interest expense........ 32,184 1,595 92,599 (4,771) 121,607 -------- -------- -------- ------- -------- Net interest (expense) income................. (10,663) 8,044 90,977 (2,527) 85,831 Provision for loan and lease losses........... 210 3,200 31,930 -- 35,340 -------- -------- -------- ------- -------- Net interest (expense) income after provision for loan and lease losses..... (10,873) 4,844 59,047 (2,527) 50,491 -------- -------- -------- ------- -------- Gain on sale of loans and leases............. 20 4,398 2,062 -- 6,480 Asset management fees... -- 10,054 -- -- 10,054 Investment banking and brokerage fees......... -- -- 27,198 -- 27,198 Loan servicing income... 59 4,397 2,429 -- 6,885 Gain (loss) on sale of equity securities...... 31,434 (298) 1,606 -- 32,742 Equity in net loss of FMC.................... (53) -- -- -- (53) Mark to market on securities and loans held for sale.......... 11,314 (15,022) (24,933) -- (28,641) Dividends received from subsidiaries........... 6,564 -- -- (6,564) -- Other income............ 1,965 3,169 8,760 -- 13,894 -------- -------- -------- ------- -------- Total fee and other income............... 51,303 6,698 17,122 (6,564) 68,559 -------- -------- -------- ------- -------- Personnel expense....... 3,133 14,574 42,634 -- 60,341 Amortization of servicing rights....... -- 259 3,964 -- 4,223 Occupancy expense....... 784 911 3,963 -- 5,658 Net (income) expenses of other real estate owned.................. (23) 717 692 -- 1,386 Professional services... 2,770 2,725 4,770 -- 10,265 Amortization of goodwill............... 200 12,653 1,653 -- 14,506 General, administrative and other expense...... 2,454 4,048 23,719 -- 30,221 -------- -------- -------- ------- -------- Total expenses........ 9,318 35,887 81,395 -- 126,600 -------- -------- -------- ------- -------- Income (loss) from continuing operations before income taxes, minority interest, deferred inter- company expense and extraordinary item..... 31,112 (24,345) (5,226) (9,091) (7,550) Income taxes............ 10,020 (9,789) (3,305) -- (3,074) Minority interest in income (loss) of consolidated subsidiaries........... 421 (46) 572 527 1,474 -------- -------- -------- ------- -------- Income (loss) from continuing operations before equity in undistributed income of subsidiaries........... 20,671 (14,510) (2,493) (9,618) (5,950) Equity in undistributed (loss) income of subsidiaries........... (27,520) -- -- 27,520 -- -------- -------- -------- ------- -------- (Loss) income from continuing operations.. (6,849) (14,510) (2,493) 17,902 (5,950) Loss from discontinued operations............. -- (899) -- -- (899) -------- -------- -------- ------- -------- (Loss) income before extraordinary item..... (6,849) (15,409) (2,493) 17,902 (6,849) Extraordinary item--gain on early extinguishment of debt, net of income taxes.................. 4,021 -- -- -- 4,021 -------- -------- -------- ------- -------- Net (loss) income....... (2,828) (15,409) (2,493) 17,902 (2,828) Preferred stock dividends.............. -- 2,527 -- (2,527) -- -------- -------- -------- ------- -------- Net (loss) income available for common shares................. $ (2,828) $(17,936) $ (2,493) $20,429 $ (2,828) ======== ======== ======== ======= ========
140 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Year Ended December 31, 1999
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Net cash provided by operating activities... $ 19,031 $ 4,385 $ 96,793 $ 31,413 $ 151,622 -------- -------- --------- -------- --------- Cash flows from investing activities: Net change in interest bearing deposits..... (32,768) 423 (214,422) -- (246,767) Sale of securities available for sale... 4,875 -- -- -- 4,875 Purchase of securities available for sale... (4,050) -- (26,757) 4,050 (26,757) Net change loans held for investment....... (11,984) (12,868) (1,524) (865) (27,241) Proceeds of sale of OREO................. 1,216 4,907 4,228 -- 10,351 Proceeds of sales of securities........... 91,709 8,849 -- -- 100,558 Purchases of premises and equipment........ (1,246) (612) (5,909) -- (7,767) Purchase of FHLB stock................ -- -- (1,983) -- (1,983) Cash utilized for acquisitions......... (8,132) -- -- -- (8,132) Net change in investment in subsidiaries......... 21,839 -- -- (21,839) -- -------- -------- --------- -------- --------- Net cash provided by (used in) investing activities............. 61,459 699 (246,367) (18,654) (202,863) -------- -------- --------- -------- --------- Cash flows from financing activities: Net change in deposits............. -- -- (87,611) (11,883) (99,494) Advances from Federal Home Loan Bank....... -- -- 30,000 -- 30,000 Repayments of advances from Federal Home Loan Bank............ -- -- (50,000) -- (50,000) Proceeds from issuance of mandatorily redeemable cumulative preferred stock...... 30,000 -- -- -- 30,000 Repurchase of mandatorily redeemable cumulative preferred stock...... (31,353) -- -- -- (31,353) Net change in other borrowings........... (12,570) (4,591) (294) (10,506) (27,961) Repurchase of Senior Notes................ (27,453) -- -- -- (27,453) Repurchase of ROPES... (6,628) -- -- -- (6,628) Capital contributions from ICII............ (2,681) 2,555 126 -- -- Dividends paid to ICII................. 6,561 (2,485) (4,076) -- -- Proceeds from exercise of stock options..... 249 -- -- -- 249 Net change in minority interest............. 731 94 22 (1,380) (533) Repurchase and retirement of stock.. (29,460) -- -- -- (29,460) -------- -------- --------- -------- --------- Net cash used in financing activities... (72,604) (4,427) (111,833) (23,769) (212,633) -------- -------- --------- -------- --------- Net change in cash.... 7,886 657 (261,407) (11,010) (263,874) Cash at beginning of period............... 3,224 725 296,259 (2,436) 297,772 -------- -------- --------- -------- --------- Cash at end of period............... $ 11,110 $ 1,382 $ 34,852 $(13,446) $ 33,898 ======== ======== ========= ======== =========
141 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED BALANCE SHEET As of December 31, 1998
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) ASSETS ------ Cash.................... $ 3,224 $ 725 $ 296,259 $ (2,436) $ 297,772 Interest bearing deposits............... 2,281 423 (1,289) -- 1,415 Investments in Federal Home Loan Bank stock... -- -- 4,657 -- 4,657 Securities available for sale and trading....... 118,623 8,421 113,723 (10,000) 230,767 Loans held for sale..... 1,698 33,160 284,203 -- 319,061 Loans held for investment, net........ 45,029 7,467 1,302,599 (35,000) 1,320,095 Servicing rights........ -- 365 3,964 -- 4,329 Retained interest in loan and lease securitizations........ -- 27,011 -- -- 27,011 Investment in FMC....... 56,334 -- -- -- 56,334 Investment in subsidiaries........... 276,863 -- -- (276,863) -- Goodwill................ -- 16,959 20,539 -- 37,498 Other assets............ 32,247 12,200 28,910 (1,925) 71,432 Net assets of discontinued operations............. 43,624 3,188 -- -- 46,812 -------- -------- ---------- --------- ---------- Total assets........ $579,923 $109,919 $2,053,565 $(326,224) $2,417,183 ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Deposits................ $ -- $ -- $1,716,689 $ (2,437) $1,714,252 Borrowings from FHLB.... -- -- 20,000 -- 20,000 Other borrowings........ 20,481 15,097 103,617 (36,925) 102,270 ROPES................... 72,165 (2,165) -- -- 70,000 Senior notes............ 219,858 -- -- -- 219,858 Minority interest in consolidated subsidiaries........... (628) 2,109 133 1,603 3,217 Other liabilities....... 34,526 7,253 12,286 -- 54,065 -------- -------- ---------- --------- ---------- Total liabilities... 346,402 22,294 1,852,725 (37,759) 2,183,662 -------- -------- ---------- --------- ---------- Shareholders' equity: Preferred stock....... -- 12,000 -- (12,000) -- Common stock.......... 129,609 135,279 114,258 (249,537) 129,609 Retained earnings (accumulated deficit)............. 101,265 (63,487) 86,582 (23,095) 101,265 Shares held in deferred executive compensation plan.... 3,833 3,833 -- (3,833) 3,833 Accumulated other comprehensive loss... (1,186) -- -- -- (1,186) -------- -------- ---------- --------- ---------- Total shareholders' equity............. 233,521 87,625 200,840 (288,465) 233,521 -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity............. $579,923 $109,919 $2,053,565 $(326,224) $2,417,183 ======== ======== ========== ========= ==========
142 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS Year Ended December 31, 1998
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Interest income......... $ 30,082 $ 12,962 $197,209 $(4,413) $235,840 Interest expense........ 30,617 1,131 95,771 (4,413) 123,106 -------- -------- -------- ------- -------- Net interest (expense) income................. (535) 11,831 101,438 -- 112,734 Provision for loan and lease losses........... -- 2,950 12,500 -- 15,450 -------- -------- -------- ------- -------- Net interest (expense) income after provision for loan and lease losses..... (535) 8,881 88,938 -- 97,284 -------- -------- -------- ------- -------- Gain on sale of loans and leases............. 46 4,790 10,052 -- 14,888 Asset management fees... -- 7,591 -- -- 7,591 Investment banking and brokerage fees......... -- -- 18,633 (170) 18,463 Loan servicing (expense) income................. (434) 4,907 7,510 -- 11,983 Loss on sale of equity securities............. (179) (50) (363) -- (592) Equity in net income of SPFC................... 12,739 -- -- -- 12,739 Equity in net income of FMC.................... 3,235 -- -- -- 3,235 Mark to market on securities and loans held for sale.......... (4,993) (11,604) (25,791) -- (42,388) Loss on impairment of equity securities...... (120,138) -- -- -- (120,138) Dividends received from subsidiaries........... 25,410 -- -- (25,410) -- Other income............ 362 1,292 11,464 -- 13,118 -------- -------- -------- ------- -------- Total other (loss) income.............. (83,952) 6,926 21,505 (25,580) (81,101) -------- -------- -------- ------- -------- Personnel expense....... 4,415 9,715 47,506 -- 61,636 Amortization of servicing rights....... -- (365) 1,851 -- 1,486 Occupancy expense....... 1,267 942 3,541 -- 5,750 Net (income) expenses of other real estate owned.................. (548) 459 (812) -- (901) Professional services... 2,897 2,773 5,348 (170) 10,848 Amortization of goodwill............... -- 1,084 1,602 -- 2,686 Provision for loss on loan repurchase........ 4,750 -- -- -- 4,750 General, administrative and other expense...... 3,493 4,121 26,967 -- 34,581 -------- -------- -------- ------- -------- Total expenses....... 16,274 18,729 86,003 (170) 120,836 -------- -------- -------- ------- -------- (Loss) income from continuing operations before income taxes, minority interest, deferred inter-- company expense and extraordinary item..... (100,761) (2,922) 24,440 (25,410) (104,653) Income taxes............ (55,061) (981) 11,978 -- (44,064) Minority interest in (loss) income of consolidated subsidiaries........... (1,552) 88 22 (22) (1,464) -------- -------- -------- ------- -------- (Loss) income from continuing operations before equity in undistributed income of subsidiaries........... (44,148) (2,029) 12,440 (25,388) (59,125) Equity in undistributed (loss) income of subsidiaries........... (29,485) -- -- 29,485 -- -------- -------- -------- ------- -------- (Loss) income from continuing operations.. (73,633) (2,029) 12,440 4,097 (59,125) Loss from discontinued operations............. -- (3,232) -- -- (3,232) Loss on disposal of AMN.................... -- (11,276) -- -- (11,276) -------- -------- -------- ------- -------- Net (loss) income....... $(73,633) $(16,537) $ 12,440 $ 4,097 $(73,633) ======== ======== ======== ======= ========
143 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Year Ended December 31, 1998
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Net cash (used in) provided by operating activities............. $(50,644) $(27,150) $ 39,006 $ 1,653 $ (37,135) -------- -------- --------- ------- --------- Cash flows from investing activities: Net change in interest bearing deposits..... 29,109 726 72,488 -- 102,323 Purchase of securities available for sale... (16,651) (900) -- -- (17,551) Sale of securities available for sale... -- 8,818 -- -- 8,818 Net change loans held for investment....... 10,884 15,738 (303,251) -- (276,629) Proceeds of sale of OREO................. 2,558 9,360 1,825 -- 13,743 Proceeds of sales of IMH stock............ 867 -- -- -- 867 Purchases of premises and equipment........ (1,721) (671) (5,441) -- (7,833) Redemption of FHLB stock................ -- -- 1,280 -- 1,280 Net change in investment in subsidiaries......... 4,591 -- -- (4,591) -- -------- -------- --------- ------- --------- Net cash provided by (used in) investing activities............. 29,637 33,071 (233,099) (4,591) (174,982) -------- -------- --------- ------- --------- Cash flows from financing activities: Net change in deposits............. -- -- 523,924 31,382 555,306 Advances from Federal Home Loan Bank....... -- -- 44,500 -- 44,500 Repayments of advances from Federal Home Loan Bank............ -- -- (69,500) -- (69,500) Net change in other borrowings........... 19,261 (15,153) (47,911) 1,232 (42,571) Capital contributions from ICII............ (4,332) 4,332 -- -- -- Dividends paid to ICII................. 20,915 (16,915) (4,000) -- -- Proceeds from exercise of stock options..... 1,037 -- -- -- 1,037 Net change in minority interest............. (1,574) (111) 22 1,706 43 Repurchase and retirement of stock.. (24,305) -- -- -- (24,305) -------- -------- --------- ------- --------- Net cash provided by (used in) financing activities............. 11,002 (27,847) 447,035 34,320 464,510 -------- -------- --------- ------- --------- Net change in cash.... (10,005) (21,926) 252,942 31,382 252,393 Cash at beginning of period............... 13,229 22,651 43,317 (33,818) 45,379 -------- -------- --------- ------- --------- Cash at end of period............... $ 3,224 $ 725 $ 296,259 $(2,436) $ 297,772 ======== ======== ========= ======= =========
144 ________________________________________________IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 32. Imperial Credit Industries, Inc. (Parent Company Only) CONDENSED BALANCE SHEETS
December 31, ------------------ 2000 1999 -------- -------- (In thousands) ASSETS ------ Cash....................................................... $ 2,975 $ 11,110 Interest bearing deposits.................................. 12,965 35,049 Securities available for sale.............................. 22,130 41,365 Trading securities......................................... 18,248 33,462 Loans held for sale........................................ 885 1,441 Loans held for investment, net............................. 51,888 55,721 Premises and equipment, net................................ 1,327 1,846 Other real estate owned, net............................... -- 187 Investment in subsidiaries................................. 116,576 255,024 Accrued interest on loans.................................. 2,728 2,135 Goodwill................................................... 16,154 11,778 Other assets............................................... 15,974 22,062 Net assets of discontinued operations...................... 29,753 44,396 -------- -------- Total assets........................................... $291,603 $515,576 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Other borrowings........................................... $ 1,220 $ 7,911 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES").................................. 44,211 63,915 Senior Notes............................................... 176,757 185,185 Minority interest in consolidated subsidiaries............. 103 Other liabilities.......................................... 29,973 53,082 -------- -------- Total liabilities...................................... 252,161 310,196 -------- -------- Shareholders' equity: Common stock, no par value, authorized 80,000,000 shares; 32,096,361 and 33,198,661 shares issued and outstanding at December 31, 2000 and 1999, respectively............. 97,668 97,220 (Accumulated deficit) retained earnings.................. (64,889) 98,437 Shares held in deferred executive compensation plan...... 5,745 7,107 Accumulated other comprehensive income--unrealized gain (loss) on securities available for sale, net............ 918 2,616 -------- -------- Total shareholders' equity............................. 39,442 205,380 -------- -------- Total liabilities and shareholders' equity............. $291,603 $515,576 ======== ========
145 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, ------------------------------ 2000 1999 1998 --------- -------- --------- (In thousands) Interest income................................ $ 17,565 $ 21,521 $ 30,082 Interest expense............................... 26,885 32,184 30,617 --------- -------- --------- Net interest (expense) income................ (9,320) (10,663) (535) Provision for loan and lease losses............ 167 210 -- --------- -------- --------- Net interest expense after provision for loan and lease losses.............................. (9,487) (10,873) (535) Gain (loss) on sale of loans................... -- 20 46 Loan servicing income (expense)................ (160) 59 (434) Loss on impairment of securities............... -- -- (120,138) Gain (loss) on sale of securities.............. 11,871 31,434 (179) Mark to market on securities................... (1,721) 11,314 (4,993) Dividends received from subsidiaries........... -- 6,564 25,410 Equity in net income of SPFC................... -- -- 12,739 Equity in net (loss) income of FMC............. -- (53) 3,235 Equity in net income of ICG.................... 479 -- -- Other income (loss)............................ (432) 1,965 362 --------- -------- --------- Total other income (loss).................... 10,037 51,303 (83,952) --------- -------- --------- Personnel expense.............................. 3,198 3,133 4,415 Occupancy expense.............................. 313 784 1,267 Other expense.................................. 12,313 5,401 10,592 --------- -------- --------- Total expenses............................... 15,824 9,318 16,274 --------- -------- --------- Income (loss) before income taxes, minority interest, deferred inter- company items and extraordinary item............................ (15,274) 31,112 (100,761) Income taxes................................... 12,725 10,020 (55,061) --------- -------- --------- Income (loss) before minority interest, deferred inter-company items and extraordinary item.......................................... (27,999) 21,092 (45,700) Minority interest in income (loss) of consolidated subsidiaries..................... -- 421 (1,552) --------- -------- --------- Income (loss) before extraordinary item........ (27,999) 20,671 (44,148) Extraordinary item--income on extinguishment of debt, net of income taxes..................... 3,534 4,021 -- --------- -------- --------- Income (loss) before equity in undistributed income of subsidiaries........................ (24,465) 24,692 (44,148) Equity in undistributed (loss) income of subsidiaries, net of income taxes(1).......... (138,861) (27,520) (29,485) --------- -------- --------- Net loss..................................... $(163,326) $ (2,828) $ (73,633) ========= ======== =========
- -------- (1) Includes net loss from discontinued operations of $5.2 million, $899,000 and $14.5 million for 2000, 1999 and 1998, respectively. 146 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, ----------------------------- 2000 1999 1998 --------- -------- -------- (In thousands) Net cash (used in) provided by operating activities..................................... $(119,081) $ 19,031 $(50,644) --------- -------- -------- Cash flows from investing activities: Net change in interest bearing deposits....... 22,084 (32,768) 29,109 Proceeds from sale of other real estate owned........................................ -- 1,216 2,558 Purchase of securities available for sale..... -- (4,050) (16,651) Sale and collections of securities available for sale..................................... 10,180 4,875 -- Proceeds from sale of securities.............. 22,495 91,709 867 Net change in loans held for investment....... 10,189 (11,984) 10,884 Net change in investment in subsidiaries...... 123,446 21,839 4,591 Investment in SPB subordinated debt........... (24,000) -- -- Investment in SPB noncumulative perpetual preferred stock.............................. (5,000) -- -- Cash utilized for acquisitions................ (2,822) (8,132) -- Other......................................... (308) (1,246) (1,721) --------- -------- -------- Net cash provided by investing activities....... 156,264 61,459 29,637 --------- -------- -------- Cash flows from financing activities: Proceeds from issuance of mandatorily redeemable cumulative preferred stock........ -- 30,000 -- Repurchase and extinguishment of mandatorily redeemable cumulative preferred stock........ -- (31,353) -- Repurchase and extinguishment of ROPES........ (15,060) (6,628) -- Repurchase and extinguishment of Senior Notes........................................ (6,498) (27,453) -- Repurchase and retirement of common stock and warrants..................................... (4,062) (29,460) (24,305) Capital contributions to consolidated subsidiaries................................. (15,000) (2,681) (4,332) Dividends and return of capital received from consolidated subsidiaries.................... -- 6,561 20,915 Proceeds from exercise of stock options....... 43 249 1,037 Net change in other borrowings................ (6,691) (12,570) 19,261 Net change in minority interest............... -- 731 (1,574) Other......................................... 1,950 -- -- --------- -------- -------- Net cash (used in) provided by financing activities..................................... (45,318) (72,604) 11,002 --------- -------- -------- Net change in cash.............................. (8,135) 7,886 (10,005) Cash at beginning of year....................... 11,110 3,224 13,229 --------- -------- -------- Cash at end of year............................. $ 2,975 $ 11,110 $ 3,224 ========= ======== ========
147 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Disclosure of Cash Flow Information The following information supplements the condensed statements of cash flows:
December 31, ------------------------ 2000 1999 1998 ------- ------- ------- (In thousands) Cash paid (received) during the period for: Interest....................................... $27,400 $33,911 $28,892 Income taxes................................... (4,123) 817 5,884 Significant non-cash activities: Loans transferred to OREO...................... 114 1,082 2,798 Change in unrealized gain on securities available for sale, net....................... 1,698 3,802 (3,112) Assets contributed to SPB...................... -- -- 9,547 Issuance of warrants........................... 3,082 -- --
33. Issuance of Warrants to Purchase Common Stock In October 2000, we reached an agreement with the plaintiffs to settle the securities class action litigation identified as In re Southern Pacific Funding Corporation Securities Litigation, Lead Case No. CV98-1239-MA, in the U.S. District Court for the District of Oregon. As a part of the settlement, ICII agreed to issue warrants to purchase three million shares of ICII Common Stock with an exercise price of $3.00 per share. The warrants have a term of seven years from their issuance date. The Common Stock to be issued upon the exercise of the warrants will be registered and freely tradable and have the same rights as ICII's existing Common Stock. The warrants will have change of control and typical anti-dilution and adjustment features. The warrants were valued using the Black-Scholes option pricing model and have an estimated value of $1.03 per warrant. The issuance of the warrants resulted in a charge to operations, and a credit to shareholders' equity of $3.1 million. 34. Subsequent Events Recapitalization Transaction On March 30, 2001 we completed the issuance of $16.2 million of Senior Secured Debt. The notes bear an interest rate of 12% and mature on April 30, 2002. The issuance of the Senior Secured Debt is the first step in a recapitalization plan first announced by our company in February 2001. Subsequent to the completed Senior Secured Debt offering, we will offer pro rata a package of the following securities in exchange (the "Debt Exchange") for our three currently outstanding series of debt securities (the "Old Notes"): (i) 12% Senior Secured Notes due 2005 (the "Exchange Notes"), (ii) up to 2.0 million shares of our Common Stock, no par value and (iii) warrants to purchase up to an additional 7.0 million shares of Common Stock at an exercise price of $2.15 per share. Concurrently with consummation of the Debt Exchange, we will issue up to 7.04 million shares of Common Stock to the holders of a majority in interest of our Old Notes who executed the recapitalization agreement. We further intend to issue and sell at least $10.0 million principal amount of 12% Convertible Subordinated Notes due 2005 to accredited investors in a private placement. The Convertible Subordinated Notes will be convertible into Common Stock of the Company at $1.25 per share. The holders of Old Notes will be offered Exchange Notes as follows: (i) the holders of our 10.25% Remarketed Par Securities due 2002 will be offered to convert into Exchange Notes at $0.80 per dollar of face amount of such Old Notes, (ii) the holders of our 9.875% Senior Notes due 2007 will be offered to convert into Exchange Notes at $0.65 per dollar of face amount of such Old Notes, and (iii) the holders of our 9.75% Senior Notes due 2004 will be offered to convert into Exchange Notes at $0.50 per dollar of face amount of such Old Notes. A majority-in-interest of the 10.25% Remarketed Par Securities due 2002 and our 9.875% Senior Notes 148 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) due 2007 have agreed to participate in the Debt Exchange, and to strip the Old Notes of all currently existing financial covenants. Supplemental indentures eliminating all covenants related to the Old Notes have been executed. Subject to the occurrence of certain conditions (including the closing of the Debt Exchange and the issuance of Convertible Subordinated Notes), all of the Senior Secured Debt will be automatically exchanged into (i) $18.2 million principal amount of Exchange Notes, (ii) 249,052 shares of Common Stock, and (iii) warrants to purchase up to an additional 781,681 shares of Common Stock at an exercise price of $2.155 per share. Each of the Senior Secured Debt purchasers will further have the right during the period following the Debt Exchange and ending March 31, 2002 to elect to exchange all or a portion of their Exchange Notes and related shares of Common Stock and Debt Exchange Warrants into $18.2 million principal amount of Convertible Subordinated Notes. The Convertible Subordinated Notes will have a 12% coupon and will be convertible into Common Stock at $1.25 per share. The Senior Secured Debt Holders will be entitled to receive additional amounts of Exchange Notes in connection with the sale of such notes by March 31, 2002 (and for a period of 60 days thereafter) if, with respect to specified types of sales, the average trading price of the Exchange Notes during the 30-day period ending on the last day of the month preceding the month in which such sale occurs is less than a price of 89 or, for other specified types of sales, if their net proceeds from such sales, are less than 89% of the principal amount of the Exchange Notes that are sold. In any such event, each of such holders will be entitled to receive from us, pro rata in accordance with the respective aggregate principal amounts of such Exchange Notes held by such holder, additional principal amounts of Exchange Notes as will generate net proceeds equal to the difference, expressed as a dollar amount, between (i) 89% of the aggregate principal amount of the Exchange Notes sold by such holder and, depending on the types of sales, either the sum of (a) the average trading value of such Exchange Notes and (b) the net proceeds, if any, resulting from the required concurrent actions as defined in the recapitalization agreement or the sum of (x) the net proceeds from such sale of Exchange Notes and (y) the net proceeds, if any, resulting from the required concurrent actions; provided, that in either event, the maximum principal amount of additional Exchange Notes so issuable to all such holders in the aggregate will be limited to $5.0 million. If additional Exchange Notes are required to be issued, 2.0 million shares of Common Stock that would otherwise be issued to the holders of a majority interest in our Old Notes will be reduced by 800 shares for each $1,000 in principal amount of additional Exchange Notes required to be so issued. Sales of Exchange Notes made above the 89% of principal amount threshold by a holder would be taken into account in determining the amount of Exchange Notes, if any, issuable to such holder for sales below the 89% threshold. In addition, if the average trading price of the Exchange Notes during the 30 day period ending March 31, 2002 is less than 70, the Senior Secured Debt Holders will be issued the maximum principal amount of additional Exchange Notes without being obligated to sell any of their Exchange Notes. Upon successful completion of the proposed offering ICII will receive gross proceeds of approximately $26 million of new capital, most of which will be invested in Tier I capital of SPB. We believe that this new capital will assist our company in its attempt to increase capital levels at SPB in order to meet regulatory requirements. However, the funds raised as a result of issuing the Senior Secured Debt and the Convertible Subordinated Notes will not provide sufficient capital by themselves to meet the requirements of SPB under its regulatory orders, and as such, we expect to raise additional capital or reduce the size of SPB in order to meet the capital requirements of the regulatory orders. Furthermore, the future exercise of warrants issued in connection with the Debt Exchange is expected to provide an additional approximately $15.0 million of capital for our company at the time of their exercise approximately three years from the date of issuance of the Exchange Notes. There can be no assurance that the proposed offering can be completed or that sufficient amounts of capital combined with asset reductions can be achieved such that the Bank might comply with its regulatory order requirements. 149 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the directors and executive officers of the Company.
Name Age Position with Company ---- --- --------------------- H. Wayne Snavely(1)(4).... 59 Chairman of the Board, President and Chief Executive Officer Brad S. Plantiko(1)(4).... 45 Executive Vice President, Chief Financial Officer and Director Irwin L. Gubman(1)........ 58 General Counsel and Secretary Paul B. Lasiter(4)........ 34 Senior Vice President and Controller Scott B. Sampson(1)(4).... 58 President of Coast Business Credit Stephen J. Shugerman...... 53 Director Robert S. Muehlenbeck(2).. 53 Director Perry A. Lerner(2)(3)..... 57 Director James P. Staes(3)......... 62 Director
- -------- (1) Member of Executive Committee. (2) Member of Compensation Committee. (3) Member of Audit Committee. (4) Member of Asset & Liability Committee. H. Wayne Snavely has been our Chairman of the Board and Chief Executive Officer since December 1991 and President since February 1996. Mr. Snavely served as a director of Imperial Bank from 1975 to 1983 and from 1993 to January 1998. He serves on the Board of Visitors of the Graduate School of Business Management at Pepperdine University. Mr. Snavely is Chairman of the Board of ICCMIC. Brad S. Plantiko has been Executive Vice President and Chief Financial Officer of the Company since July 1998. From October 1980 to July 1998, Mr. Plantiko was with KPMG Peat Marwick, LLP, where he was partner in-charge of its finance company services for the western United States. Mr. Plantiko has more than 18 years of experience serving banks, thrifts, mortgage banks and finance companies. He serves on the Board of Visitors of the Graduate School of Business Management at Pepperdine University. Mr. Plantiko is a member of the American Institute of Certified Public Accountants. Irwin L. Gubman has been our General Counsel and Secretary since October 1996. From February 1992 to September 1996, Mr. Gubman was a Partner at Coudert Brothers serving in various capacities including syndicated lending, structured finance, and regulatory matters. From December 1970 to September 1991, Mr. Gubman served in various capacities at Bank of America, most recently as Senior Vice President and Associate General Counsel. Paul B. Lasiter has been our Senior Vice President and Controller since November 1992. From June 1988 to November 1992, Mr. Lasiter was a Supervising Senior Accountant for KPMG Peat Marwick, LLP, specializing in the financial institutions industry. Mr. Lasiter is a Certified Public Accountant. Stephen J. Shugerman has been a Director since December 1991. From June 1987 until December 1998, Mr. Shugerman was President of SPB. Mr. Shugerman has been Vice-Chairman of SPB since December 1998. 150 From June 1985 to May 1987, Mr. Shugerman was President of ATI Thrift & Loan Association, a privately owned thrift and loan association, and, from 1979 to 1985, he was Senior Vice President of Imperial Thrift and Loan Association, a former subsidiary of Imperial Bank. Mr. Shugerman has recently served as President of the California Association of Thrift & Loan Companies. Robert S. Muehlenbeck has been a Director since December 1991. Mr. Muehlenbeck retired in 1998 as an Executive Vice President of Imperial Bank with primary responsibility for corporate finance and mergers and acquisitions. In addition, he also served as President of Imperial Ventures, Inc., Imperial Bank's venture capital small business investment company and President of Imperial Credit Corp., an investment and mezzanine lending entity. Mr. Muehlenbeck was formerly the President of Seaborg, Incorporated and has been involved in commercial and residential real estate development and finance activities. Perry A. Lerner has been a Director since May 1992. He has been a principal in the investment firm of Crown Capital Group, Inc., since 1996. Mr. Lerner was with the law firm of O'Melveny & Myers from 1982 to 1997, having been a partner with the firm from 1984 to 1996. Mr. Lerner was an Attorney-Advisor of the International Tax Counsel of the United States Treasury Department from 1973 to 1976. Mr. Lerner is a Director of Boss Holdings Inc., a specialty consumer products company. James P. Staes has been a Director since December 1999. Mr. Staes, a commercial banker and retired Navy Captain, served as President and CEO of Home Bank in Signal Hill, California from 1982 to 1996 and Vice Chairman of California United Bank from 1996 to 1997. Mr. Staes is a past President of the California Bankers Association and Southern California Community Bankers Association. Mr. Staes also served as a director of the Western Independent Bankers Association and as a member of the Conference of State Bank Supervisors. Our directors hold office until the next annual meeting of shareholders and until their successors are elected and qualified, or until their earlier resignation or removal. All officers are appointed by and serve at the discretion of our Board of Directors, subject to employment agreements, where applicable. With the exception of Mr. Snavely and Mr. Shugerman, in their capacities as Chairman and Director of Southern Pacific Funding Corporation, respectively, no directors or executive officers were involved in any petitions under the Federal bankruptcy laws during the past five years. ITEM 11. EXECUTIVE COMPENSATION The members of our board of directors who are not employees of our company receive cash compensation of $7,500 per quarter and $500 for each board of directors meeting attended and for each committee meeting attended which is not on the same day as another board meeting. In addition, these non-employee directors receive options to purchase 10,000 shares of our common stock which vest on the one year anniversary of the date of grant and become first exercisable one year from the date of the grant at a price equal to the fair market value of the common stock on the date of the grant, and which expire on the tenth anniversary of the date of the grant. 151 The following table provides information concerning the cash and non-cash compensation earned and received by our Chief Executive Officer and our four highly compensated executive officers (the "Named Executive Officers"), other than our Chief Executive Officer, whose salary and bonus during the fiscal year ended December 31, 2000 exceeded $100,000: SUMMARY COMPENSATION TABLE
Long Term Annual Compensation Compensation ------------------------ Awards Fiscal Other Annual Options Name and Principal Position Year Salary Bonus Compensation Granted --------------------------- ------ -------- -------- ------------ ------------ H. Wayne Snavely............................... 2000 $500,000 $500,000(7) $24,767(1) -- President, Chief Executive Officer and 1999 500,000 500,000 76,558(1) 150,000(2) Chairman 1998 502,114 -- 78,640(1) -- Brad S. Plantiko............................... 2000 $335,571 $300,000(7) $14,151(3) -- Executive Vice President and Chief Financial 1999 175,000 225,471 63,828(3) 100,000(2) Officer 1998 77,403 99,519 55,815(3) 84,000(2) Irwin L. Gubman................................ 2000 $250,000 $300,000(7) $15,851(4) -- General Counsel and Secretary 1999 210,385 100,000 64,703(4) 100,000(2) 1998 201,532 125,000 18,557(4) 26,800(2) John C. Getzelman.............................. 2000 $205,573 $ -- $13,469(5) -- President, Southern Pacific Bank 1999 196,285 100,000 16,614(5) 50,000(2) 1998 15,385 -- 923(5) 50,000(2) Scott B. Sampson............................... 2000 $300,000 $ -- $10,700(6) -- President, the Coast Business Credit division 1999 300,000 391,000 10,228(6) -- Of Southern Pacific Bank 1998 227,302 471,404 13,517(6) 67,000(2)
- -------- (1) In 2000, 1999 and 1998, consists of a car allowance paid by our company of $18,000, $18,000 and $18,000, respectively, and aggregate contributions paid by our company of $6,767, $58,558 and $60,640, respectively, under employee benefit plans. (2) See "--Stock Option Plans" for details regarding the terms of such options. (3) In 2000 and 1999, consists of a car allowance paid by our company of $9,000 and $9,000, respectively, and aggregate contributions paid by our company of $5,151 and $54,828, respectively, under employee benefit plans. (4) In 2000, 1999 and 1998 consists of a car allowance paid by our company of $9,000, $9,000 and $8,307, respectively, and aggregate contributions paid by our company of $6,851, $55,703 and $10,250, respectively, under employee benefit plans. (5) In 2000 and 1999, consists of a car allowance paid by our company of $8,308 and $12,000, respectively, and aggregate contributions paid by our company of $5,162 and $4,614, respectively, under employee benefit plans. (6) In 2000, 1999 and 1998, consists of a car allowance paid by our company of $6,000, $6,000 and $6,000, respectively, and aggregate contributions paid by our company of $4,700, $4,228 and $7,517, respectively, under employee benefit plans. (7) In 2000, consists of amounts paid primarily in connection with the successful completion of the ICCMIC acquisition. 152 Option Grants, Exercises and Year End Values
Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for 2000 Percentage Exercise Option Term Options of Total Price Expiration ------------------- Name Granted Grants Per Option Date 5% 10% - ---- ------- ---------- ---------- ---------- --------- --------- H. Wayne Snavely.. -- --% $ -- -- $ -- $ -- Brad S. Plantiko.. -- -- -- -- -- -- Irwin L. Gubman... -- -- -- -- -- -- John C. Getzelman........ -- -- -- -- -- -- Scott B. Sampson.. -- -- -- -- -- --
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of Number of Unexercised Senior Unexercised Management Options at FY- Options at End Under the FY-End Under the Value of all Unexercised Shares Option Plan Option Plan In-the-Money Options at Acquired on Value Exercisable/ Exercisable/ December 31, 1999 Name Exercise Realized Unexercisable(1) Unexercisable(2) Exercisable/Unexercisable(3) ---- ----------- -------- ---------------- ------------------ ---------------------------- H. Wayne Snavely........ -- -- 340,000/210,000 917,052/-- $--/$ -- Brad S. Plantiko........ -- -- 43,600/140,400 --/-- --/ -- Irwin L. Gubman......... -- -- 86,720/140,080 --/-- --/ -- John C. Getzelman....... -- -- --/-- --/-- --/ -- Scott B. Sampson........ -- -- 26,800/-- --/-- --/ --
- -------- (1) For a description of the terms of such options, see "--Stock Option Plans." (2) For a description of the terms of such options, see "--Senior Management Stock Options." (3) Based on a price per share of $0.47, which was the price of a share of our common stock as quoted on the NASDAQ National Market at the close of business on December 31, 2000. Employment Agreements As of January 1, 1997, Mr. Snavely entered into a five-year employment agreement at an annual base salary of $450,000, subject to adjustment, plus an annual bonus based on attainment of performance objectives, including our company's return on equity, earnings per share and increase in the price of our company's common stock. Mr. Snavely's total cash compensation may not exceed $1.5 million annually. Pursuant to the employment agreement with Mr. Snavely, he is entitled to receive compensation following his termination, as follows: (1) with cause: base salary shall be paid through the date on which termination occurs, or (2) without cause (or for "good reason" as defined in the employment agreement), base salary shall be paid through the date of termination together with the pro-rata portion of any cash bonus award the employee would be entitled to receive at year end and a severance amount equal to base salary reduced by the employee's projected primary social security benefit. The severance amount shall be further reduced if the executive becomes employed by another company or becomes an independent contractor of another company and shall be eliminated entirely if such other company is determined by our board of directors to compete with our company. Compensation Committee Interlocks and Insider Participation Our company's Compensation Committee consists of Messrs. Muehlenbeck and Lerner. Mr. Muehlenbeck retired in 1998 as an Executive Vice President of Imperial Bank. Mr. Lerner is the Manager of Corona Film Finance Fund (in which ICII is an investor). 153 Termination Protection Agreements In January 1999, we entered into termination protection agreements with Messrs. Snavely, Gubman and Plantiko. The agreements provide for severance payments to those senior executives in the event of a change in control of our company and a subsequent termination of any one of these senior executives within three years of a change in control for any reason. The senior executives will receive a lump sum payment of three times their respective base salaries and their highest bonus earned in any of the last three fiscal years preceding the change in control and a percentage of their respective bonuses for the year in which the change of control occurs. In addition, we will continue to provide these senior executives with medical, dental, life insurance, disability and accidental death and dismemberment benefits until the third anniversary of the termination unless the executive becomes employed by another employer, in which case these coverages will be secondary to those provided by the new employer. All deferred compensation in respect of each senior executive will also become fully vested and we will pay such executive in cash all deferred compensation and any unpaid portion of the executive's bonus. Any amounts payable to an executive will include additional amounts to cover certain taxes resulting from those payments. A change in control for purposes of the termination protection agreements includes the following events: (1) any person or persons become the beneficial owner of at least 40% of our outstanding common stock other than by the acquisition of such common stock directly from our company, or (2) any merger or other business combination, liquidation or sale of substantially all of our assets where our shareholders and any trustee or fiduciary of our employee benefit plans own less than 60% of the surviving corporation, or (3) within any 24 month period, the persons who were directors immediately before the beginning of such period cease to constitute at least a majority of our board, or the board of any successor corporation. Senior Management Stock Options Effective January 1992, members of senior management received ten year options to purchase shares of our company's common stock. Such options are not covered by our option plans described below. The exercise price of these options is $0.89 per share for one-half of the options, with the other half exercisable at $1.40 per share. These options are currently exercisable. H. Wayne Snavely, Joseph R. Tomkinson, and Stephen J. Shugerman were granted 917,053, 917,053 and 458,526 of such options, respectively. In April 1996, Mr. Tomkinson sold 750,000 shares of our common stock he acquired under the option agreement described above. In November 1996, Mr. Shugerman sold 300,000 shares of our common stock he acquired under the option agreement described above. We recognize compensation expense with respect to the senior management stock options because they were granted at less than the estimated market value of our common stock. The total compensation expense was $2.2 million, all of which was recognized as of December 31, 1997. Stock Option Plans 1992 Stock Option Plan A total of 2,292,632 shares of our Common Stock has been reserved for issuance under our 1992 Incentive Stock Option and Nonstatutory Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own terms in 2002. A total of 525,366 options were outstanding at December 31, 2000. The 1992 Stock Option Plan provides for the grant of "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options ("NQSOs") to employees, officers, directors and consultants. ISOs may be granted only to employees. The 1992 Stock Option Plan is administered by our board of directors or a committee appointed by our board, 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 154 options granted under the 1992 Stock Option Plan is 10 years. With respect to any participant who owns stock representing more than 10% of the voting rights of our outstanding capital stock, the exercise price of any option must be at least equal to 110% of the fair market value on the date of grant. 1996 Stock Option Plan In 1996, we adopted our 1996 Stock Option, Deferred Stock and Restricted Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards consisting of deferred stock, restricted stock, stock appreciation rights and limited stock appreciation rights ("Awards"). The 1996 Stock Option Plan is administered by a committee of directors appointed by the board of directors (the "Committee"). ISOs may be granted to the officers and key employees of the Company or any of its subsidiaries. The exercise price for any option granted under the 1996 Stock Option Plan may not be less than 100% (110% in the case of ISOs granted to an employee who is deemed to own in excess of 10% of our outstanding common stock) of the fair market value of the shares of common stock at the time the option is granted. The purpose of the 1996 Stock Option Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to those whose job performance affects our company. The effective date of the 1996 Stock Option Plan was June 21, 1996. A total of 3,000,000 shares of our common stock is reserved for issuance under the 1996 Stock Option Plan and a total of 2,971,562 options were outstanding at December 31, 2000. If an option granted under the 1996 Stock Option Plan expires or terminates, or an Award is forfeited, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the 1996 Stock Option Plan. Unless previously terminated by our board of directors, no options or Awards may be granted under the 1996 Stock Option Plan after June 21, 2006. Options granted under the 1996 Stock Option Plan will become exercisable upon the terms of the grant made by the Committee. Awards will be subject to the terms and restrictions of the Award made by the Committee. The Committee has discretionary authority to select participants from among eligible persons and to determine at the time an option or Award is granted and in the case of options, whether it is intended to be an ISO or a NQSO. Under current law, ISOs may not be granted to any individual who is not also an officer or employee of our company or any subsidiary. Each option must terminate no more than 10 years from the date it is granted (or five years in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the combined voting power of our outstanding common stock). Options may be granted on terms providing for exercise in whole or in part at any time or times during their respective terms, or only in specified percentages at stated time periods or intervals during the term of the option, as determined by the Committee. The exercise price of any option granted under the 1996 Stock Option Plan is payable in full: (1) in cash (2) by surrender of shares of the Company's Common Stock already owned by the option holder having a market value equal to the aggregate exercise price of all shares to be purchased including, in the case of the exercise of NQSOs, restricted stock subject to an Award under the 1996 Stock Option Plan, (3) by cancellation of indebtedness owed by the Company to the option holder, or (4) by any combination of the foregoing. Our board of directors may from time to time revise or amend the 1996 Stock Option Plan, and may suspend or discontinue it at any time. However, no such revision or amendment may impair the rights of any participant under any outstanding options or Award without such participant's consent or may, without shareholder approval, increase the number of shares subject to the 1996 Stock Option Plan or decrease the exercise price of a stock 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. 155 Profit Sharing and 401(k) Plan On July 1, 1993, we terminated participation in Imperial Bancorp's 401(k) and profit sharing plans, and we established our own 401(k) plan. On September 30, 1993, Imperial Bancorp transferred all plan assets to our company. Under our 401(k) plan, employees may elect to enroll on the first of any month, provided that they have been employed for at least six months. Employees may contribute up to 14% of their salaries. We will match 50% of the first 4% of employee contributions. We recorded 401(k) matching expense of $273,000, $334,000 and $457,000, for the years ended December 31, 2000, 1999, and 1998, respectively. We may make an additional contribution at our discretion. If we made a discretionary contribution, the contribution would first be allocated to those employees deferring salaries in excess of 4%. The matching contribution would be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. If discretionary contribution funds remain following the allocation outlined above, then any remaining company discretionary contributions would be allocated as a 50% match of employee contributions, on the first 4% of the employee's deferrals. There were no discretionary contributions charged to operations in 2000, 1999, or 1998. We make matching contributions as of December 31st each year. Deferred Executive Compensation Plans Effective July 1, 1998, we adopted our Deferred Executive Compensation Plan (the "DEC Plan 1") and our Deferred Executive Compensation Plan 2 (the "DEC Plan 2", and together with the DEC Plan 1, the "DEC Plans"). The DEC Plans are each administered by a committee appointed by our board of directors. Any of our employees who have an annual base salary of at least $100,000 or who had an annual base salary of at least $100,000 in the prior year and our directors may elect to participate in the DEC Plans. A participant's annual base salary includes all cash compensation excluding bonuses, commissions, employee benefits, stock options, relocation expenses, incentive payments, non-monetary awards, automobile and other allowances. Participants in the DEC Plans may defer up to 50% of their annual base salary and commissions and/or up to 100% of their annual bonus payments. Benefits accrued under the DEC Plans will be paid to all participants, other than participants who have voluntarily resigned their positions, in the form of a lifetime annuity issued by a life insurance company. DEC Plan benefits accrue through retirement so long as the participant remains employed by our company. Participants who voluntarily resign prior to retirement will be paid all of their vested benefits under the DEC Plans. If we terminate the DEC Plans, we may elect to pay participants in a lump sum, or in a lifetime annuity. Deferred compensation contributed to DEC Plan 1 will be invested in our common stock. In 1998 and 1999, we matched contributions to the DEC Plan 1, to be paid in our common stock, on a formula basis up to $50,000 per participant provided minimum returns or equity have been met. The Company has elected not to match contributions in FYE 2000. We also reserve the right to make discretionary matches, to be paid in our common stock, in any year. Matching contributions will vest 50% a year, commencing one year from the date of the matching contributions. Matching contributions will vest completely if a participating employee retires, becomes permanently disabled, or dies. Deferred compensation contributed to DEC Plan 2 may be invested in certain mutual and money market funds. We will not make matching contributions to the DEC Plan 2. All DEC Plan 2 contributions are completely vested immediately. Limitations on Directors' Liabilities and Indemnification Our company and our subsidiaries' Articles of Incorporation and Bylaws provide for indemnification of our officers and directors to the full extent permitted by law. The General Corporation Law of the State of California permits a corporation to limit, under certain circumstances, a director's liability for monetary damages in actions brought by or in the right of the corporation. Our company's and our subsidiaries' Articles of Incorporation also provide for the elimination of the liability of directors for monetary damages to the full extent permitted by law. We also entered into agreements to indemnify our directors and officers in addition to the indemnification provided for in the Articles of Incorporation and Bylaws. These agreements, among other things, indemnify our 156 directors and officers for certain expenses (including attorneys' fees), judgments, fines, and settlement amounts incurred in any action or proceeding, including any action by or in the right of our company, on account of services as our director or officer, as a director or officer of any of our subsidiaries, or as a director or officer of any other enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. We have directors' and officers' liability insurance in the amount of $30.0 million. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Company as to which indemnification is sought, nor are we aware of any threatened litigation or proceeding that may result in claims for indemnification, except as set forth in Item 3. Legal Proceedings. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to the Company with respect to the beneficial ownership of the Company's Common Stock as of January 31, 2001, by (I) each director of the Company, (ii) the Chief Executive Officer and the four most highly compensated executive officers whose salary exceeded $100,000 for the year ended December 31, 2000, (iii) each person who is known to the Company to own beneficially more than 5% of the Common Stock, and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
Number of Shares % of Total Beneficial Owner(1) Beneficially Owned Outstanding(2) - ------------------- ------------------ -------------- Wallace R. Weitz & Company(3)............... 7,410,400 21.6% Waveland Partners LP(4)..................... 3,160,232 9.2 Dimensional Fund Advisors(5)................ 2,793,060 8.1 H. Wayne Snavely(6)......................... 2,088,235 6.1 Stephen J. Shugerman(7)..................... 383,634 * Perry A. Lerner(8).......................... 183,145 * Robert S. Muehlenbeck(9).................... 158,242 * James P. Staes(10).......................... 23,500 * Paul B. Lasiter(11)......................... 162,103 * Irwin L. Gubman(12)......................... 294,228 * Brad S. Plantiko(13)........................ 183,365 * Dave Hourigan(14)........................... 68,932 * All Directors and Officers as a Group (9 persons)(15)............................... 3,545,384 10.3%
- -------- *Less than 1%. (1) Each of such persons may be reached through our company at 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance, California 90505, telephone (310) 373-1704. (2) Percentage ownership is based on 32,096,361 shares of common stock outstanding as of January 31, 2001. (3) Based upon a Schedule 13G filed with the Company reflecting beneficial ownership as of December 31, 2000. The shares are owned by various investment advisory clients of Wallace R. Weitz & Co., which is deemed a beneficial owner of the shares only by virtue of the direct or indirect investment and/or voting discretion they possess pursuant to the provisions of investment advisory agreements with such clients. (4) Based upon a Schedule 13G filed with the Company reflecting beneficial ownership as of December 31, 2000. (5) Based upon a Schedule 13G filed with the Company reflecting beneficial ownership as of December 31, 2000. (6) Includes 1,367,052 shares subject to stock options exercisable within 60 days of January 31, 2001. (7) Includes 284,524 shares subject to stock options exercisable within 60 days of January 31, 2001. (8) Includes 146,422 shares subject to stock options exercisable within 60 days of January 31, 2001. 157 (9) Includes 90,022 shares subject to stock options exercisable within 60 days of January 31, 2001. (10) Includes 10,000 shares subject to stock options exercisable within 60 days of January 31, 2001. (11) Includes 50,000 shares subject to stock options exercisable within 60 days of January 31, 2001. (12) Includes 136,720 shares subject to stock options exercisable within 60 days of January 31, 2001. (13) Includes 93,600 shares subject to stock options exercisable within 60 days of January 31, 2001. (14) Includes 60,000 shares subject to stock options exercisable within 60 days of January 31, 2001. (15) Includes 2,202,340 shares subject to stock options exercisable within 60 days of January 31, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS Relationships with ICG During the fourth quarter of 2000, we sold a portion of our ICG holdings to ICG and to certain members of ICG's management. The Company currently owns 38.5% of ICG as compared to 63.2% prior to the sale. As a result of the sale, we will no longer consolidate the operations of ICG. Beginning with the fourth quarter of 2000, we consider ICG to be an Equity Interest and will report future ICG results of operations as equity in the operations of ICG. ICG has been engaged by our company to provide investment banking services in connection with our recapitalization transaction. Under the terms of the engagement, ICG may earn fees of up to $5.6 million upon the successful completion of the recapitalization transaction. ICG has entered into a separate agreement with our company that requires the prepayment of $2.6 million of principal amount of subordinated debt owed to our company by ICG upon the payment of the fees earned as a result of the recapitalization transaction. See Item 7. "Management's Discussion and Analysis--Results of Operations--Recapitalization Transaction" for more information. Sale of Holdings by former Principal Shareholder and Outstanding Line of Credit On May 14, 1999, we entered into an agreement with our former parent Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP). On May 17, 1999, we repurchased 10% or 3,682,536 shares of our outstanding common stock for $8.00 per share or $29.5 million. At December 31, 1999, Imperial Bank owns no shares of ICII common stock. In October 1999, we purchased the Lewis Horwitz Organization and certain loan portfolios from Imperial Bancorp. As part of the transaction, a line of credit was established with Imperial Bank in order to fund the acquisition. As of December 31, 1999, the outstanding balance for the line of credit was $6.7 million. Relationships with IMH In December 1997, we negotiated a termination of the management agreement between ICAI and IMH (the "Termination Agreement"). We received consideration pursuant to the Termination Agreement comprised of 2,009,310 shares of IMH common stock and certain securitization-related assets. Additionally, we agreed to cancel our note receivable from ICIFC, the origination unit of IMH, in the amount of $29.1 million. We recorded the IMH common stock and the securitization related assets at their estimated fair values of approximately $35.0 million and $13.1 million, respectively, for a total of $48.1 million. This amount, when netted with the $29.1 million cancellation of the ICIFC note receivable resulted in the gain on termination of the management agreement of approximately $19.0 million. Pursuant to the IMH Registration Rights Agreement IMH agreed to file one or more registration statements under the Securities Act in the future for shares of IMH held by ICAI pursuant to the Termination Agreement, subject to certain conditions. Pursuant to the IMH Registration Rights Agreement, IMH will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of IMH held by ICAI pursuant to the Termination Agreement. ICAI contributed the shares to 158 ICII. During the years ended December 31, 1999, 1998 and 1997, we sold 1,887,110 shares, 122,200 shares and 374,538 shares of IMH stock. At December 31, 1999, we owned no shares of IMH common stock. Relationships with ICCMIC ICCMIC Management Agreement On October 20, 1997, ICCMIC entered into a management agreement (the "ICCMIC Management Agreement") with Imperial Credit Commercial Asset Management Corporation ("ICCAMC"), a wholly-owned subsidiary of ICII, for an initial term expiring on October 20, 1999. Mr. Snavely is the Chairman of ICCMIC's board of directors. On July 23, 1999, we announced the signing of a definitive merger agreement by which a wholly owned subsidiary of ours would acquire all of the outstanding shares of ICCMIC (consisting of the 25,930,000 shares not already owned by us and certain of our affiliates and subsidiaries) for a cash purchase price of $11.50 per share. (See--Item 8, "Notes to Consolidated Financial Statements--Note 2) for further information). Fees under the management agreement were payable in arrears. ICCAMC's base and incentive fees and reimbursable costs and expenses are calculated by ICCAMC within 45 days after the end of each quarter, and such calculation promptly delivered to ICCMIC. ICCMIC is obligated to pay such fees, costs and expenses within 60 days after the end of each fiscal quarter. ICCMIC paid ICCAMC $5.9 million, $6.3 million and $940,000 in fees related to the ICCMIC Management Agreement during the years ended December 31, 1999, 1998 and 1997. Other Items In November 1999, ICCMIC purchased from SPB approximately $25 million in principal amount of mortgage loans at a price of par plus accrued interest and with the right to resell those loans to SPB at par plus accrued interest on or after February 28, 2000 or earlier upon the termination of the merger agreement. During 1999, SPB repurchased from ICCMIC certain multifamily and commercial real estate loans with an aggregate principal balance of $47.3 million. ICCMIC is presently negotiating with ICII to resolve certain claims that ICCMIC may have against SPB, ICII or both in connection with the repurchased loans and other loans that ICCMIC previously purchased from SPB. ICII has informed ICCMIC that it believes ICCMIC's claims, which aggregate to approximately $1.4 million, are largely without merit. Mortgage Loan and Other Asset Purchases In 1998, ICCMIC purchased a pool of multifamily and commercial mortgage loans from SPB and from the Company for an aggregate purchase price of approximately $190.0 million plus interest. Equity Investment As of December 31, 1999, we own 9.0% of the outstanding common stock of ICCMIC. ICCMIC invests primarily in performing multifamily and commercial loans and in mortgage backed securities. Other Matters In October 1997, we loaned H. Wayne Snavely, our Chairman and Chief Executive Officer, $1,999,998 for the purpose of assisting him to purchase ICCMIC common stock. The loan was evidenced by a promissory note maturing June 14, 2002, secured by a deed of trust and stock of ICCMIC held by such individual. The note bears interest at an annual rate of 10.4% and was payable in semi-annual installments commencing June 15, 1998. At January 31, 2000, the remaining balance was $288,182, for Mr. Snavely. Mr. Snavely paid off this loan during the year ended December 31, 2000. This loan was made in our ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectibility or present other unfavorable features. 159 In December 1999, we loaned H. Wayne Snavely, Brad S. Plantiko, Irwin L. Gubman, Paul B. Lasiter, and John C. Getzelman each $61,050 in connection with their purchase of $81,400 of Imperial Credit Asset Resolution, Inc. ("ICARI"), Preferred Stock. ICARI is a 100% owned consolidated subsidiary of our parent company, ICII. Each loan is evidenced by a promissory note maturing on December 22, 2019, and is secured by the Preferred Stock of ICARI purchased by each of the above named executive officers. Each note bears interest at an annual rate of 10.4% and is payable in semi-annual installments commencing June 15, 2000. Mr. Getzelman paid this loan in full during the year ended December 31, 2000. At March 30, 2001, the outstanding balance of each note was $61,050 for each of the above named executive officers, except Mr. Getzelman. Each of these loans was made in our ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectibility or present other unfavorable features. In October 2000, we loaned Paul B. Lasiter $30,025 in connection with their purchase of $40,700 ICARI, Preferred Stock. This loan is evidenced by a promissory note maturing on December 22, 2019, and is secured by the Preferred Stock of ICARI purchased by Mr. Lasiter. The note bears interest at an annual rate of 10.4% and is payable in semi-annual installments commencing December 15, 2000. At March 30, 2001, the outstanding balance of this note was $30,025. This loan was made in our ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectibility or present other unfavorable features. 160 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Imperial Credit Industries, Inc. /s/ H. Wayne Snavely By: _________________________________ H. Wayne Snavely Chairman of the Board, President and Chief Executive Officer Date: March 30, 2001 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints H. Wayne Snavely and Irwin L. Gubman and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection wherewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorneys-in fact and agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Signature Title Date --------- ----- ---- /s/ H. Wayne Snavely Chairman of the Board, March 30, 2001 ____________________________________ President and Chief (H. Wayne Snavely) Executive Officer and Director (Principal Executive Officer) /s/ Brad S. Plantiko Executive Vice President, March 30, 2001 ____________________________________ Chief Financial Officer, (Brad S. Plantiko) and Director (Principal Financial Officer and Principal Accounting Officer) /s/ Stephen J. Shugerman Director March 30, 2001 ____________________________________ (Stephen J. Shugerman) /s/ Robert S. Muehlenbeck Director March 30, 2001 ____________________________________ (Robert S. Muehlenbeck) /s/ Perry A. Lerner Director March 30, 2001 ____________________________________ (Perry A. Lerner) /s/ James P. Staes Director March 30, 2001 ____________________________________ (James P. Staes)
161 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8K (a) Exhibits are listed in the table below.
Exhibit Number Description of Exhibit ------- ---------------------- 3.1(S) Articles of Incorporation, as amended of Registrant. 3.2(S) Bylaws of Registrant. 4.1(S) Form of Common Stock Certificate. 4.2# Indenture relating to 9 7/8% Senior Notes, dated as of January 23, 1997, with forms of 9 7/8% Senior Notes. 4.3+ Certificate of Trust of Imperial Credit Capital Trust I. 4.4+ Amended and Restated Declaration of Trust of Imperial Credit Capital Trust I, with form of Remarketed Redeemable Par Securities, dated June 9, 1997. 4.5+ Indenture relating to the Resettable Rate Debentures, dated as of June 9, 1997, with forms of Resettable Rate Debentures. 4.6+ Remarketing Agreement, by and among, the Registrant, the Trust and Lehman Brothers, Inc., dated as of June 9, 1997. 4.7+ Guarantee Agreement by the Registrant, for the benefit of the Holders of Remarketed Redeemable Par Securities, Series B. 10.1(S) Form of Indemnification Agreement for directors and officers. 10.2(S) 1992 Incentive Stock Option Plan and Nonstatutory Stock Option Plan and form of Stock Option Agreement thereunder. 10.3* 1996 Stock Option, Deferred Stock and Restricted Stock Plan effective as of June 21, 1996. 10.4(S) Senior Management Stock Option Agreement dated effective as of January 1, 1992 by and Between Registrant and H. Wayne Snavely. 10.5** Senior Management Stock Option Agreement dated effective as of January 1, 1992 by and Between Registrant and Joseph R. Tomkinson. 10.6** Senior Management Stock Option Agreement dated effective as of January 1, 1992 by and Between Registrant and Stephen J. Shugerman. 10.7** Amendment No. 1 to Senior Management Stock Option Agreement by and between Registrant and H. Wayne Snavely, effective as of January 1, 1992. 10.8** Amendment No. 1 to Senior Management Stock Option Agreement by and between Registrant and Joseph R. Tomkinson, effective as of January 1, 1992. 10.9** Amendment No. 1 to Senior Management Stock Option Agreement by and between Registrant and Stephen J. Shugerman, effective as of January 1, 1992. 10.10** Amendment No. 2 to Senior Management Stock Option by and between Registrant and H. Wayne Snavely, effective as of September 30, 1995. 10.11** Amendment No. 2 to Senior Management Stock Option by and between Registrant and Joseph R. Tomkinson, effective as of September 30, 1995. 10.12** Amendment No. 2 to Senior Management Stock Option by and between Registrant and Stephen J. Shugerman, effective as of September 30, 1995. 10.13*** Employment agreement dated as of January 1, 1997 by and between Registrant and H. Wayne Snavely. 10.15*** Employment agreement dated as of January 1, 1997 by and between Registrant and Stephen J. Shugerman.
162
Exhibit Number Description of Exhibit ------- ---------------------- 10.16*** Registration Rights Agreement dated as of August 26, 1997, by and among Registrant, FLRT, Inc., and Franchise Mortgage Acceptance Company. 10.17+ Agreement for Purchase and Sale of Real Estate Loans between Southern Pacific Bank and Imperial Credit Commercial Mortgage Investment Corp., dated as of October 1, 1997. 10.18+ Agreement for Purchase and Sale of Mortgage-Backed Securities between Southern Pacific Bank and Imperial Credit Commercial Mortgage Investment Corp., dated as of October 22, 1997. 10.19+ Agreement for Purchase of Mortgage-Backed Securities between Registrant and Imperial Credit Commercial Mortgage Investment Corp., dated as of October 22, 1997. 10.20*** Registration Rights Agreement dated as of December 29, 1997, by and between ICAI and IMH. 10.21*** Termination Agreement dated as of December 19, 1997, by and between ICAI and IMH. 10.22*** Promissory Note Secured by Stock Pledge and Deed of Trust dated as of October 21, 1997, Between Registrant and H. Wayne Snavely. 10.24## Deferral of Executive Compensation Plan effective July 1, 1998. 10.25## Deferral of Executive Compensation Plan, Plan I, effective January 1, 1999. 10.26## Deferral of Executive Compensation Plan, Plan II, Effective January 1, 1999. 10.28## Termination Protection Agreement, effective as of January 27, 1999, by and between Registrant and H. Wayne Snavely. 10.29## Termination Protection Agreement, effective as of January 27, 1999, by and between Registrant and Irwin L. Gubman. 10.30## Termination Protection Agreement, effective as of January 27, 1999, by and between Registrant and Brad S. Plantiko. 10.31*** Employment Agreement dated as of September 18, 1995, by and between Registrant and Scott B. Sampson. 10.32## Amendment to Employment Agreement by and between Registrant and Scott B. Sampson, Effective as of September 1, 1998. 10.33### Asset Purchase Agreement by and between Registrant and Imperial Bank, dated as of October 1, 1999. 10.34### Servicing Agreement between Registrant and Imperial Bank, effective as of October 1, 1999. 10.35### Assignment and Assumption Agreement, dated as of October 1, 1999, between Imperial Bank and Registrant. 10.36### Services Agreement between Registrant and Southern Pacific Bank, effective October 1, 1999. 10.37### Severance Agreement between The Lewis Horwitz Organization and Imperial Bank, effective September 30, 1999. 10.38### General Assignment and Assumption of Loan between Imperial Bank and Registrant, dated October 1, 1999. 10.39### Form of Endorsement to Note between Imperial Bank and the Registrant, dated October 1, 1999. 10.40### Employment Severance Agreement, Settlement Agreement and General Release, effective September 1, 1999, between Registrant and Stephen J. Shugerman. 10.41### Employment Severance Agreement, Settlement Agreement and General Release, effective September 30, 1999, between Registrant and Kevin E. Villani. 10.42 Amended Termination Protection Agreement, effective January 27, 1999, by and between Registrant and H. Wayne Snavely which supercedes exhibit 10.28##.
163
Exhibit Number Description of Exhibit ------- ---------------------- 10.43 Amended Termination Protection Agreement, effective January 27, 1999, by and between Registrant and Irwin L. Gubman which supercedes exhibit 10.29##. 10.44 Amended Termination Protection Agreement, effective January 27, 1999, by and between Registrant and Brad S. Plantlike which supercedes exhibit 10.30##. 11 Statement Regarding Computation of Earnings Per Share. 20.1.1 Master Recapitalization Agreement, dated March 29, 2001 20.1.2 Exchange Note Registration Rights, dated March 29, 2001 20.1.3 Form of Senior Note Secured, dated March 29, 2001 20.1.4 Collateral Agency and Security Agreement, date March 29, 2001 21 Subsidiaries of Registrant. 23.1.1 Consent of KPMG LLP. 24 Power of Attorney (included on signature page of Form 10-K).
- -------- (S)Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-45606) and Amendments No. 1, 2 and 3 filed with the SEC on February 10, 1992, April 20, 1992, May 7, 1992 and May 18, 1992, respectively. + Incorporated by reference to Registrant's Registration Statement on Form S- 4 (Registration No. 333-30809) filed on July 3, 1997. # Incorporated by reference to Registrant's Registration Statement on Form S- 4 (Registration No. 333-22141) filed with the SEC on February 19, 1997. * Incorporated by reference to Registrant's Registration Statement on Form S- 8 (Registration No. 333-13805) filed October 9, 1996. ** Incorporated by reference to Registrant's Registration Statement on Form S-8 (Registration No. 333-15149) filed October 31, 1996. *** Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. + Incorporated by reference to Imperial Credit Commercial Mortgage Investment Corp.'s Form 10-Q for the quarter ended September 30, 1997. ## Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. ### Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. (b)Report on Form 8-K The Registrant filed the following Report on Form 8-K during the three months ended December 31, 2000; on December 28, 2000, the Registrant filed a press release announcing the consenting to the issuance by the FDIC of an order (the "FDIC Order") to cease and desist from what the FDIC alleges to be certain unsafe and unsound practices relating to the Bank's operations. 164 EX-10.42 2 0002.txt AMENDED TERMINATION PROTECTION AGREEMENT EXHIBIT 10.42 TERMINATION PROTECTION AGREEMENT -------------------------------- AGREEMENT effective January 27, 1999, between Imperial Credit Industries, Inc., a California Corporation, (the "Company") and H. Wayne Snavely (the "Executive"). Executive, who is a senior executive of the Company, is a skilled and dedicated employee who has important management responsibilities and talents which benefit the Company and its affiliates. The Company believes that its best interests will be served if Executive is encouraged to remain with the Company. The Company has determined that the Company's ability to retain Executive as an employee will be significantly enhanced if Executive is provided with fair and reasonable protection from the potential effects of a change in ownership or control of the Company. Accordingly, the Company and Executive agree as follows: 1. Defined Terms. -------------- Unless otherwise indicated, capitalized terms used in this Agreement which are defined in Schedule A shall have the meanings set forth in Schedule A. 2. Effective Date; Term. --------------------- This Agreement shall commence on the date hereof (the "Effective Date") and shall continue in effect through December 31, 2000; provided, however, the term -------- of this Agreement shall automatically be extended for one additional year beyond 2000 and successive one year periods thereafter, unless, not later than January 30 of each calendar year, commencing in 2000, the Company shall have given notice that it does not wish to extend this Agreement for an additional year beyond such calendar year, in which event this Agreement shall continue to be effective until the end of its then remaining term; provided, further, that, -------- notwithstanding any such notice by the Company not to extend, if a Change in Control shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of 36 months beyond such Change in Control. 1 3. Change in Control Benefits. --------------------------- If Executive's employment with the Company or its affiliates is terminated (a) at any time within the three years following a Change in Control by the Company or its affiliates without Cause or by Executive for Good Reason, or (b) by Executive for any reason during the 30 day period beginning on the first anniversary of a Change in Control (the effective date of any such termination hereafter referred to as the "Termination Date"), Executive shall be entitled to the benefits provided hereafter in this Section 3 and as otherwise set forth in this Agreement. If Executive's employment is terminated prior to a Change in Control at the request or suggestion of any individual or entity acquiring ownership and control of the Company, this Agreement shall become effective upon the subsequent occurrence of a Change in Control involving such acquirer, and Executive's Termination Date shall be deemed to have occurred immediately following the Change in Control, with the result that Executive shall be entitled to the benefits provided hereafter in this Section 3 and as otherwise set forth in this Agreement. A. Severance Benefits. Within five business days after the Termination ------------------ Date, the Company shall pay Executive a lump sum amount, in cash, equal to: (i) three times the sum of: (a) Executive's Base Salary, and (b) Executive's highest Bonus earned in respect of any of the last three Company fiscal years preceding the Change in Control, and (ii). Executive's Target Bonus multiplied by a fraction, the numerator of which shall equal the number of days Executive was employed by the Company or an affiliate in the calendar year in which the Termination Date occurs and the denominator of which shall equal 365. B. Continued Welfare Benefits. Until the third anniversary of the -------------------------- Termination Date, the Company shall, at its expense, provide Executive with medical, dental, life insurance, disability and accidental death and dismemberment benefits at the highest level provided to Executive during the period beginning immediately prior to the Change in Control and ending on the Termination Date; provided, however, that if Executive becomes -------- employed by a new employer, the coverages provided by the Company pursuant to this sentence shall become secondary to those coverages provided by the new employer. 2 C. Payment of Accrued But Unpaid Amounts. Within five business days after ------------------------------------- the Termination Date, (i) all deferred compensation (including any deferrals and matches on those deferrals in the Company's Deferral of Executive Compensation Plan I or the Company's Deferral of Executive Compensation Plan II) shall become fully vested and (ii) the Company shall pay Executive, in cash, (A) any unpaid portion of Executive's Bonus accrued with respect to the full calendar year ended prior to the Termination Date; and (B) all unpaid deferred compensation of Executive. D. Effect on Existing Plans and Employment Agreements. All Change in -------------------------------------------------- Control provisions applicable to Executive and contained in any plan, program, agreement or arrangement maintained on the Effective Date (or thereafter) by the Company or any affiliate (including, but not limited to, any stock option or pension plan) shall remain in effect through the date of a Change in Control (as altered by this Agreement), and for such period thereafter as is necessary to carry out such provisions and provide the benefits payable thereunder, and may not be altered in a manner which adversely affects Executive without Executive's prior written approval. No benefits shall be paid to Executive, however, under any severance plan maintained generally for the employees of the Company or any affiliate if Executive is eligible to receive benefits under this Section 3. Notwithstanding the provisions of Section 4 hereof, any payments or benefits provided under this Agreement shall be reduced by any payments or benefits Executive receives as a result of his termination of employment under an employment agreement between the Company or any affiliate and Executive (an "Employment Agreement"). In addition, any non-competition or non-solicitation covenant in an Employment Agreement or other agreement between the Company or any affiliate and Executive shall lapse on the date of a Change in Control. E. Outplacement Counseling. For the three year period following the ----------------------- Termination Date, the Company shall reimburse all reasonable expenses incurred by Executive (up to 20% of Base Salary per year) for professional outplacement services by qualified consultants selected by Executive. 4. Mitigation. ----------- A. Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, and compensation earned from such employment or otherwise shall not reduce the amounts otherwise payable under this Agreement. No amounts payable under this Agreement shall be subject to reduction or offset in respect of any claims which the Company (or any other person or entity) may have against Executive. 3 5. Gross-Up. --------- A. In the event that any payment or benefit received or to be received by Executive pursuant to the terms of this Agreement (the "Contract Payments") or in connection with Executive's termination of employment or contingent upon a Change in Control of the Company pursuant to any plan or arrangement or other agreement with the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, as determined as provided below, the Company shall pay to Executive, at the time specified in Section 5(B) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive, after deduction of the Excise Tax on the Payments and any federal, state and local income or other tax and Excise Tax upon the payment provided for by this Section 5(A), and any interest, penalties or additions to tax payable by Executive with respect thereto, shall be equal to the total value of the Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of Section 28OG(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 28OG(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent tax counsel selected by the Company's independent auditors and reasonably acceptable to Executive ("Tax Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of Section 28OG(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of Section 28OG(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 28OG(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest effective rates of taxation applicable to individuals as are in effect in the state and locality of Executive's residence or place of employment in the calendar year in which the Gross-Up Payment is to be made. B. The Gross-Up Payments provided for in Section 5(A) hereof shall be made upon the earlier of (i) the payment to Executive of any Payment or (ii) the imposition upon Executive or payment by Executive of any Excise Tax. 4 C. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30 day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably satisfactory to the Executive; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs -------- and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. D. The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the -------- Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or other tax (including interest or 5 penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Executive is required to extend the statute -------- of limitations to enable the Company to contest such claim, the Executive may limit this extension solely to such contested amount. The Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Company without the Executive's consent if such position or resolution could reasonably be expected to adversely affect the Executive (including any other tax position of the Executive unrelated to the matters covered hereby). E. As a result of the uncertainty in the application of Section 4999 of the Code at the time of a determination by the Company or the Tax Counsel hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies, as set forth above, and the Executive thereafter is required to pay to the Internal Revenue Service an additional amount, the Company or the Tax Counsel shall determine the amount of the Underpayment that has occurred and any such Underpayment shall promptly be paid by the Company to or for the benefit of the Executive. F. If, after the receipt by Executive of the Gross-Up Payment or an amount advanced by the Company in connection with the contest of an Excise Tax claim, the Executive receives any refund with respect to such claim, the Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company in connection with an Excise Tax claim, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after such determination, such advance shall be forgiven and shall not be required to be repaid. 6. Termination for Cause. --------------------- Nothing in this Agreement shall be construed to prevent the Company or its affiliates from terminating Executive's employment for Cause. If Executive is terminated for Cause, the Company shall have no obligation to make any payments under this Agreement, except for payments that may otherwise be payable under then existing employee benefit plans, programs and arrangements of the Company and its affiliates. 6 7. Indemnification; Director's and OMcer's Liability Insurance. ------------------------------------------------------------ Executive shall, after the Termination Date, retain all rights to indemnification under applicable law or under the applicable Company's Articles of Incorporation or By-Laws, as they may be amended or restated from time to time. In addition, the Company shall maintain Director's and Officer's liability insurance on behalf of Executive, at the level in effect immediately prior to the Termination Date, for the three-year period following the Termination Date, and throughout the period of any applicable statute of limitations. 8. Confidential Information. ------------------------- Except as required by law or by any court or administrative agency, during the six-month period following the Termination Date, Executive shall not disclose to any person, or use to the significant disadvantage of any of the Company or its affiliates, any Confidential Information; provided that nothing contained in -------- this Section 8 shall prevent Executive from being employed by a competitor of any of the Company or utilizing Executive's general skills, experience, and knowledge, including those developed while employed by any of the Company or its affiliates. 9. Disputes. --------- Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Los Angeles, California or, at the option of Executive, in the county where Executive then resides, in accordance with the Rules of the American Arbitration Association then in effect, except that Executive may, at Executive's option, bring that action in a court of competent jurisdiction, even if the Company has earlier instituted an action hereunder. Judgment may be entered on an arbitrator's award relating to this Agreement in any court having jurisdiction. 10. Costs of Proceedings. --------------------- The Company shall pay all costs and expenses, including attorneys' fees and disbursements, at least monthly, of Executive in connection with any legal proceeding (including arbitration), whether instituted by the Company or Executive, relating to the interpretation or enforcement of any provision of this Agreement, except that if Executive instituted the proceeding and the judge, arbitrator or other individual presiding over the proceeding affirmatively finds that Executive instituted the proceeding in bad faith, Executive shall pay all costs and expenses, including attorney's fees and disbursements, of Executive. The Company shall pay prejudgment interest on any money judgment obtained by Executive as a result of such a proceeding, calculated at the prime rate of The Chase Manhattan Bank, as in effect from time to time, from the date that payment should have been made to Executive under this Agreement. 7 11. Assignment. ---------- Except as otherwise provided herein, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and Executive and their respective heirs, legal representatives, successors and assigns. If the Company shall be merged into or consolidated with another entity, the provisions of this Agreement shall be binding upon and inure to the benefit of the entity surviving such merger or resulting from such consolidation. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The provisions of this Section I 1 shall continue to apply to each subsequent employer of Executive hereunder in the event of any subsequent merger, consolidation or transfer of assets of such subsequent employer. 12. Withholding. ------------ Notwithstanding the provisions of Sections 4 and 5 hereof, the Company may, to the extent required by law, withhold applicable federal, state and local income and other taxes from any payments due to Executive hereunder. 13. Applicable Law. --------------- This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed therein. 14. Entire Agreement. ----------------- This Agreement constitutes the entire agreement between the parties regarding the subject matter hereof. This Agreement may be changed only by a written agreement executed by the Company and Executive. IN WITNESS WHEREOF, the parties have executed this Agreement on the 29th day of January, 1999. IMPERIAL CREDIT INDUSTRIES, INC. /S/ By: /S/ - -------------------------------- -------------------------------------- Executive: H. Wayne Snavely Robert S. Muehlenbeck, Chairman, Compensation Committee 8 Schedule A CERTAIN DEFINITIONS As used in this Agreement, and unless the context requires a different meaning, the following terms, when capitalized, have the meaning indicated: "Average Bonus" means the average Bonus earned by Executive in respect of the last three full fiscal years of the Company ending prior to the Change in Control, excluding any Bonus paid in such years in respect of a partial year of employment. "Base Salary" means Executive's annual rate of base salary in effect ------------- on the date of the Change in Control or the Termination Date, whichever is higher. "Board" means the Company's Board of Directors. ------- "Bonus" means the amount payable to Executive under the Company's ------- applicable annual bonus plan with respect to a Company fiscal year. "Cause" means either of the following: ------- (i) the willful and continued failure of Executive to perform substantially his or her duties with the Company or its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to Executive by the Board or an elected officer of the Company which specifically identifies the manner in which the Board or the elected officer believes that Executive has not substantially performed his or her duties; or (ii) (A) Executive's conviction of, or plea of guilty or nolo contenders to, a felony or (B) the willful engaging by Executive in gross misconduct which is materially and demonstrably injurious to the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause (except for Cause pursuant to (ii)(A) above) unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the outside (i.e., nonemployee) directors at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive was guilty of conduct set forth above and specifying the particulars thereof in detail. 9 "Change in Control" means the first to occur of any of the ----------------- following dates: (i) any person or persons acting in concert (excluding Company benefit plans) becomes the beneficial owner of securities of the Company having at least 30% of the voting power of the Company's then outstanding securities; or (ii) shareholder approval of, or consummation of, any merger or other business combination of the Company (any of the foregoing being referred to herein as a "Transaction") other than a Transaction immediately ------------ following which the shareholders of the Company and any trustee or fiduciary of any Company employee benefit plan immediately prior to the Transaction own at least 60% of the voting power, directly or indirectly, of the surviving corporation following the Transaction; or (iii) within any 24 month period, the persons who were directors immediately before the beginning of such period shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of a successor to the Company; or (iv) shareholder approval of, or the consummation of, the liquidation or dissolution of the Company or a sale of 50% or more of the Company's consolidated assets; or (v) any other event, Transaction, or series of events or Transactions occurs as a result of which there has occurred a "change in control" of the Company of the type that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A of the Securities and Exchange Commission or any successor provision, whether or not the Company is then subject to such reporting requirements. "Code" means the Internal Revenue Code of 1986, as amended. ------ "Company" means Imperial Credit Industries, Inc. --------- "Confidential Information" means nonpublic information relating -------------------------- to the business plans, marketing plans, customers or employees of the Company or its affiliates other than information the disclosure of which cannot reasonably be expected to adversely affect the business of the Company or its affiliates. "Good Reason" means any of the following actions, without ------------- Executive's express prior written approval, other than due to Executive's Permanent Disability or death: (i) Executive's base salary is reduced below the Base Salary; 10 (ii) Executive's annual Bonus is reduced below the Average Bonus. (iii) Executive's duties, titles or responsibilities are diminished in comparison to the duties, titles and responsibilities enjoyed by Executive immediately prior to the Change in Control; (iv) the incentive compensation programs, welfare plans and pension plans offered to Executive are materially diminished in comparison to the incentive compensation programs, welfare plans and pension plans enjoyed by Executive immediately prior to the Change in Control; (v) the relocation of Executive's principal place of business to a location more than 15 miles from where Executive was based immediately prior to the Change in Control; or (vi) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform the Agreement, as contemplated in Section 11 of the Agreement. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. "Permanent Disability" means Executive's inability, by reason of any ---------------------- physical or mental impairment, to substantially perform the significant aspects of his regular duties which inability is reasonably contemplated to continue for at least one year from its incurrence. "Target Bonus" means the annual bonus payable to Executive for the -------------- year in which a Change in Control occurs, calculated on the assumption that Executive and the Company or those entities or business units within the Company on whose performance Executive's bonus depends achieve the applicable target performance goals established under the applicable bonus plan with respect to that year. If no target performance goals for the year in which the Change in Control occurs have been set prior to the Change in Control, the Target Bonus shall be determined by substituting, in the previous sentence, the prior year for the year in which a Change in Control occurs, or the bonus amount accrued for that Executive in the Company's approved annual budget applicable to that Executive, whichever is higher. 11 EX-10.43 3 0003.txt AMENDED TERMINATION PROTECTION AGREEMENT 2/27/1999 EXHIBIT 10.43 TERMINATION PROTECTION AGREEMENT -------------------------------- AGREEMENT effective January 27, 1999 between Imperial Credit Industries, Inc., a California Corporation, (the "Company") and Irwin L. Gubman (the "Executive"). Executive, who is a senior executive of the Company, is a skilled and dedicated employee who has important management responsibilities and talents which benefit the Company and its affiliates. The Company believes that its best interests will be served if Executive is encouraged to remain with the Company. The Company has determined that the Company's ability to retain Executive as an employee will be significantly enhanced if Executive is provided with fair and reasonable protection from the potential effects of a change in ownership or control of the Company. Accordingly, the Company and Executive agree as follows: 1. Defined Terms. -------------- Unless otherwise indicated, capitalized terms used in this Agreement which are defined in Schedule A shall have the meanings set forth in Schedule A. 2. Effective Date; Term. --------------------- This Agreement shall commence on the date hereof (the "Effective Date") and shall continue in effect through December 31, 2000; provided, however, the term -------- of this Agreement shall automatically be extended for one additional year beyond 2000 and successive one year periods thereafter, unless, not later than January 30 of each calendar year, commencing in 2000, the Company shall have given notice that it does not wish to extend this Agreement for an additional year beyond such calendar year, in which event this Agreement shall continue to be effective until the end of its then remaining term; provided, further, that, -------- notwithstanding any such notice by the Company not to extend, if a Change in Control shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of 36 months beyond such Change in Control. 1 3. Change in Control Benefits. --------------------------- If Executive's employment with the Company or its affiliates is terminated (a) at any time within the three years following a Change in Control by the Company or its affiliates without Cause or by Executive for Good Reason, or (b) by Executive for any reason during the 30 day period beginning on the first anniversary of a Change in Control (the effective date of any such termination hereafter referred to as the "Termination Date"), Executive shall be entitled to the benefits provided hereafter in this Section 3 and as otherwise set forth in this Agreement. If Executive's employment is terminated prior to a Change in Control at the request or suggestion of any individual or entity acquiring ownership and control of the Company, this Agreement shall become effective upon the subsequent occurrence of a Change in Control involving such acquirer, and Executive's Termination Date shall be deemed to have occurred immediately following the Change in Control, with the result that Executive shall be entitled to the benefits provided hereafter in this Section 3 and as otherwise set forth in this Agreement. A. Severance Benefits. Within five business days after the ------------------ Termination Date, the Company shall pay Executive a lump sum amount, in cash, equal to: (i) three times the sum of: (a) Executive's Base Salary, and (b) Executive's highest Bonus earned in respect of any of the last three Company fiscal years preceding the Change in Control, and (ii). Executive's Target Bonus multiplied by a fraction, the numerator of which shall equal the number of days Executive was employed by the Company or an affiliate in the calendar year in which the Termination Date occurs and the denominator of which shall equal 365. B. Continued Welfare Benefits. Until the third anniversary of the -------------------------- Termination Date, the Company shall, at its expense, provide Executive with medical, dental, life insurance, disability and accidental death and dismemberment benefits at the highest level provided to Executive during the period beginning immediately prior to the Change in Control and ending on the Termination Date; provided, however, that if Executive becomes -------- employed by a new employer, the coverages provided by the Company pursuant to this sentence shall become secondary to those coverages provided by the new employer. 2 C. Payment of Accrued But Unpaid Amounts. Within five business days after ------------------------------------- the Termination Date, (i) all deferred compensation (including any deferrals and matches on those deferrals in the Company's Deferral of Executive Compensation Plan I or the Company's Deferral of Executive Compensation Plan II) shall become fully vested and (ii) the Company shall pay Executive, in cash, (A) any unpaid portion of Executive's Bonus accrued with respect to the full calendar year ended prior to the Termination Date; and (B) all unpaid deferred compensation of Executive. D. Effect on Existing Plans and Employment Agreements. All Change in -------------------------------------------------- Control provisions applicable to Executive and contained in any plan, program, agreement or arrangement maintained on the Effective Date (or thereafter) by the Company or any affiliate (including, but not limited to, any stock option or pension plan) shall remain in effect through the date of a Change in Control (as altered by this Agreement), and for such period thereafter as is necessary to carry out such provisions and provide the benefits payable thereunder, and may not be altered in a manner which adversely affects Executive without Executive's prior written approval. No benefits shall be paid to Executive, however, under any severance plan maintained generally for the employees of the Company or any affiliate if Executive is eligible to receive benefits under this Section 3. Notwithstanding the provisions of Section 4 hereof, any payments or benefits provided under this Agreement shall be reduced by any payments or benefits Executive receives as a result of his termination of employment under an employment agreement between the Company or any affiliate and Executive (an "Employment Agreement"). In addition, any non-competition or non-solicitation covenant in an Employment Agreement or other agreement between the Company or any affiliate and Executive shall lapse on the date of a Change in Control. E. Outplacement Counseling. For the three year period following the ----------------------- Termination Date, the Company shall reimburse all reasonable expenses incurred by Executive (up to 20% of Base Salary per year) for professional outplacement services by qualified consultants selected by Executive. 4. Mitigation. ----------- A. Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, and compensation earned from such employment or otherwise shall not reduce the amounts otherwise payable under this Agreement. No amounts payable under this Agreement shall be subject to reduction or offset in respect of any claims which the Company (or any other person or entity) may have against Executive. 3 5. Gross-Up. --------- A. In the event that any payment or benefit received or to be received by Executive pursuant to the terms of this Agreement (the "Contract Payments") or in connection with Executive's termination of employment or contingent upon a Change in Control of the Company pursuant to any plan or arrangement or other agreement with the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, as determined as provided below, the Company shall pay to Executive, at the time specified in Section 5(B) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive, after deduction of the Excise Tax on the Payments and any federal, state and local income or other tax and Excise Tax upon the payment provided for by this Section 5(A), and any interest, penalties or additions to tax payable by Executive with respect thereto, shall be equal to the total value of the Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of Section 28OG(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 28OG(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent tax counsel selected by the Company's independent auditors and reasonably acceptable to Executive ("Tax Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of Section 28OG(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of Section 28OG(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 28OG(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest effective rates of taxation applicable to individuals as are in effect in the state and locality of Executive's residence or place of employment in the calendar year in which the Gross-Up Payment is to be made. B. The Gross-Up Payments provided for in Section 5(A) hereof shall be made upon the earlier of (i) the payment to Executive of any Payment or (ii) the imposition upon Executive or payment by Executive of any Excise Tax. 4 C. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30 day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably satisfactory to the Executive; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs -------- and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. D. The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the -------- Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or other tax (including interest or 5 penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Executive is required to extend the statute -------- of limitations to enable the Company to contest such claim, the Executive may limit this extension solely to such contested amount. The Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Company without the Executive's consent if such position or resolution could reasonably be expected to adversely affect the Executive (including any other tax position of the Executive unrelated to the matters covered hereby). E. As a result of the uncertainty in the application of Section 4999 of the Code at the time of a determination by the Company or the Tax Counsel hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies, as set forth above, and the Executive thereafter is required to pay to the Internal Revenue Service an additional amount, the Company or the Tax Counsel shall determine the amount of the Underpayment that has occurred and any such Underpayment shall promptly be paid by the Company to or for the benefit of the Executive. F. If, after the receipt by Executive of the Gross-Up Payment or an amount advanced by the Company in connection with the contest of an Excise Tax claim, the Executive receives any refund with respect to such claim, the Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company in connection with an Excise Tax claim, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after such determination, such advance shall be forgiven and shall not be required to be repaid. 6. Termination for Cause. --------------------- Nothing in this Agreement shall be construed to prevent the Company or its affiliates from terminating Executive's employment for Cause. If Executive is terminated for Cause, the Company shall have no obligation to make any payments under this Agreement, except for payments that may otherwise be payable under then existing employee benefit plans, programs and arrangements of the Company and its affiliates. 6 7. Indemnification; Director's and OMcer's Liability Insurance. ------------------------------------------------------------ Executive shall, after the Termination Date, retain all rights to indemnification under applicable law or under the applicable Company's Articles of Incorporation or By-Laws, as they may be amended or restated from time to time. In addition, the Company shall maintain Director's and Officer's liability insurance on behalf of Executive, at the level in effect immediately prior to the Termination Date, for the three-year period following the Termination Date, and throughout the period of any applicable statute of limitations. 8. Confidential Information. ------------------------- Except as required by law or by any court or administrative agency, during the six-month period following the Termination Date, Executive shall not disclose to any person, or use to the significant disadvantage of any of the Company or its affiliates, any Confidential Information; provided that nothing contained in -------- this Section 8 shall prevent Executive from being employed by a competitor of any of the Company or utilizing Executive's general skills, experience, and knowledge, including those developed while employed by any of the Company or its affiliates. 9. Disputes. --------- Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Los Angeles, California or, at the option of Executive, in the county where Executive then resides, in accordance with the Rules of the American Arbitration Association then in effect, except that Executive may, at Executive's option, bring that action in a court of competent jurisdiction, even if the Company has earlier instituted an action hereunder. Judgment may be entered on an arbitrator's award relating to this Agreement in any court having jurisdiction. 10. Costs of Proceedings. --------------------- The Company shall pay all costs and expenses, including attorneys' fees and disbursements, at least monthly, of Executive in connection with any legal proceeding (including arbitration), whether instituted by the Company or Executive, relating to the interpretation or enforcement of any provision of this Agreement, except that if Executive instituted the proceeding and the judge, arbitrator or other individual presiding over the proceeding affirmatively finds that Executive instituted the proceeding in bad faith, Executive shall pay all costs and expenses, including attorney's fees and disbursements, of Executive. The Company shall pay prejudgment interest on any money judgment obtained by Executive as a result of such a proceeding, calculated at the prime rate of The Chase Manhattan Bank, as in effect from time to time, from the date that payment should have been made to Executive under this Agreement. 7 11. Assignment. ---------- Except as otherwise provided herein, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and Executive and their respective heirs, legal representatives, successors and assigns. If the Company shall be merged into or consolidated with another entity, the provisions of this Agreement shall be binding upon and inure to the benefit of the entity surviving such merger or resulting from such consolidation. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The provisions of this Section I 1 shall continue to apply to each subsequent employer of Executive hereunder in the event of any subsequent merger, consolidation or transfer of assets of such subsequent employer. 12. Withholding. ------------ Notwithstanding the provisions of Sections 4 and 5 hereof, the Company may, to the extent required by law, withhold applicable federal, state and local income and other taxes from any payments due to Executive hereunder. 13. Applicable Law. --------------- This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed therein. 14. Entire Agreement. ----------------- This Agreement constitutes the entire agreement between the parties regarding the subject matter hereof. This Agreement may be changed only by a written agreement executed by the Company and Executive. IN WITNESS WHEREOF, the parties have executed this Agreement on the 29th day of January, 1999. IMPERIAL CREDIT INDUSTRIES, INC. S/ By: S/ - -------------------------------- -------------------------------------- Executive: Irwin L. Gubman H. Wayne Snavely 8 Schedule A CERTAIN DEFINITIONS As used in this Agreement, and unless the context requires a different meaning, the following terms, when capitalized, have the meaning indicated: "Average Bonus" means the average Bonus earned by Executive in respect of the last three full fiscal years of the Company ending prior to the Change in Control, excluding any Bonus paid in such years in respect of a partial year of employment. "Base Salary" means Executive's annual rate of base salary in effect ------------- on the date of the Change in Control or the Termination Date, whichever is higher. "Board" means the Company's Board of Directors. ------- "Bonus" means the amount payable to Executive under the Company's ------- applicable annual bonus plan with respect to a Company fiscal year. "Cause" means either of the following: ------- (i) the willful and continued failure of Executive to perform substantially his or her duties with the Company or its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to Executive by the Board or an elected officer of the Company which specifically identifies the manner in which the Board or the elected officer believes that Executive has not substantially performed his or her duties; or (ii) (A) Executive's conviction of, or plea of guilty or nolo contenders to, a felony or (B) the willful engaging by Executive in gross misconduct which is materially and demonstrably injurious to the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause (except for Cause pursuant to (ii)(A) above) unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the outside (i.e., nonemployee) directors at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive was guilty of conduct set forth above and specifying the particulars thereof in detail. 9 "Change in Control" means the first to occur of any of the ----------------- following dates: (i) any person or persons acting in concert (excluding Company benefit plans) becomes the beneficial owner of securities of the Company having at least 30% of the voting power of the Company's then outstanding securities; or (ii) shareholder approval of, or consummation of, any merger or other business combination of the Company (any of the foregoing being referred to herein as a "Transaction") other than a Transaction immediately ------------ following which the shareholders of the Company and any trustee or fiduciary of any Company employee benefit plan immediately prior to the Transaction own at least 60% of the voting power, directly or indirectly, of the surviving corporation following the Transaction; or (iii) within any 24 month period, the persons who were directors immediately before the beginning of such period shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of a successor to the Company; or (iv) shareholder approval of, or the consummation of, the liquidation or dissolution of the Company or a sale of 50% or more of the Company's consolidated assets; or (v) any other event, Transaction, or series of events or Transactions occurs as a result of which there has occurred a "change in control" of the Company of the type that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A of the Securities and Exchange Commission or any successor provision, whether or not the Company is then subject to such reporting requirements. "Code" means the Internal Revenue Code of 1986, as amended. ------ "Company" means Imperial Credit Industries, Inc. --------- "Confidential Information" means nonpublic information relating to the -------------------------- business plans, marketing plans, customers or employees of the Company or its affiliates other than information the disclosure of which cannot reasonably be expected to adversely affect the business of the Company or its affiliates. "Good Reason" means any of the following actions, without Executive's ------------- express prior written approval, other than due to Executive's Permanent Disability or death: (i) Executive's base salary is reduced below the Base Salary; (ii) Executive's annual Bonus is reduced below the Average Bonus. 10 (iii) Executive's duties, titles or responsibilities are diminished in comparison to the duties, titles and responsibilities enjoyed by Executive immediately prior to the Change in Control; (iv) the incentive compensation programs, welfare plans and pension plans offered to Executive are materially diminished in comparison to the incentive compensation programs, welfare plans and pension plans enjoyed by Executive immediately prior to the Change in Control; (v) the relocation of Executive's principal place of business to a location more than 15 miles from where Executive was based immediately prior to the Change in Control; or (vi) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform the Agreement, as contemplated in Section 11 of the Agreement. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. "Permanent Disability" means Executive's inability, by reason of any ---------------------- physical or mental impairment, to substantially perform the significant aspects of his regular duties which inability is reasonably contemplated to continue for at least one year from its incurrence. "Target Bonus" means the annual bonus payable to Executive for the -------------- year in which a Change in Control occurs, calculated on the assumption that Executive and the Company or those entities or business units within the Company on whose performance Executive's bonus depends achieve the applicable target performance goals established under the applicable bonus plan with respect to that year. If no target performance goals for the year in which the Change in Control occurs have been set prior to the Change in Control, the Target Bonus shall be determined by substituting, in the previous sentence, the prior year for the year in which a Change in Control occurs, or the bonus amount accrued for that Executive in the Company's approved annual budget applicable to that Executive, whichever is higher. 11 EX-10.44 4 0004.txt AMENDED TERMINATION PROTECTION AGREEMENT EXHIBIT 10.44 TERMINATION PROTECTION AGREEMENT -------------------------------- AGREEMENT effective January 27, 1999 between Imperial Credit Industries, Inc., a California Corporation, (the "Company") and Brad S. Plantiko (the "Executive"). Executive, who is a senior executive of the Company, is a skilled and dedicated employee who has important management responsibilities and talents which benefit the Company and its affiliates. The Company believes that its best interests will be served if Executive is encouraged to remain with the Company. The Company has determined that the Company's ability to retain Executive as an employee will be significantly enhanced if Executive is provided with fair and reasonable protection from the potential effects of a change in ownership or control of the Company. Accordingly, the Company and Executive agree as follows: 1. Defined Terms. -------------- Unless otherwise indicated, capitalized terms used in this Agreement which are defined in Schedule A shall have the meanings set forth in Schedule A. 2. Effective Date; Term. --------------------- This Agreement shall commence on the date hereof (the "Effective Date") and shall continue in effect through December 31, 2000; provided, however, the term -------- of this Agreement shall automatically be extended for one additional year beyond 2000 and successive one year periods thereafter, unless, not later than January 30 of each calendar year, commencing in 2000, the Company shall have given notice that it does not wish to extend this Agreement for an additional year beyond such calendar year, in which event this Agreement shall continue to be effective until the end of its then remaining term; provided, further, that, -------- notwithstanding any such notice by the Company not to extend, if a Change in Control shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of 36 months beyond such Change in Control. 3. Change in Control Benefits. --------------------------- If Executive's employment with the Company or its affiliates is terminated (a) at any time within the three years following a Change in Control by the Company or its affiliates without Cause or by Executive for Good Reason, or (b) by Executive for any reason during the 30 day period beginning on the first anniversary of a Change in Control (the effective date of any such termination hereafter referred to as the "Termination Date"), Executive shall be entitled to the benefits provided hereafter in this Section 3 and as otherwise set forth in this Agreement. If Executive's employment is terminated prior to a Change in Control at the request or suggestion of any individual or entity acquiring ownership and control of the Company, this Agreement shall become effective upon the subsequent occurrence of a Change in Control involving such acquirer, and Executive's Termination Date shall be deemed to have occurred immediately following the Change in Control, with the result that Executive shall be entitled to the benefits provided hereafter in this Section 3 and as otherwise set forth in this Agreement. A. Severance Benefits. Within five business days after the ------------------ Termination Date, the Company shall pay Executive a lump sum amount, in cash, equal to: (i) three times the sum of: (a) Executive's Base Salary, and (b) Executive's highest Bonus earned in respect of any of the last three Company fiscal years preceding the Change in Control, and (ii). Executive's Target Bonus multiplied by a fraction, the numerator of which shall equal the number of days Executive was employed by the Company or an affiliate in the calendar year in which the Termination Date occurs and the denominator of which shall equal 365. B. Continued Welfare Benefits. Until the third anniversary of the -------------------------- Termination Date, the Company shall, at its expense, provide Executive with medical, dental, life insurance, disability and accidental death and dismemberment benefits at the highest level provided to Executive during the period beginning immediately prior to the Change in Control and ending on the Termination Date; provided, however, that if Executive becomes -------- employed by a new employer, the coverages provided by the Company pursuant to this sentence shall become secondary to those coverages provided by the new employer. 2 C. Payment of Accrued But Unpaid Amounts. Within five business days after ------------------------------------- the Termination Date, (i) all deferred compensation (including any deferrals and matches on those deferrals in the Company's Deferral of Executive Compensation Plan I or the Company's Deferral of Executive Compensation Plan II) shall become fully vested and (ii) the Company shall pay Executive, in cash, (A) any unpaid portion of Executive's Bonus accrued with respect to the full calendar year ended prior to the Termination Date; and (B) all unpaid deferred compensation of Executive. D. Effect on Existing Plans and Employment Agreements. All Change in -------------------------------------------------- Control provisions applicable to Executive and contained in any plan, program, agreement or arrangement maintained on the Effective Date (or thereafter) by the Company or any affiliate (including, but not limited to, any stock option or pension plan) shall remain in effect through the date of a Change in Control (as altered by this Agreement), and for such period thereafter as is necessary to carry out such provisions and provide the benefits payable thereunder, and may not be altered in a manner which adversely affects Executive without Executive's prior written approval. No benefits shall be paid to Executive, however, under any severance plan maintained generally for the employees of the Company or any affiliate if Executive is eligible to receive benefits under this Section 3. Notwithstanding the provisions of Section 4 hereof, any payments or benefits provided under this Agreement shall be reduced by any payments or benefits Executive receives as a result of his termination of employment under an employment agreement between the Company or any affiliate and Executive (an "Employment Agreement"). In addition, any non-competition or non-solicitation covenant in an Employment Agreement or other agreement between the Company or any affiliate and Executive shall lapse on the date of a Change in Control. E. Outplacement Counseling. For the three year period following the ----------------------- Termination Date, the Company shall reimburse all reasonable expenses incurred by Executive (up to 20% of Base Salary per year) for professional outplacement services by qualified consultants selected by Executive. 4. Mitigation. ----------- A. Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, and compensation earned from such employment or otherwise shall not reduce the amounts otherwise payable under this Agreement. No amounts payable under this Agreement shall be subject to reduction or offset in respect of any claims which the Company (or any other person or entity) may have against Executive. 3 5. Gross-Up. --------- A. In the event that any payment or benefit received or to be received by Executive pursuant to the terms of this Agreement (the "Contract Payments") or in connection with Executive's termination of employment or contingent upon a Change in Control of the Company pursuant to any plan or arrangement or other agreement with the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, as determined as provided below, the Company shall pay to Executive, at the time specified in Section 5(B) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive, after deduction of the Excise Tax on the Payments and any federal, state and local income or other tax and Excise Tax upon the payment provided for by this Section 5(A), and any interest, penalties or additions to tax payable by Executive with respect thereto, shall be equal to the total value of the Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of Section 28OG(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 28OG(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent tax counsel selected by the Company's independent auditors and reasonably acceptable to Executive ("Tax Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of Section 28OG(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of Section 28OG(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 28OG(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest effective rates of taxation applicable to individuals as are in effect in the state and locality of Executive's residence or place of employment in the calendar year in which the Gross-Up Payment is to be made. B. The Gross-Up Payments provided for in Section 5(A) hereof shall be made upon the earlier of (i) the payment to Executive of any Payment or (ii) the imposition upon Executive or payment by Executive of any Excise Tax. 4 C. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30 day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably satisfactory to the Executive; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs -------- and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. D. The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the -------- Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or other tax (including interest or 5 penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Executive is required to extend the statute of limitations to enable the Company to contest such claim, the Executive may limit this extension solely to such contested amount. The Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Company without the Executive's consent if such position or resolution could reasonably be expected to adversely affect the Executive (including any other tax position of the Executive unrelated to the matters covered hereby). E. As a result of the uncertainty in the application of Section 4999 of the Code at the time of a determination by the Company or the Tax Counsel hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies, as set forth above, and the Executive thereafter is required to pay to the Internal Revenue Service an additional amount, the Company or the Tax Counsel shall determine the amount of the Underpayment that has occurred and any such Underpayment shall promptly be paid by the Company to or for the benefit of the Executive. F. If, after the receipt by Executive of the Gross-Up Payment or an amount advanced by the Company in connection with the contest of an Excise Tax claim, the Executive receives any refund with respect to such claim, the Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company in connection with an Excise Tax claim, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after such determination, such advance shall be forgiven and shall not be required to be repaid. 6. Termination for Cause. --------------------- Nothing in this Agreement shall be construed to prevent the Company or its affiliates from terminating Executive's employment for Cause. If Executive is terminated for Cause, the Company shall have no obligation to make any payments under this Agreement, except for payments that may otherwise be payable under then existing employee benefit plans, programs and arrangements of the Company and its affiliates. 6 7. Indemnification; Director's and OMcer's Liability Insurance. ------------------------------------------------------------ Executive shall, after the Termination Date, retain all rights to indemnification under applicable law or under the applicable Company's Articles of Incorporation or By-Laws, as they may be amended or restated from time to time. In addition, the Company shall maintain Director's and Officer's liability insurance on behalf of Executive, at the level in effect immediately prior to the Termination Date, for the three-year period following the Termination Date, and throughout the period of any applicable statute of limitations. 8. Confidential Information. ------------------------- Except as required by law or by any court or administrative agency, during the six-month period following the Termination Date, Executive shall not disclose to any person, or use to the significant disadvantage of any of the Company or its affiliates, any Confidential Information; provided that nothing contained in -------- this Section 8 shall prevent Executive from being employed by a competitor of any of the Company or utilizing Executive's general skills, experience, and knowledge, including those developed while employed by any of the Company or its affiliates. 9. Disputes. --------- Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Los Angeles, California or, at the option of Executive, in the county where Executive then resides, in accordance with the Rules of the American Arbitration Association then in effect, except that Executive may, at Executive's option, bring that action in a court of competent jurisdiction, even if the Company has earlier instituted an action hereunder. Judgment may be entered on an arbitrator's award relating to this Agreement in any court having jurisdiction. 10. Costs of Proceedings. --------------------- The Company shall pay all costs and expenses, including attorneys' fees and disbursements, at least monthly, of Executive in connection with any legal proceeding (including arbitration), whether instituted by the Company or Executive, relating to the interpretation or enforcement of any provision of this Agreement, except that if Executive instituted the proceeding and the judge, arbitrator or other individual presiding over the proceeding affirmatively finds that Executive instituted the proceeding in bad faith, Executive shall pay all costs and expenses, including attorney's fees and disbursements, of Executive. The Company shall pay prejudgment interest on any money judgment obtained by Executive as a result of such a proceeding, calculated at the prime rate of The Chase Manhattan Bank, as in effect from time to time, from the date that payment should have been made to Executive under this Agreement. 7 11. Assignment. ---------- Except as otherwise provided herein, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and Executive and their respective heirs, legal representatives, successors and assigns. If the Company shall be merged into or consolidated with another entity, the provisions of this Agreement shall be binding upon and inure to the benefit of the entity surviving such merger or resulting from such consolidation. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The provisions of this Section I 1 shall continue to apply to each subsequent employer of Executive hereunder in the event of any subsequent merger, consolidation or transfer of assets of such subsequent employer. 12. Withholding. ------------ Notwithstanding the provisions of Sections 4 and 5 hereof, the Company may, to the extent required by law, withhold applicable federal, state and local income and other taxes from any payments due to Executive hereunder. 13. Applicable Law. --------------- This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed therein. 14. Entire Agreement. ----------------- This Agreement constitutes the entire agreement between the parties regarding the subject matter hereof. This Agreement may be changed only by a written agreement executed by the Company and Executive. IN WITNESS WHEREOF, the parties have executed this Agreement on the 29th day of January, 1999. IMPERIAL CREDIT INDUSTRIES, INC. /S/ /S/ ________________________________ By:__________________________________ Executive: Brad S. Plantiko H. Wayne Snavely 8 Schedule A CERTAIN DEFINITIONS As used in this Agreement, and unless the context requires a different meaning, the following terms, when capitalized, have the meaning indicated: "Average Bonus" means the average Bonus earned by Executive in respect of the last three full fiscal years of the Company ending prior to the Change in Control, excluding any Bonus paid in such years in respect of a partial year of employment. "Base Salary" means Executive's annual rate of base salary in effect ------------- on the date of the Change in Control or the Termination Date, whichever is higher. "Board" means the Company's Board of Directors. ------- "Bonus" means the amount payable to Executive under the Company's ------- applicable annual bonus plan with respect to a Company fiscal year. "Cause" means either of the following: ------- (i) the willful and continued failure of Executive to perform substantially his or her duties with the Company or its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to Executive by the Board or an elected officer of the Company which specifically identifies the manner in which the Board or the elected officer believes that Executive has not substantially performed his or her duties; or (ii) (A) Executive's conviction of, or plea of guilty or nolo contenders to, a felony or (B) the willful engaging by Executive in gross misconduct which is materially and demonstrably injurious to the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause (except for Cause pursuant to (ii)(A) above) unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the outside (i.e., nonemployee) directors at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive was guilty of conduct set forth above and specifying the particulars thereof in detail. 9 "Change in Control" means the first to occur of any of the ----------------- following dates: (i) any person or persons acting in concert (excluding Company benefit plans) becomes the beneficial owner of securities of the Company having at least 30% of the voting power of the Company's then outstanding securities; or (ii) shareholder approval of, or consummation of, any merger or other business combination of the Company (any of the foregoing being referred to herein as a "Transaction") other than a Transaction immediately ------------ following which the shareholders of the Company and any trustee or fiduciary of any Company employee benefit plan immediately prior to the Transaction own at least 60% of the voting power, directly or indirectly, of the surviving corporation following the Transaction; or (iii) within any 24 month period, the persons who were directors immediately before the beginning of such period shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of a successor to the Company; or (iv) shareholder approval of, or the consummation of, the liquidation or dissolution of the Company or a sale of 50% or more of the Company's consolidated assets; or (v) any other event, Transaction, or series of events or Transactions occurs as a result of which there has occurred a "change in control" of the Company of the type that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A of the Securities and Exchange Commission or any successor provision, whether or not the Company is then subject to such reporting requirements. "Code" means the Internal Revenue Code of 1986, as amended. ------ "Company" means Imperial Credit Industries, Inc. --------- "Confidential Information" means nonpublic information relating to the -------------------------- business plans, marketing plans, customers or employees of the Company or its affiliates other than information the disclosure of which cannot reasonably be expected to adversely affect the business of the Company or its affiliates. "Good Reason" means any of the following actions, without Executive's ------------- express prior written approval, other than due to Executive's Permanent Disability or death: (i) Executive's base salary is reduced below the Base Salary; (ii) Executive's annual Bonus is reduced below the Average Bonus. 10 (iii) Executive's duties, titles or responsibilities are diminished in comparison to the duties, titles and responsibilities enjoyed by Executive immediately prior to the Change in Control; (iv) the incentive compensation programs, welfare plans and pension plans offered to Executive are materially diminished in comparison to the incentive compensation programs, welfare plans and pension plans enjoyed by Executive immediately prior to the Change in Control; (v) the relocation of Executive's principal place of business to a location more than 15 miles from where Executive was based immediately prior to the Change in Control; or (vi) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform the Agreement, as contemplated in Section 11 of the Agreement. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. "Permanent Disability" means Executive's inability, by reason of any ---------------------- physical or mental impairment, to substantially perform the significant aspects of his regular duties which inability is reasonably contemplated to continue for at least one year from its incurrence. "Target Bonus" means the annual bonus payable to Executive for the -------------- year in which a Change in Control occurs, calculated on the assumption that Executive and the Company or those entities or business units within the Company on whose performance Executive's bonus depends achieve the applicable target performance goals established under the applicable bonus plan with respect to that year. If no target performance goals for the year in which the Change in Control occurs have been set prior to the Change in Control, the Target Bonus shall be determined by substituting, in the previous sentence, the prior year for the year in which a Change in Control occurs, or the bonus amount accrued for that Executive in the Company's approved annual budget applicable to that Executive, whichever is higher. 11 EX-11 5 0005.txt COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 Imperial Credit Industries, Inc. Statement Regarding Computation of Earnings Per Share (In thousands, except per share amounts)
Years Ending December 31, 2000 1999 1998 ---- ---- ---- Loss from continuing operations before extraordinary item $(161,642) $ (5,950) $ (59,125) Operating loss from discontinued operations of AMN, net of income taxes (5,218) (899) (3,232) Loss on disposal of AMN, including provision of $3.7 million for operating losses during phase-out period, net of $6.6 million of income taxes - - (11,276) --------- --------- --------- Loss before extraordinary item (166,860) (6,849) (73,633) Extraordinary item-gain on early extinguishment of debt, net of income taxes 3,534 4,021 - --------- --------- --------- Net loss $(163,326) $ (2,828) $ (73,633) ========= ========= ========= Weighted average common shares outstanding used to compute basic loss per share 32,573 34,517 38,228 Assumed common shares issued on exercise of stock options - - - --------- --------- --------- Number of common shares used to compute diluted loss per share 32,573 34,517 38,228 ========= ========= ========= Basic loss per share: - --------------------- Loss from continuing operations before extraordinary items $ (4.96) $ (0.17) $ (1.55) Loss from discontinued operations, net of income taxes (0.16) (0.02) (0.08) Loss on disposal of AMN, net of income taxes - - (0.30) Extraordinary item-gain on early extinguishment of debt, net of income taxes 0.11 0.11 - --------- --------- --------- Net basic loss per common share $ (5.01) $ (0.08) $ (1.93) ========= ========= ========= Diluted loss per share: - ----------------------- Loss from continuing operations before extraordinary items $ (4.96) $ (0.17) $ (1.55) Loss from discontinued operations, net of income taxes (0.16) (0.02) (0.08) Loss on disposal of AMN, net of income taxes - - (0.30) Extraordinary item-gain on early extinguishment of debt, net of incomes taxes 0.11 0.11 - --------- --------- --------- Net diluted loss per common share $ (5.01) $ (0.08) $ (1.93) ========= ========= =========
EX-20.1.1 6 0006.txt MASTER RECAPITALIZATION AGREEMENT 3/29/2001 EXHIBIT 20.1.1 =============================================================================== MASTER RECAPITALIZATION AGREEMENT by and among IMPERIAL CREDIT INDUSTRIES, INC. and EACH OF THE INVESTORS REFERRED TO HEREIN Dated as of March 29, 2001 =============================================================================== MASTER RECAPITALIZATION AGREEMENT This Master Recapitalization Agreement, dated as of March 29, 2001 (the "Recapitalization Agreement" or this "Agreement"), is entered into by and among Imperial Credit Industries, Inc., a California corporation (the "Company"), and the respective Senior Secured Debt Purchasers and Signatory Debtholders initially named on the signature pages hereof, together with each of the Convertible Subordinated Debt Purchasers who subsequently become parties hereto as hereinafter provided (each of which is acting severally and not jointly and as to itself only) on the basis of the following facts: A. The Company is the holding company of Southern Pacific Bank, a California industrial bank (the "Bank") that is subject to regulation and supervision by the California Department of Financial Institutions (the "DFI") pursuant to the California Banking Law (California Financial Code Sections 99 et -- seq.) and the deposit accounts of which are insured by the Federal Deposit - --- Insurance Corporation (the "FDIC"). B. Pursuant to separate orders issued by the FDIC and the DFI in response to substantial losses suffered by the Bank, the capital of the Bank is required to be substantially increased, with a major portion of such increase to be completed by March 31, 2001 and additional increases in capital to be completed in stages through June 30, 2001 pursuant to a Final Order of the DFI dated December 27, 2000 (the "DFI Order") and through December 31, 2001 pursuant to a Cease and Desist Order by the FDIC dated December 15, 2000 (the "FDIC Order"). Pursuant to the foregoing regulatory orders, the Bank is required, among other things, to formulate, adopt and submit for regulatory approval a plan for complying with the increased capital requirements specified therein. C. The Company intends that the recapitalization transactions provided for in this Agreement shall provide the basis for enabling the Company to supply to the Bank a significant portion of the amounts and types of additional regulatory capital required to comply with the orders of the FDIC and the DFI. Such recapitalization transactions consist of (i) an initial infusion of $16.2 million of cash into the Company pursuant to the purchase of the Senior Secured Debt provided for in this Agreement and the contribution by the Company of the net proceeds from such purchase as "Tier I Capital" to the Bank to enable the Bank to reduce the amount of assets it must sell to achieve its required regulatory capital ratios, (ii) the restructuring of the outstanding public debt of the Company pursuant to the Debt Exchange provided for in this Agreement to provide greater certainty that the Company will be able to comply with its debt service requirements, and (iii) the raising of additional capital for infusion into the Bank through the private placement of Convertible Subordinated Debt in the Convertible Subordinated Debt Placement provided for in this Agreement. THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS Section 1.1 Definitions. As used in this Agreement, and unless the context ----------- requires a different meaning, the following terms have the meanings indicated: "Accredited Investor" means a Person who meets the requirements specified for such status in Rule 501(a) of the Securities Act. "Affiliate" means, with respect to any Person, any Person that, directly or indirectly, controls, is controlled by or is under common control with such Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Agreed De Minimis Amount" has the meaning set forth in Section 6.13(c). "Agreement" or "Recapitalization Agreement" means this Master Recapitalization Agreement and all exhibits and schedules hereto, as the same may be amended, supplemented or modified from time to time. "Average Trading Price" has the meaning set forth in Section 2.4(c)(v). "Average Trading Value" has the meaning set forth in Section 2.4(c)(vi). "Bank" means Southern Pacific Bank, a California industrial bank, together with its successors. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the city of Los Angeles, California are authorized by law to close. "Capital Securities" of any Person means Capital Stock of the Person and Stock Equivalents of the Person. "Capital Stock" of any Person means any and all shares or other equity interest of such Person. "Closing" means, as applicable, the Senior Secured Debt Closing, the Debt Exchange Closing and/or the Convertible Subordinated Debt Placement Closing. "Closing Date" means, as applicable, the Senior Secured Debt Closing Date, the Debt Exchange Closing Date and/or the Convertible Subordinated Debt Placement Closing Date. "Code" means the Internal Revenue Code of 1986, as amended (or any successor statute in effect from time to time), and the rules and regulations promulgated thereunder. 2 "Collateral Agent" means Wilmington Trust Company, not individually but solely in its capacity as agent for the benefit of the Senior Secured Debt Purchasers pursuant to the Security Agreement and, from and after the issuance of Exchange Notes, the Exchange Notes Trustee for the benefit of the holders of the Exchange Notes. "Common Stock" means the Common Stock, no par value per share, of the Company. "Company" means Imperial Credit Industries, Inc., a California corporation, together with its successors. "Company Financial Statements" has the meaning set forth in Section 3.1(j). "Confidential Memorandum" means the Private Placement Memorandum, dated March 8, 2001, as amended by the Supplement to the Private Placement Memorandum dated March 27, 2001, with respect to the recapitalization transactions provided for herein, as amended or supplemented at any time. "Convertible Subordinated Debt" means the Convertible Subordinated Notes that are to be purchased by Convertible Subordinated Debt Purchasers pursuant to Section 2.3, which shall be substantially in the form attached as Exhibit D hereto, as amended, supplemented or otherwise modified from time to time with the consent of the Senior Secured Debt Purchasers. "Convertible Subordinated Debt Placement Closing" has the meaning set forth in Section 2.3(c). "Convertible Subordinated Debt Placement Closing Date" has the meaning set forth in Section 2.3(c). "Convertible Subordinated Debt Placement" means the private placement of Convertible Subordinated Debt provided for in Section 2.3. "Convertible Subordinated Debt Purchasers" means the Investors who will become parties to this Agreement after the initial effective date hereof, will be identified as such in Exhibit A hereto and will agree to purchase Convertible Subordinated Debt in the Convertible Subordinated Debt Placement, all as provided in Section 2.3. "Debt Exchange" has the meaning set forth in Section 2.2(a). "Debt Exchange Closing" has the meaning set forth in Section 2.2(e). "Debt Exchange Closing Date" has the meaning set forth in Section 2.2(e). "Debt Exchange Warrants" means the warrants to purchase shares of Common Stock that are to be issued in the Debt Exchange, which warrants shall have an exercise price of $2.15 per share and a term of seven years and shall be issued pursuant to a Warrant Agreement, which shall be substantially in the form attached as Exhibit C-2 hereto, as amended, supplemented or 3 otherwise modified from time to time with the consent of the Senior Secured Debt Purchasers if such amendment, supplement or modification occurs before the Senior Secured Debt Exchange. "DFI" means the California Department of Financial Institutions and any successor thereto. "Exchange Act" means the Securities Exchange Act of 1934, as amended and in effect from time to time (or any successor statute in effect from time to time), and the rules and regulations of the SEC promulgated thereunder. "Exchange Note Registration Rights Agreement" means the registration rights agreement of that name to be entered into by and among the Company and the Senior Secured Debt Purchasers, which shall be substantially in the form attached as Exhibit E-2 hereto, as amended, supplemented or otherwise modified from time to time with the consent of the Senior Secured Debt Purchasers. "Exchange Notes" means the 12% Senior Secured Notes due 2005 to be issued by the Company in exchange for Old Notes in the Debt Exchange pursuant to Section 2.2 or in exchange for the Senior Secured Debt pursuant to Section 2.4, which Exchange Notes shall be secured by the assets of the Company, and shall be in the form specified in and issued pursuant to the Exchange Note Indenture. "Exchange Notes Indenture" means the indenture relating to the Exchange Notes, which shall be substantially in the form attached as Exhibit C-1 hereto, as amended, supplemented or otherwise modified from time to time, it being understood that if such indenture is amended, supplemented or otherwise modified prior to the Senior Secured Debt Exchange without the consent of the Senior Secured Debt Purchasers, the Senior Secured Debt Purchasers shall have no obligation to exchange the Senior Secured Debt pursuant to Section 2.4(a) of this Agreement. "Exchange Notes Trustee" means The Chase Manhattan Bank and Trust Company, National Association, not individually but solely as trustee under the Exchange Notes Indenture. "Exchanging Debt Holders" means those holders of Old Notes who tender their Old Notes for Exchange Notes in the Debt Exchange provided for in Section 2.2 and who do not withdraw such tender. "FDIA" means the Federal Deposit Insurance Act, as amended (or any successor statute in effect from time to time). "FDIC" means the Federal Deposit Insurance Corporation and any successor thereto. "HSR" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (or any successor statute in effect from time to time), and the rules and regulations of the Federal Trade Commission promulgated thereunder. "Indemnitee" has the meaning set forth in Section 6.14. 4 "Investor" means each Person who is a Senior Secured Debt Purchaser, a Signatory Debtholder or a Convertible Subordinated Debt Purchaser listed on the signature pages of this Agreement, and any permitted successor or assign of such Person as provided herein, including any Person who becomes a party hereto in any of the preceding categories by executing and delivering a signature page hereto after the initial date of this Agreement. "Lien" means, with respect to any asset, any mortgage, lien, pledge, encumbrance, charge or security interest of any kind in respect of such asset. "Material Adverse Effect" means a material adverse effect on the financial condition, assets or results of operations of (i) the Bank or (ii) the Company and its Subsidiaries taken as a whole and shall not include changes in the prices of outstanding equity or debt securities. "NASD" means the National Association of Securities Dealers, Inc. "Net Proceeds" means the gross proceeds realized by the holder of Unexchanged Notes from the sale thereof or from the sale of a proportionate number of shares of Common Stock and Debt Exchange Warrants required to be sold pursuant to Section 2.4(c), less all fees and expenses relating to such sale (including any underwriting discounts, registration costs and expenses of sale). "Old Junior Notes" means the 9.75% Senior Notes due 2004 issued by the Company and currently outstanding. "Old Notes" means, collectively, the Old Senior Notes, the Old Junior Notes and the ROPES. "Old Senior Notes" means the 9.875% Senior Notes due 2007 issued by the Company and currently outstanding. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or a political subdivision or an agency or instrumentality thereof. "Preferred Stock" means the preferred stock, no par value per share, of the Company. "Previously Disclosed" means disclosed in a letter dated the date hereof and delivered by the Company to the attention of the Investors, or from an Investor to the Company, as applicable, specifically referring to the appropriate section of this Agreement and describing in reasonable detail the matters contained therein. "Registration Rights Agreement" means the Registration Rights Agreement to be entered into by and among the Company and the Investors who acquire Common Stock, Debt Exchange Warrants, Exchange Notes (not including the Exchange Notes into which the Senior Secured Debt may be exchanged or that are issued pursuant to Section 2.4(c)) or Convertible 5 Subordinated Debt pursuant to this Agreement, which shall be substantially in the form attached as Exhibit E-1 hereto, as amended, supplemented or otherwise modified from time to time. "Related Agreements" means the Senior Secured Notes, the Security Agreement, the Exchange Notes Indenture, the Exchange Notes, the Debt Exchange Warrants, the Convertible Subordinated Debt, the Exchange Note Registration Rights Agreement and the Registration Rights Agreement. "ROPES" means the Remarketed Redeemable Par Securities, Series B, issued by Imperial Credit Capital Trust I, a Delaware statutory business trust formed by the Company. "SEC" means the Securities and Exchange Commission and any successor thereto. "Securities" means, collectively, the Senior Secured Debt, the Exchange Notes, the Common Stock, the Debt Exchange Warrants (including the Common Stock issuable upon an exercise thereof) and the Convertible Subordinated Debt (including the Common Stock issuable upon conversion thereof) to be issued pursuant to this Agreement. "Securities Act" means the Securities Act of 1933, as amended (or any successor statute thereto as in effect from time to time), and the rules and regulations of the SEC promulgated thereunder. "Security Agreement" means the Collateral Agency and Security Agreement by and among the Company and the Collateral Agent on behalf of the holders of the Senior Secured Debt and, from and after the Debt Exchange Closing Date, the Exchange Notes Trustee, as trustee for holders of the Exchange Notes, which shall be substantially in the form attached as Exhibit B-2 hereto, as the same may be amended, supplemented or otherwise modified from time to time with the consent of the Senior Secured Debt Purchasers if such amendment, supplement or modification occurs before the Senior Secured Debt Exchange. "Senior Secured Debt" means the Senior Secured Notes that are to be purchased by the Senior Secured Debt Purchasers pursuant to Section 2.1, which shall be substantially in the form attached as Exhibit B-1 hereto, as amended, supplemented or otherwise modified from time to time with the consent of the Senior Secured Debt Purchasers. "Senior Secured Debt Closing" has the meaning set forth in Section 2.1(b). "Senior Secured Debt Closing Date" has the meaning set forth in Section 2.1(b). "Senior Secured Debt Exchange" has the meaning set forth in Section 2.4(a). "Senior Secured Debt Purchasers" means those Investors identified as such in Exhibit A hereto who will purchase the Senior Secured Debt pursuant to Section 2.1. "Shareholder Rights Plan" means the Preferred Share Purchase Rights Plan, dated October 2, 1998, between the Company and U.S. Stock Transfer Corporation as Rights Agent. 6 "Signatory Debtholders" means the Investors identified as such in Exhibit A hereto who have agreed in this Agreement to exchange the Old Notes held by them for Exchange Notes pursuant to the Debt Exchange provided for in Section 2.2, and does not include any other Person who may tender Old Notes in the Debt Exchange provided for herein. "State" means each of the states of the United States, the District of Columbia and the Commonwealth of Puerto Rico. "Stock Equivalents" means, with respect to any Person, options, warrants, calls, convertible instruments, contracts or other rights entered into or issued by such Person which confer upon the holder thereof the right (whether or not contingent) to acquire any Capital Stock, voting securities or securities convertible into or exchangeable for Capital Stock or voting securities of such Person. "Stock Option Plans" means the stock option plans and arrangements adopted by the Company that have been Previously Disclosed. "Subsidiary" of any Person means any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are owned directly or indirectly by such Person. "Tax Returns" means all foreign, federal, State and local returns relating to Taxes. "Taxes" means all taxes, charges, fees, levies or other governmental assessments, including, without limitation, all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, estimated, severance, stamp, occupation, property or other taxes, customs, dues, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign). "Unanimous Consent Action" means a consent, waiver, amendment, supplement, modification or termination that affects, involves or relates to (a) a change in any provision relating to the interest rate, the principal amount, the maturity date, the priority or exchange of the Senior Secured Debt, (b) the currency in which any amount payable under the Senior Secured Debt is payable, (c) the terms of Section 6.3 or (d) the right to institute suit for the enforcement of any payment on or with respect to the Senior Secured Debt. ARTICLE II RECAPITALIZATION TRANSACTIONS Section 2.1 Purchase and Sale of Senior Secured Debt. ---------------------------------------- (a) Purchase and Sale. Subject to the terms and conditions herein set ----------------- forth, the Company agrees that it will issue and sell to each Senior Secured Debt Purchaser, and each Senior Secured Debt Purchaser agrees, severally and not jointly, that it will purchase from the 7 Company, the principal amount of Senior Secured Debt set forth below such Investor's name on Exhibit A hereto at prices equal to the respective principal amounts of such Senior Secured Debt, which prices shall aggregate $16,200,000. (b) Closing. The purchase and sale of the Senior Secured Debt shall take ------- place at a closing (the "Senior Secured Debt Closing") to be held at the offices of Mayer, Brown & Platt, Los Angeles, California. The parties hereto agree to cooperate and use their reasonable best efforts to enable the Senior Secured Debt Closing to be completed by March 31, 2001, or on a date as soon as possible thereafter when all of the conditions to the parties' obligations hereunder specified in Article IV of this Agreement (other than the delivery of certificates, opinions and other instruments and documents to be delivered at such Closing) have been satisfied or waived, or at such other location and on such other Business Day as the Company and the Senior Secured Debt Purchasers shall mutually agree. The date on which the Senior Secured Debt Closing occurs is referred to herein as the "Senior Secured Debt Closing Date." Section 2.2 Debt Exchange. ------------- (a) The Company shall conduct an exchange offer in which it shall offer Exchange Notes, Common Stock and Debt Exchange Warrants on the terms hereinafter provided in exchange for the respective series of indebtedness comprising the Old Notes (the "Debt Exchange"). The Signatory Debt Holders agree to tender all Old Notes held by them in the Debt Exchange and to accept Exchange Notes, Common Stock and Debt Exchange Warrants in exchange therefor on the terms herein provided. (b) (i) In the Debt Exchange, the Company shall offer to exchange the Exchange Notes for Old Notes having aggregate principal amounts equal to the following indicated percentages of the aggregate principal amount of the respective series of Old Notes: (A) 50.0% for the Old Junior Notes; (B) 65.0% for the Old Senior Notes; and (C) 80.0% for the ROPES. (ii) In addition to the above-provided principal amounts of Exchange Notes, up to a maximum (if all of the Old Notes are exchanged in the Debt Exchange) of two million shares of Common Stock and Debt Exchange Warrants relating to up to a maximum of seven million shares of Common Stock shall be issued to exchanging holders of Old Notes on the following basis: each exchanging holder of Old Notes shall receive 13.684163 shares of Common Stock and Debt Exchange Warrants relating to 47.894572 shares of Common Stock for each $1,000 aggregate principal amount of Exchange Notes received by such exchanging holder of Old Notes in the Debt Exchange. (c) The Debt Exchange shall be conducted in accordance with applicable federal and state securities laws. The parties hereto intend that the Debt Exchange shall qualify for the exemption from registration under the Securities Act provided by Section 3(a)(9) of the 8 Securities Act. In the event the Company determines after consultation with its legal counsel, that the Debt Exchange may not so qualify, the parties hereto shall cooperate and use their respective best efforts to arrange that the Debt Exchange may be accomplished pursuant to another appropriate exemption from the registration requirements of the Securities Act or, if the Company determines after consultation with its legal counsel that such compliance is not reasonably feasible, to take all appropriate action to register the Debt Exchange, and the Exchange Notes, Common Stock and Debt Exchange Warrants to be issued in connection therewith, pursuant to the Securities Act and to comply with any corresponding requirements of applicable state securities laws as soon as reasonably possible. (d) In the Debt Exchange, exchanging holders of the Old Notes will be required, as a condition to acceptance of their tender of the Old Notes, to consent to the amendment of the indentures governing the Old Notes to delete the existing covenants and to make the other amendments thereto that are described in Exhibit H to this Agreement. (e) The parties hereto agree to cooperate and use their reasonable best efforts to enable the Debt Exchange to be completed (the "Debt Exchange Closing") by June 15, 2001 or as soon thereafter as reasonably possible. The date on which the Debt Exchange Closing occurs is referred to herein as the "Debt Exchange Closing Date." (f) The Company shall cancel and retire all Old Notes that have been acquired by it prior to or in the Debt Exchange. (g) Upon completion of the Debt Exchange, but in no event later than July 1, 2001, the Company shall issue an aggregate of 5.04 million shares of Common Stock to the Signatory Debtholders. If no additional Exchange Notes are required to be issued by the Company to any holders of Unexchanged Notes as provided in Section 2.4(c), the Company shall issue an aggregate of 2 million additional shares of Common Stock to the Signatory Debtholders on the earlier of (i) the date all Exchange Notes issued to holders of Senior Secured Debt in exchange for such notes are exchanged for Convertible Subordinated Debt pursuant to Section 2.4(b) or (ii) April 15, 2002. If additional Exchange Notes are required to be so issued pursuant to Section 2.4(c), the aggregate amount of additional Common Stock, if any, to be issued by the Company to the Signatory Debtholders shall be equal to (A) 2 million, reduced by (B) 800 shares of Common Stock for each $1,000 in principal amount of additional Exchange Notes required to be so issued, subject to a maximum such reduction of 2 million shares. In the event the issuance of the full number of shares of Common Stock provided for in this Section 2.2(g) would be prohibited pursuant to NASD Rule 4350 on the date for such issuance, then the Company shall issue as many of such shares of Common Stock as shall be permitted pursuant to such Rule and shall issue in lieu of the shares not issuable pursuant to such Rule nonconvertible promissory notes, having a maturity of one year from their date of issue, in an aggregate principal amount equal to the product of (A) the number of shares not so issuable and (B) $3.00, but subject to a maximum aggregate principal amount of such notes of $1.872 million. The terms and provisions of such notes shall be the same as those of the Convertible Subordinated Debt, except that such notes (x) shall not be convertible into Common Stock, (y) shall have a maturity of one year from their original issue date and (z) shall provide that the principal and all accrued interest thereon 9 may be paid by the issuance to the holders thereof of freely tradeable registered shares of Common Stock. Section 2.3 Convertible Subordinated Debt Placement. --------------------------------------- (a) The Company shall use its best efforts to issue and sell $10,000,000 aggregate principal amount of Convertible Subordinated Debt in the Convertible Subordinated Debt Placement provided for in this Section 2.3 at a price equal to 100% of the principal amount thereof. The Persons who agree to purchase the Convertible Subordinated Debt shall be required to become parties to this Agreement by executing and delivering to the Company an appropriate signature page to this Agreement indicating such Person's agreement to become bound by this Agreement in the capacity of a Convertible Subordinated Debt Purchaser; provided, that no Person may become a party to this Agreement without the approval and acceptance of such Person in such capacity by the Company. Exhibit A to this Agreement shall be promptly amended as necessary from time to time to list all Persons who join this Agreement as Convertible Subordinated Debt Purchasers pursuant to this Section 2.3(a), together with the aggregate principal amounts of Convertible Subordinated Debt to be purchased by each. (b) The Convertible Subordinated Debt to be issued and sold in the Convertible Subordinated Debt Placement shall be offered and sold solely to Accredited Investors in conformance with such procedures and circumstances as shall be necessary to qualify each of such offers and sales, and the Convertible Subordinated Debt Placement in general, as a private placement pursuant to Section 4(2) of the Securities Act and comparable provisions of applicable state securities laws; provided, however, that if the Company, after consultation with its legal counsel, determines that the Convertible Subordinated Debt Placement cannot reasonably be completed in the form of a private placement the Company shall have the right to register the sale of the Convertible Subordinated Debt contemplated to be issued in the Convertible Subordinated Debt Placement under the Securities Act and to comply with any applicable registration or qualification requirements relating thereto under applicable state securities laws. (c) The parties hereto agree to cooperate and to use their reasonable best efforts to enable the Convertible Subordinated Debt Placement to be completed (the "Convertible Subordinated Debt Placement Closing") by June 15, 2001, or as soon thereafter as possible. The date on which the Convertible Subordinated Debt Placement Closing occurs is referred to herein as the "Convertible Subordinated Debt Placement Closing Date." Section 2.4 Exchange of Senior Secured Debt; Further Exchange or ----------------------------------------------------- Market-Based Adjustment. - ----------------------- (a) Subject to satisfaction of the conditions set forth in Section 4.4, the Company shall exchange the Senior Secured Debt for, and each holder of the Senior Secured Debt shall tender the Senior Secured Debt held by such holder in exchange for, Exchange Notes, shares of Common Stock and Debt Exchange Warrants on the basis of the following exchange ratio: for each $1,000 principal amount of Senior Secured Debt, the Company shall issue to the holder thereof (i) $1,123.45679 principal amount of Exchange Notes and (ii) for every $1,000 principal amount of Exchange Notes so issued, (a) 13.684163 shares of Common Stock and (b) Debt 10 Exchange Warrants to purchase 47.894572 shares of Common Stock (collectively, the "Senior Secured Debt Exchange"). The Senior Secured Debt Exchange shall be deemed to have occurred automatically upon the later to occur of (x) ten Business Days after the Company gives notice to the Senior Secured Debt Purchasers of the occurrence of the Debt Exchange Closing and (y) ten Business Days after the Company sends notice to the Senior Secured Debt Purchasers of the satisfaction of all of the conditions set forth in Section 4.4, in either case whether or not the holders of the Senior Secured Debt have surrendered the certificates representing the Senior Secured Debt held by them for such exchange; provided, however, that the Company shall have the right to require that such certificates be so surrendered. (b) (i) At any time during the period (the "Election Period") commencing upon the issuance of the Exchange Notes to the Senior Secured Debt Purchasers pursuant to Section 2.4(a) and ending on March 31, 2002, each holder of Exchange Notes issued in exchange for the Senior Secured Debt shall have the right, upon written notice to the Company (an "Election Notice") given as herein provided prior to the expiration of the Election Period, to exchange such Exchange Notes for Convertible Subordinated Debt in aggregate principal amounts equal to the aggregate principal amounts of the Exchange Notes as to which such exchange is made; provided, however, that such holder shall concurrently surrender to the Company for cancellation the number of shares of Common Stock and Debt Exchange Warrants received in the Senior Secured Debt Exchange for such Exchange Notes. (ii) If any holder of Exchange Notes shall make the election provided for in Section 2.4(b)(i), such electing holder shall provide to the Company, together with its Election Notice, the original certificates representing the proportionate number of shares of Common Stock and Debt Exchange Warrants required to be included as part of such exchange. If any of such certificates are mutilated, lost, stolen or destroyed, each such holder shall notify the Company of such fact and shall provide to the Company an affidavit evidencing such mutilation, loss, theft or destruction of such certificate, and of the ownership of it, and an indemnity or bond in such amount as the Company shall reasonably require, with such affidavit and indemnity or bond to be provided to such holder by the Company within ten Business Days of receipt of such Election Notice. Within ten Business Days following receipt of each Election Notice and the surrender of such Common Stock and Debt Exchange Warrant certificates (or after receipt of any affidavit and indemnity or bond required to be provided), the Company shall issue or cause to be issued the appropriate principal amount of Convertible Subordinated Debt to the holder providing such Election Notice. (c) If any Exchange Notes issued pursuant to the exchange provided for in Section 2.4(a) are not exchanged for Convertible Subordinated Debt pursuant to Section 2.4(b), the holders of any such unexchanged Exchange Notes (such unexchanged Exchange Notes being hereinafter referred to as the "Unexchanged Notes") shall be entitled to receive additional amounts of Exchange Notes on the basis, and subject to the limitations, set forth below: 11 (i) If any Unexchanged Notes are sold during the Election Period or within 60 days thereafter by any of such holders (a) in a transaction not involving an underwriter or broker (a "Private Sale") or (b) in any transaction involving an underwriter or broker (a "Public Sale") that is not covered under subsection 2.4(c)(ii), such additional amounts of Exchange Notes shall only be issuable if the Average Trading Price of the Exchange Notes (during the 30-day period ending on the last day of the month preceding the month in which such sale occurred) is less than 89%. In any such event, each of such selling holders shall be entitled to receive from the Company, and the Company hereby agrees to issue for sale by such selling holders, additional Exchange Notes in such aggregate principal amount as will yield to such holders Net Proceeds equal to the difference, expressed as a dollar amount (such amount being herein referred to as the "Private Sale Limit"), between (x) 89% of the aggregate principal amount of the Unexchanged Notes sold by such selling holder during the Election Period or within 60 days thereafter and (y) the sum of (a) the Average Trading Value of the Unexchanged Notes sold by such selling holder and (b) the Net Proceeds, if any, resulting from the Required Concurrent Actions. (ii) If any Unexchanged Notes are, during the Election Period or within 60 days thereafter, (a) sold pursuant to the procedures contemplated by Section 2.4(c)(vii) (a "Company Designated Public Sale"), (b) if not sold by the Company Designated Underwriter during the 30-day period provided by Section 2.4(c)(vii), sold thereafter by the holder thereof in a Public Sale, or (c) sold in a Public Sale in which the Net Proceeds are less than 70% of the principal amount of the Unexchanged Notes so sold, then, on account of all such sales pursuant to the preceding clauses (a), (b), or (c), such additional amounts of Exchange Notes shall only be issuable if the Net Proceeds realized in such sale are less than 89% of the principal amount of the Unexchanged Notes so sold. In any such event, each of such selling holders shall be then entitled to receive from the Company, and the Company hereby agrees to issue for sale by such selling holders, additional Exchange Notes in such aggregate principal amount as will yield to such holders Net Proceeds equal to the difference, expressed as a dollar amount (such amount being herein referred to as the "Public Sale Amount"), between (x) 89% of the aggregate principal amount of such Unexchanged Notes sold by such holder during the Election Period or within 60 days thereafter and (y) the sum of the Net Proceeds from the sale of such Unexchanged Notes and the Net Proceeds, if any, resulting from the Required Concurrent Actions. (iii) In connection with any holder of Unexchanged Notes receiving additional principal amounts of Exchange Notes pursuant to either subsections 2.4(c)(i) or 2.4(c)(ii), such holder shall use commercially reasonable efforts to sell, concurrently with such sale of Unexchanged Notes, the number of the shares of Common Stock and the Debt Exchange Warrants received in the Senior Secured Debt Exchange with respect to the principal amount of Unexchanged Notes being sold, but if either or both of such Common Stock and Debt Exchange Warrants is not sold, such holder shall be required to surrender to the Company promptly following such sale of Unexchanged Notes original certificate or certificates (or other required documents) evidencing the number of shares of Common Stock and/or Debt Exchange Warrants received in the Senior Secured Debt Exchange 12 with respect to the Unexchanged Notes being sold. The required sales and surrenders required by the preceding sentence are hereinafter referred to as the "Required Concurrent Actions". The Net Proceeds resulting from any Required Concurrent Actions in which shares of Common Stock and/or Debt Exchange Warrants are surrendered to the Company shall be deemed to be zero in respect of the securities that are surrendered. (iv) Notwithstanding anything herein to the contrary, the maximum principal amount of additional Exchange Notes issuable by the Company to all holders of Unexchanged Notes in the aggregate under Section 2.4(c) shall be $5 million and the maximum principal amount of additional Exchange Notes that is so issuable to each such holder shall be pro-rated in accordance with the respective aggregate principal amounts of the Exchange Notes sold by such holder over the aggregate principal amount of the Unexchanged Notes issued to all Senior Secured Debt Purchasers pursuant to Section 2.4(a). (v) The term "Average Trading Price" shall mean the arithmetic mean of the last sale prices of the Exchange Notes, expressed as percentages of the principal amounts thereof, reported for each of the trading days in the 30- day period referred to in Section 2.4(c)(i) or 2.4(c)(ix), as applicable, or for any trading day for which no reported sale price is available, then the last sale price as of the first preceding day for which a reported sale price is available, as reported by Nasdaq's Fixed Income Pricing Service or, if not so reported, then as reported by Interactive Data Corp. and, if not reported by either of them, then the quotient, expressed as a percentage, of the Net Proceeds received for the Unexchanged Notes that were sold, divided by the aggregate principal amount of the Unexchanged Notes that were sold. (vi) The term "Average Trading Value" shall mean the amount equal to (A) the principal amount of an Exchange Note referred to in Section 2.4(c), multiplied by (B) the Average Trading Price. (vii) Any holder of Unexchanged Notes may request that the Company designate an underwriter or broker to effect a Public Sale. Promptly upon the making of such request and, in any event within three Business Days of such request, the Company shall designate a broker or underwriter to effect such Public Sale (the "Company Designated Underwriter"). The Company Designated Underwriter shall endeavor to sell the Unexchanged Notes designated for sale by such holder promptly and at the best price available therefor (but, in any event, within 30 calendar days after the designation of such Company Designated Underwriter) in a transaction or series of transactions occurring over not more than such 30-day period. If the Company shall have failed to designate the Company Designated Underwriter or if the Company Designated Underwriter shall have failed to sell the Unexchanged Notes within the time periods provided herein, the Private Sale Limit shall not be applicable and the holder of the Unexchanged Notes shall be entitled to additional Exchange Notes equal to the Public Sale Amount notwithstanding the manner of disposition of the Unexchanged Securities. 13 (viii) All sales of Unexchanged Notes by a holder shall be aggregated for purposes of calculating additional Exchange Notes to be issued to such holder pursuant to this Section 2.4(c). (ix) Notwithstanding anything in Sections 2.4(c)(i) or 2.4(c)(ii) to the contrary, if the Average Trading Price of the Exchange Notes during the 30- day period ending on March 31, 2002 is less than 70%, then, each holder of Unexchanged Notes on March 31, 2002 shall be entitled to receive from the Company, and the Company hereby agrees to issue to such holders, such additional amounts of Exchange Notes as each such holder would be entitled to receive pursuant to Section 2.4(c)(i), including the effects of Sections 2.4(c)(iv) and 2.4(c)(viii), if such holder had sold all of its then held Unexchanged Notes in a Private Sale on April 1, 2002 but without such holder being obligated to sell any such Unexchanged Notes. ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.1 Representations and Warranties of the Company. Except as --------------------------------------------- Previously Disclosed, the Company represents and warrants to each of the Investors as follows: (a) Capital Structure. The authorized capital stock of the Company ----------------- consists of 80,000,000 shares of Common Stock and 8,000,000 shares of Preferred Stock. As of the date hereof, there are (i) 32,096,361 shares of Common Stock issued and outstanding, and (ii) no shares of Preferred Stock issued and outstanding or held as treasury shares. Immediately prior to each of the Senior Secured Debt Closing, the Debt Exchange Closing and the Convertible Subordinated Debt Placement Closing, the Company's outstanding Capital Stock will be as set forth in the preceding sentence, except for any increases in outstanding Common Stock as a result of the transactions provided for herein or of the exercise of options or warrants referred to in the penultimate sentence of this Section 3.1(a). All outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and none of the outstanding shares of Common Stock has been issued in violation of the preemptive rights of any Person. Except for (i) options to purchase 4,892,442 shares of Common Stock pursuant to the Stock Option Plans in place as of the date hereof, (ii) warrants relating to 3,000,000 shares of Common Stock to be issued in settlement of certain litigation as Previously Disclosed, (iii) as contemplated by this Agreement, and (iv) warrants to purchase Preferred Stock (and, in certain events, Common Stock) pursuant to the Shareholder Rights Plan, there are no Stock Equivalents authorized, issued or outstanding with respect to the Capital Stock of the Company as of the date hereof. As of the date hereof, the aggregate issued and outstanding principal amounts of the ROPES, the Old Senior Notes and the Old Junior Notes are $41.05 million, $165.9 million and $10.9 million, respectively. Except as provided herein, there are no subscriptions, stock equivalents, partnership interests or similar ownership interests, (including preemptive rights), commitments or agreements of any character to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound obligating the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, or 14 repurchase, redeem or otherwise acquire, reprice, or cause the repurchase, redemption or acquisition or repricing, of any shares of capital stock, stock equivalents, partnership interests or similar ownership interests of the Company or any of its Subsidiaries or obligating the Company or any of its Subsidiaries to grant, extend, accelerate the vesting of or reprice, or enter into any such subscription, commitment or agreement, as a result of the execution and delivery of this Agreement or the transactions contemplated hereby. (b) Organization, Standing and Authority of the Company and Its ----------------------------------------------------------- Subsidiaries. The Company and each of its Subsidiaries is a corporation duly - ------------ organized and validly existing under the laws of the jurisdiction of its incorporation as set forth in Schedule 3.14(b) with full corporate power and authority to own or lease all of its properties and assets and to carry on its business as now conducted and is duly licensed or qualified to do business and is in good standing in each jurisdiction in which its ownership or leasing of property or the conduct of its business requires such licensing or qualification, except where the failure to be so licensed, qualified or in good standing would not have a Material Adverse Effect. True and complete copies of the articles of incorporation and bylaws, or similar governing documents, of the Company and the Bank as in effect as of the date hereof have been Previously Disclosed. (c) Ownership of Subsidiaries. The Bank is a wholly-owned subsidiary of ------------------------- the Company. A schedule setting forth all of the Subsidiaries of the Company and the Bank has been Previously Disclosed. The outstanding shares of Capital Stock of the Bank, each other Subsidiary of the Company, and each Subsidiary of the Bank have been duly authorized and validly issued, are fully paid and nonassessable, and, except as Previously Disclosed, are directly owned by the Company free and clear of all Liens. Except as Previously Disclosed, no Stock Equivalents are authorized, issued or outstanding with respect to the Capital Stock of the Bank and there are no agreements, understandings or commitments relating to the right of the Company to vote or to dispose of such Capital Stock. (d) Organization, Standing and Authority of the Bank. The Bank is an ------------------------------------------------ industrial bank duly organized and validly existing under the laws of the State of California. The deposit accounts of the Bank are insured by the FDIC to the maximum extent permitted by the FDIA, and the Bank has paid all premiums and assessments required by the FDIA and the regulations thereunder. (e) Authority. The Company has full corporate power and authority to --------- perform its obligations under this Agreement and each of the Related Agreements to which it is or will become a party, and the execution, delivery and performance by the Company of this Agreement and of each Related Agreement to which it is or will become a party have been duly authorized by all necessary corporate action on the part of the Company. (f) Due Execution. This Agreement, and each of the Related Agreements to ------------- which the Company is or will become a party, when duly authorized, executed and delivered by the Company, will constitute a valid and binding obligation of the Company, enforceable against the Company, in accordance with its terms, except that (i) rights to indemnity and contribution under any of the Related Agreements may be limited by applicable law, (ii) the enforceability of each 15 of this Agreement and the Related Agreements may be limited by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights generally and (iii) rights of acceleration and the availability of equitable remedies pursuant to or in connection with this Agreement and each of the Related Agreements may be limited by equitable principles of general applicability. (g) No Conflict; Government Authorization. The execution, delivery and ------------------------------------- performance of this Agreement and each of the Related Agreements to which the Company, is or will become a party will not conflict with or constitute a breach of, or a default under (i) the articles of incorporation or bylaws, or any similar governing documents, of the Company, or any of its Subsidiaries, (ii) upon the delivery of the consents and supplemental indentures set forth and provided for in Section 3.3, any material obligation, agreement, indenture, bond, debenture, note, instrument or any other evidence of indebtedness to which the Company or any of its Subsidiaries is a party or its assets are subject, or (iii) subject to the approvals and compliance referred to in the next sentence, any law, ordinance, order, license, rule or other regulation or demand of any court or governmental agency, arbitration panel or authority applicable to the Company or any of its Subsidiaries. Except for (i) the approval of the issuance of the Debt Exchange Warrants by the shareholders of the Company pursuant to Rule 4350 of the NASD (unless exempted therefrom upon application to the NASD), (ii) compliance with applicable federal and state securities laws in connection with this Agreement and the performance by the Company of its obligations under the Registration Rights Agreement and the Exchange Note Registration Rights Agreement and (iii) any required compliance by the Company with applicable federal and state securities laws and/or HSR in connection with (x) the issuance of shares of Common Stock upon exercise of the Debt Exchange Warrants in accordance with their terms or (y) the issuance of Common Stock pursuant to Section 2.2 of this Agreement or upon conversion of the Convertible Subordinated Debt, no consent, approval, order or other authorization of any governmental, administrative or regulatory body or agency is legally required by or on behalf of the Company in connection with the execution, delivery or performance of this Agreement and each of the Related Agreements to which the Company is or will become a party. The representations and warranties contained in this Section 3.1(g), insofar as they relate to federal and state securities law requirements, are made in reliance on the representations and warranties of the Investors contained in Section 3.2 of this Agreement and any similar representations and warranties that may be given by any other Persons who purchase Securities pursuant to the transactions provided for in this Agreement. (h) Status of Securities. Subject to satisfaction of the condition set -------------------- forth in Section 5.1 hereof, the shares of Common Stock issuable pursuant to (i) the Debt Exchange provided for in Section 2.2, (ii) the conversion of the Convertible Subordinated Debt to be issued pursuant to Sections 2.3 and 2.4 hereof or (iii) the exercise of the Debt Exchange Warrants, have been authorized by all necessary corporate action on the part of the Company. When the Senior Secured Debt and the Exchange Notes are delivered to the Senior Secured Debt Purchasers and the Exchanging Debt Holders, respectively, at the Senior Secured Debt Closing, the Debt Exchange Closing and pursuant to Section 2.4(a), as applicable, against payment therefor, through wire transfer of funds or tender of Old Notes or Senior Secured Debt, as the case may be, as provided herein, the Senior Secured Debt and the Exchange Notes will be duly authorized, validly issued and will constitute valid and binding obligations of the Company. Subject to the 16 approvals and compliance referred to in the second sentence of Section 3.1(g) hereof, the shares of Common Stock issued by the Company pursuant to the transactions provided for in this Agreement, including shares of Common Stock issued upon exercise of Debt Exchange Warrants and conversion of the Convertible Subordinated Debt issued in connection with such transactions, will be duly authorized, validly issued, fully paid and non-assessable at the time of issuance. The representations and warranties contained in this Section 3.1(h), insofar as they relate to federal and state securities laws requirements, are made in reliance on the representations and warranties of the Investors contained in Section 3.2 of this Agreement and any similar representations and warranties that may be given by any other Persons who purchase Securities pursuant to the transactions provided for in this Agreement. (i) Securities Reports. The Company has filed all reports and other ------------------ documents required to be filed by it under the Exchange Act and the Securities Act on a timely basis or has received a valid extension of such time of filing, and all such reports and other documents complied in all material respects with the requirements of the Exchange Act and the Securities Act, as applicable, and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, at the time and in light of the circumstances under which they were made, not misleading. (j) Financial Statements. -------------------- (i) The Company has previously delivered to each Investor (x) consolidated balance sheets of the Company as of December 31, 1998, 1999 and 2000 and consolidated statements of operations, changes in shareholders' equity and cash flows of the Company for each of the years ended December 31, 1997, 1998, 1999 and 2000, accompanied, in the case of such 1998 and 1999 financial statements, by the related audit report of KPMG LLP, the Company having Previously Disclosed that the audit report for its 2000 financial statements has not yet been issued by KPMG LLP. The foregoing financial statements (collectively the "Company Financial Statements"), fairly present the consolidated financial condition of the Company as of the respective dates set forth therein, and the consolidated results of operations, changes in shareholders' equity and cash flows of the Company for the respective periods or as of the respective dates set forth therein. (ii) Each of the Company Financial Statements has been prepared in accordance with generally accepted accounting principles consistently applied during the periods involved, except as stated therein, and except that unaudited Company Financial Statements do not contain all of the footnote and line item disclosures that would be required for financial statements prepared in accordance with generally accepted accounting principles. The books and records of the Company are being maintained in material compliance with applicable legal and accounting requirements, and such books and records accurately reflect in all material respects all dealings and transactions in respect of the business, assets, liabilities and affairs of the Company. 17 (iii) Except to the extent (x) reflected, disclosed or provided for in the consolidated statement of financial condition of the Company as of December 31, 2000, (y) of liabilities incurred since such date in the ordinary course of business, none of which has had a Material Adverse Effect, and (z) Previously Disclosed, the Company does not have any liabilities, whether absolute, accrued, contingent or otherwise, which would have a Material Adverse Effect. (k) Material Adverse Change. Except as Previously Disclosed, since ----------------------- December 31, 2000, no events or developments involving the Company or the Bank have occurred which, individually or in the aggregate, (i) have had, or would reasonably be likely to have, a Material Adverse Effect, or (ii) materially impair the ability of the Company to perform its obligations under this Agreement, any Related Agreement to which it is or will become a party or any of the Securities. (l) Tax Matters. The Company and each of its Subsidiaries have timely ----------- filed all Tax Returns required by applicable law to be filed by them (including, without limitation, estimated tax returns, income tax returns, information returns and withholding and employment tax returns) and have paid, or where payment is not required to have been made, have set up an adequate reserve or accrual for the payment of, all Taxes required to be paid in respect of the periods covered by such Tax Returns, except in all cases where the failure to do so does not or will not have a Material Adverse Effect. Except as Previously Disclosed, as of the date hereof, there is no audit examination, assessed deficiency, deficiency litigation or refund litigation with respect to any Taxes of the Company or any of its Subsidiaries. All Taxes due with respect to completed and settled examinations or concluded litigation relating to the Company or any of its Subsidiaries have been paid in full or adequate provision has been made for any such Taxes on the Company's consolidated statement of financial condition in accordance with generally accepted accounting principles. Neither the Company nor any of its Subsidiaries has executed an extension or waiver of any statute of limitations on the assessment or collection of any material tax due that is currently in effect. (m) Litigation. Except as Previously Disclosed, there are no actions, ---------- suits, investigations or legal proceedings pending against, or to the knowledge of the Company threatened against, or affecting the Company or any of its Subsidiaries or their respective properties before any court or governmental body or agency which would reasonably be expected to have a Material Adverse Effect or which in any manner challenge the legality, validity or enforceability of this Agreement, any of the Related Agreements or any of the Securities, or which would reasonably be expected to materially impair the ability or obligation of the Company to perform fully on a timely basis its obligations under this Agreement, any Related Agreement to which it is or will become a party or any of the Securities. (n) Compliance with Laws. Each of the Company and each of its Subsidiaries -------------------- has all permits, licenses, certificates of authority, orders and approvals of, and has made all filings, applications and registrations with, federal, state, local and foreign governmental or regulatory bodies that are necessary in order to permit it to carry on its business as it is presently being conducted and the absence of which could have a Material Adverse Effect; all such permits, 18 licenses, certificates of authority, orders and approvals are in full force and effect and, to the best knowledge of the Company, no suspension or cancellation of any of the same is threatened. (o) No Default or Violation. Neither the Company nor any of its ----------------------- Subsidiaries currently is in violation of its articles of incorporation, bylaws, or similar governing documents, or any applicable federal or state law or any order, rule or regulation of any federal or state governmental agency or body, or in default with respect to any order, writ, injunction or decree of any court, or in default under any order, license, regulation or demand of any federal or state governmental agency, any of which violations or defaults could, individually or in the aggregate, reasonably be deemed to (i) have a Material Adverse Effect or (ii) materially adversely impair the ability of the Company to perform on a timely basis any obligation which it has under this Agreement, any Related Agreement to which it is or will become a party or any of the Securities, and neither the Company nor any of its Subsidiaries has received any notice or communication from any federal, state or local governmental authority asserting that the Company or any Subsidiary is in violation of any of the foregoing which could reasonably be deemed to have any effect set forth in clauses (i) or (ii) above. Except as Previously Disclosed, neither the Company nor any of its Subsidiaries is subject to any regulatory or supervisory cease and desist order, agreement, written directive, memorandum of understanding or written commitment, and none of them has received any written communication requesting that they enter into any of the foregoing. (p) Certain Fees. Except as Previously Disclosed, no fees or commissions ------------ will be payable by the Company or any of its Subsidiaries to brokers, finders, investment bankers or banks pursuant to any agreement entered into by the Company or any of its Subsidiaries with respect to any of the other transactions contemplated hereby if such payment would cause the exemption from the registration requirements of the Securities Act set forth in Section 3(a)(9) thereof not to be available for the Debt Exchange provided herein. (q) Usury Laws. None of the Senior Secured Debt, the Exchange Notes nor ---------- the Convertible Subordinated Debt will be subject to a defense that the interest rate is in violation of the usury laws of the State of California, as currently in effect. The Company hereby waives, to the fullest extent permitted by applicable law, its right to assert the violation of any such usury law and the usury law of any other applicable jurisdiction as a defense to the fulfillment of any of its obligations under the Senior Secured Debt or the Exchange Notes and covenants and agrees to take all reasonable actions as may be necessary in the future to make such waiver effective. (r) No Securities Act or State Law Registration. Neither the Company nor, ------------------------------------------- assuming the accuracy of such representations of the Investors as may be requested by the Company in connection with the transactions contemplated hereby, any Person acting on its behalf, has taken or will take any action which might subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act or comparable provisions of any applicable state securities laws. (s) Shareholder Rights Plan. The Company has taken appropriate action ----------------------- (which action has been Previously Disclosed) to amend its Shareholder Rights Plan so as to provide that 19 neither the execution and delivery of this Agreement nor the completion of the transactions provided for herein shall cause any of the warrants issued pursuant to the Shareholder Rights Plan to become exercisable or to require that certificates separately representing such warrants be distributed to any stockholders of the Company. (t) Nasdaq Listing and Compliance. The Common Stock is listed on the ----------------------------- Nasdaq National Market, and the listing agreement between the NASD and the Company with respect thereto is in full force and effect. Except as Previously Disclosed, the Company is in compliance with, and has filed all reports and other documents required to be filed by it under, applicable NASD rules and regulations, and all such reports and other documents are in compliance in all material respects with the requirements of the applicable NASD rules and regulations. (u) No Acceleration of Employment or Other Contractual Rights. Except as --------------------------------------------------------- Previously Disclosed, neither the execution of this Agreement nor the completion of the transactions contemplated hereby will result in the activation of any change of control or severance provisions of any employment contract, stock option, bonus or other compensation plan or arrangement or result in the acceleration of any contractual rights of any third parties. Section 3.2 Representations and Warranties of the Investors. Each ----------------------------------------------- Investor, severally and not jointly, represents and warrants to, and covenants and agrees with, the Company that: (a) Investment Intent. The Securities to be acquired by it pursuant to ----------------- this Agreement are being acquired for its own account for investment and with no intention of distributing or reselling such Securities or any part thereof or interest therein in any transaction which would be in violation of the securities laws of the United States of America or any state, without prejudice, however, to an Investor's right, subject to the provisions of this Agreement and the Registration Rights Agreement, at all times to sell or otherwise dispose of all or any part of such Securities under an effective registration statement under the Securities Act and other applicable state securities laws or under an exemption from such registration. Each Investor, severally and not jointly, further represents and warrants to the Company that except as contemplated under this Agreement such Investor has no present agreement, understanding, plan or intent to transfer any Senior Secured Debt, Debt Exchange Warrants or Common Stock acquired by it pursuant to this Agreement (including Common Stock acquired upon exercise of Debt Exchange Warrants) to any transferee. (b) Transfer Restrictions. If an Investor should decide to dispose of any --------------------- of the Securities, such Investor understands and agrees that it may do so only pursuant to an effective registration statement under the Securities Act or in accordance with the following: (i) to the Company, (ii) to any Person reasonably believed by such Investor to be a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in compliance with Rule 144A under the Securities Act, (iii) pursuant to and in compliance with restrictions set forth in Rule 144 under the Securities Act, (iv) to any Person who is reasonably believed by such Investor to be an Accredited Investor and that, prior to such transfer, furnishes to the Investor and the Company a signed letter confirming its status as an Accredited Investor and agreeing to the restrictions on 20 transfer of the Securities set forth in this Agreement, (v) to any Affiliate of such Investor pursuant to an applicable exemption under the Securities Act, or (vi) in compliance with the requirements for transfer of securities acquired in a transaction to which the exemption set forth in Section 3(a)(9) of the Securities Act is applicable. In connection with any transfer of any Securities other than (i) any transfer pursuant to an effective registration statement or (ii) any transfer by a qualified institutional buyer (as defined in Rule 144A under the Securities Act) pursuant to clause (i) or (ii) above, the Company may require that the transferor of any such Securities provide to the Company an opinion of counsel experienced in the area of United States securities laws selected by the transferor, which counsel shall be and the form and substance of which opinion shall be, reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such Securities under the Securities Act or any state securities laws. In connection with any transfer pursuant to clause (ii) above, the Company may request reasonable certification as to the status of the transferor's transferee as a qualified institutional buyer. Each Investor agrees to the imprinting, so long as appropriate, (i) on certificates representing the Senior Secured Debt, the legend set forth on the form of Senior Secured Note attached as Exhibit B-1 hereto, (ii) on the Debt Exchange Warrants, the legend set forth on the form of Debt Exchange Warrant attached as Exhibit C-2 hereto and (iii) on certificates representing the Common Stock issuable (x) upon the exercise of Debt Exchange Warrants or (y) as provided for in Section 2.3, a legend substantially similar to the foregoing legends. The legends set forth above may be removed if and when the applicable Securities are disposed of pursuant to an effective registration statement under the Securities Act or if in the opinion of counsel to the Company experienced in the area of United States securities laws such legend is no longer required under applicable requirements of the Securities Act. Each of the Securities shall also bear any other legends required by applicable federal or state securities laws, which legends may be removed when, in the opinion of counsel to the Company experienced in the applicable securities laws, the same are no longer required under the applicable requirements of such securities laws. The Company agrees that it will provide each Investor, upon request, with a substitute document evidencing the Securities not bearing such legend at such time as such legend is no longer applicable. (c) Stop Transfer Instructions. Each Investor agrees that the Company -------------------------- shall be entitled to make a notation on its records and give instructions to any transfer agent of the Securities in order to implement the restrictions on transfer set forth in Section 3.2(b) of this Agreement. (d) Accredited Investor. (i) At the time such Investor was offered any ------------------- Securities, it was, (ii) at the date hereof, such Investor is, and (iii) at the date such Investor acquires any of the Securities, it will be, an Accredited Investor, and has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment, is able to bear the economic risk of such investment and is able to afford a complete loss of such investment. Each Investor shall provide to the Company and its representatives upon request such evidence and confirmation of the foregoing as the Company may reasonably request. 21 (e) Due Execution. This Agreement has been, and each Related Agreement to ------------- which such Investor is or will become a party will be, duly executed and delivered by it or on its behalf and constitutes, or will constitute, as applicable, a valid and binding obligation of such Investor, enforceable against the Investor in accordance with its terms, except that (i) rights to indemnity and contribution under any Related Agreement may be limited by applicable law, (ii) enforceability may be limited by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights generally and (iii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. (f) No Conflict. The execution, delivery and performance of this Agreement ----------- and each of the Related Agreements to which such Investor is or will become a party do not and will not, as applicable, conflict with or constitute a breach or a default under (i) its articles of incorporation, charter or bylaws, or other similar organizational document, as applicable, (ii) any material obligation, agreement, indenture, bond, debenture, note, instrument or any other evidence of indebtedness to which it is a party or its assets are subject or (iii) subject to Section 3.2(i) hereof, any law, rule or other regulation, license, or order or demand of any court or governmental agency, arbitration panel or authority applicable to such Investor. (g) Access to Information. Each Investor acknowledges receipt of the --------------------- Confidential Memorandum and further acknowledges that prior to the date hereof it has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities to be acquired by such Investor pursuant to this Agreement and (ii) access to such information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects as such Investor has requested to enable it to evaluate its investment in such Securities. (h) Reliance. Each Investor understands and acknowledges that (i) the -------- Securities (other than the Exchange Notes, Debt Exchange Warrants and Common Stock to be issued in the Debt Exchange,) are being offered and sold without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) such exemption depends in part on, and that the Company and its legal counsel and other advisors will rely upon, the accuracy and truthfulness of the foregoing representations and warranties of such Investor, and each Investor hereby consents to such reliance. (i) Governmental Authorization. Except for (i) compliance with applicable -------------------------- federal and state securities laws in connection with the performance by an Investor of such Investor's obligations under the Registration Rights Agreement or the Exchange Note Registration Rights Agreement, as applicable, and (ii) any required compliance by an Investor with applicable federal and state securities laws, HSR and/or federal or state banking laws and regulations in connection with (x) the issuance of shares of Common Stock upon exercise of the Debt Exchange Warrants in accordance with their terms or (y) issuances of Common Stock pursuant to Sections 2.2, 2.3 or 2.4, no consent, approval, order or other authorization of any governmental, administrative or regulatory body or agency is legally required by or on behalf of such Investor in connection with 22 the execution, delivery and performance of this Agreement and each Related Agreement to which such Investor will become a party. (j) Additional Representations Relating to Tax Matters. Each of the Senior -------------------------------------------------- Secured Debt Purchasers, severally and not jointly, makes the representations and warranties set forth in the attached Schedule 3.2(j)-A and each of the Signatory Debtholders, severally and not jointly, makes the representations and warranties set forth in the attached Schedule 3.2(j)-B. Such representations are furnished by the respective Investors in connection with the rendering of opinions to the Company by Mayer, Brown & Platt and/or other advisors concerning the tax consequences to the Company of the Recapitalization Transactions (the "Opinions"). Each Investor, severally and not jointly, represents that, after due investigation by such Investor with respect to the representations made by such Investor, the representations made by such Investor are true to the knowledge of such Investor on the date hereof, and, if requested by the Company prior to the later to occur of the Debt Exchange Closing Date or the Convertible Subordinated Debt Placement Closing Date such Investor will advise the Company if any such matter becomes known to such Investor to be untrue. Each Investor understands that Mayer, Brown & Platt and/or other advisors of the Company will rely on the accuracy of the representations made by such Investor in rendering the Opinions and that the Opinions will be expressly conditioned on the accuracy of the representations made by such Investor as of the date of the Opinions. Section 3.3 Additional Representations, Warranties and Covenants of the ----------------------------------------------------------- Signatory Debtholders. Each Signatory Debtholder, severally and not jointly, - ---------------------- represents and warrants to, and covenants and agrees with, the Company that: (a) Such Signatory Debtholder is the sole owner of the respective aggregate principal amounts of the Old Notes set forth opposite the name of such Signatory Debtholder in Exhibit A hereto, which principal amounts constitute, in the aggregate, a majority in principal amount of each series of Old Notes, of record and beneficially, free (except as Previously Disclosed) of any claim, lien or encumbrance, and with full right, authority and power to transfer the same in the Debt Exchange as herein contemplated and to vote and give the consents with respect to such Old Notes set forth and contemplated herein. (b) Such Signatory Debtholder hereby consents with respect to all Old Notes held by it, to the issuance of the Senior Secured Debt as herein contemplated and further authorizes and approves the execution and delivery of appropriate supplemental indentures and other appropriate instruments and documents to evidence and confirm amendments of the terms of the Old Notes to effect the foregoing, with such consent and amendments to be effective as of the Senior Secured Debt Closing Date. (c) Such Signatory Debtholder hereby consents, with respect to all Old Notes held by it, to the amendments of the terms of the indentures for the Old Notes to remove covenants and amend other provisions thereof, all as set forth in Exhibit H hereto, and further authorizes and approves the execution and delivery of appropriate supplemental indentures and other appropriate instruments and documents to evidence and confirm the foregoing with such amendments to become effective as of the Debt Exchange Closing Date. 23 ARTICLE IV CONDITIONS PRECEDENT TO THE CLOSINGS Section 4.1 Conditions to the Obligations of the Parties. The respective -------------------------------------------- obligations of each of the parties hereto to fulfill their obligations under Article II hereof shall be subject to the satisfaction or waiver prior to, unless otherwise indicated, the Senior Secured Debt Closing, the Debt Exchange Closing and the Convertible Subordinated Debt Placement Closing, as applicable, of the following conditions: (a) All requirements prescribed by law which are necessary to the consummation of the transactions contemplated by this Agreement at such closing shall have been satisfied. (b) No party hereto shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of any of the transactions contemplated by this Agreement. (c) No statute, rule or regulation shall have been enacted, entered, promulgated, interpreted, applied or enforced by any governmental authority which prohibits, restricts or makes illegal consummation of any of the transactions contemplated by this Agreement. (d) Each of the parties hereto shall have received (i) a counterpart to this Agreement, duly executed and delivered by the other parties hereto, with such required deliveries to be deemed satisfied by delivery of such executed counterparts to (a) as to the Senior Secured Debt Purchasers, the legal counsel for holders contracted to purchase a majority in aggregate principal amount of the Senior Secured Debt (the "SSD Counsel") and (b) as to the Signatory Debtholders, the legal counsel for holders of a majority in aggregate principal amount of the Old Notes held by the Signatory Debtholders (the "SD Counsel"), (ii) in connection with the Senior Secured Debt Closing, a counterpart of the Security Agreement, duly executed and delivered by the other parties thereto, and of the Exchange Note Registration Rights Agreement, duly executed and delivered by the Company, with such required deliveries to be deemed satisfied by delivery of executed counterparts of each such agreement to the SSD Counsel and the SD Counsel and (iii) prior to the Debt Exchange Closing, a counterpart of the Exchange Notes Indenture, duly executed and delivered by the parties thereto, and of the Registration Rights Agreement, duly executed and delivered by the Company, with such required deliveries to be deemed satisfied by delivery of executed counterparts of each such agreement to the SSD Counsel and the SD Counsel. (e) Except with respect to the Senior Secured Debt Closing, either (i) the Company's issuance of the Common Stock, the Debt Exchange Warrants and the Convertible Subordinated Debt as contemplated by this Agreement shall have been approved by the requisite vote of the holders of the Common Stock pursuant to Rule 4350(i) of the NASD or (ii) the Company shall have obtained Nasdaq approval of its reliance upon an exception to such requirement to obtain shareholder approval and mailed to all shareholders of the Company the notice referred to in NASD Rule 4350(i)(2). 24 Section 4.2 Conditions to the Obligations of the Investors. The ---------------------------------------------- obligations of each of the Investors (except with respect to clause (h), which shall not apply to the Senior Secured Debt Purchasers) to fulfill its obligations under Article II hereof shall be subject to the satisfaction or waiver prior to, unless otherwise indicated, the Senior Secured Debt Closing, the Debt Exchange Closing or the Convertible Debt Closing, as applicable, of the following conditions: (a) Each of the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the applicable Closing Date as if made on such Closing Date (or on the date when made in the case of any representation or warranty which specifically relates to an earlier date). (b) The Company shall have performed, in all material respects, each of its covenants and agreements contained in this Agreement to be performed prior to the applicable Closing; and each of the Investors shall have received a certificate signed by the Chief Executive Officer and the Chief Financial Officer of the Company, dated the applicable Closing Date, to the foregoing effect. (c) Each Investor shall have received, in form and substance reasonably satisfactory to it, an opinion, addressed to the Investors and dated as of the applicable Closing Date, of Mayer, Brown & Platt, counsel for the Company, with respect to the matters set forth in Exhibit F hereto. (d) No party to this Agreement (other than the relevant Investor) shall be in material breach of this Agreement unless such breach shall have been waived in writing by each of the other parties to this Agreement. (e) Each Investor shall have received such other certificates, opinions, documents and instruments relating to the transactions contemplated hereby as may have been reasonably required by it and are customary for transactions of this type, and all corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement, shall be reasonably satisfactory in form and substance to it. (f) With respect to each Closing (other than the Senior Secured Debt Closing), the Company shall have executed and delivered the Registration Rights Agreement to the Investors involved in such Closing who have not previously become signatory parties thereto for their execution and delivery as of such Closing. (g) (i) The indentures governing the Old Senior Notes and the ROPES shall have been amended to permit the issuance of the Senior Secured Debt and the granting of the Liens securing the Senior Secured Debt contemplated by the terms thereof, and a supplemental indenture to the indenture pertaining to the Old Senior Notes and a supplemental indenture to the indenture pertaining to the ROPES evidencing such amendments, as applicable, shall have been duly executed by the Company, the trustee for the Old Senior Notes or the trustee for the ROPES, as applicable, and any other necessary signatories, and (ii) no other consents, including 25 without limitation, consents with respect to the Old Junior Notes, shall be required to permit the transactions contemplated under this Agreement; provided, however, that if this condition has been satisfied for purposes of the Senior Secured Debt Closing, this condition shall be deemed to have been satisfied for purposes of the Debt Exchange Closing and the Convertible Subordinated Debt Placement Closing. (h) The Senior Secured Debt Closing shall have occurred and there shall be no pending or, to the knowledge of the Company, threatened action or proceeding (judicial or otherwise) to rescind, alter or modify such transaction. Section 4.3 Additional Conditions to the Obligations of the Senior Secured -------------------------------------------------------------- Debt Purchasers. The obligations of each of the Senior Secured Debt Purchasers - --------------- under this Agreement, including the obligations set forth in Section 2.1 hereof, shall be subject to the satisfaction or waiver prior to the Senior Secured Debt Closing of the following additional conditions: (a) Each of the other Senior Secured Debt Purchasers shall concurrently comply with their obligation to purchase Senior Secured Debt hereunder so that all $16,200,000 in Senior Secured Debt shall be purchased and the Company shall receive $16,200,000 in payment therefor. (b) The Security Agreement shall have been executed and delivered by each of the contemplated parties thereto. (c) The Company shall have executed and delivered the Exchange Note Registration Rights Agreement to the Senior Secured Debt Purchasers. (d) The Company shall have taken or caused to be taken all such actions, executed and delivered or caused to be executed and delivered all such agreements, documents and instruments, and made or caused to be made all such filings and recordings as may be necessary or, in the opinion of the Collateral Agent, desirable in order to create in favor of the Collateral Agent for the benefit of the Senior Secured Debt Purchasers a valid and (upon such filings and recordings) perfected first priority security interest in the assets of the Company referred to in and covered by the Security Agreement, including the following: (i) Delivery to the Collateral Agent of (A) certificates (which certificates shall be accompanied by irrevocable undated stock powers, duly endorsed in blank and otherwise satisfactory in form and substance to the Collateral Agent) representing all capital stock of the Bank pledged pursuant to the Security Agreement and (B) all promissory notes or other instruments (duly endorsed, where appropriate, in a manner satisfactory to the Agent) evidencing any collateral; (ii) Delivery to the Collateral Agent of (A) the results of a recent search, by a Person satisfactory to the Collateral Agent, of all effective UCC financing statements and fixture filings and all judgment and tax lien filings which may have been made with respect to any personal or mixed property of the Company, together with copies of all 26 such filings disclosed by such search, and (B) any such UCC termination statements duly executed by all such applicable Persons for filing in all such applicable jurisdictions as may be necessary to terminate any effective UCC financing statements or fixture filings disclosed in such search that relate in any way to the Collateral. Section 4.4 Conditions to the Senior Secured Debt Exchange. The ---------------------------------------------- obligations of the Senior Secured Debt Purchasers to exchange their Senior Secured Debt for Exchange Notes pursuant to Section 2.4 hereof shall be subject to the satisfaction or waiver prior to the Senior Secured Debt Exchange of the following conditions: (a) The Debt Exchange shall have occurred. (b) The Senior Secured Debt Purchasers shall have received evidence that the Exchange Notes to be registered pursuant to the Exchange Note Registration Rights Agreement are duly registered pursuant to the Securities Act of 1933 and the SEC shall have declared the registration statement pertaining thereto to be effective. (c) The Convertible Subordinated Debt Placement shall have been consummated and the net proceeds from such placement shall have been contributed by the Company to the Bank as "Tier I Capital". (d) As of the date that the last to occur of the conditions set forth in subsections 4.4(a), (b) and (c) has occurred, either (i) the Bank shall be in compliance with the FDIC Order and the DFI Order and shall have satisfied all of the requirements required pursuant to such orders to be satisfied on or before such date, or (ii) if not so in compliance, neither the FDIC nor DFI shall have taken or threatened to take any action adverse to the Bank or the Company as a result of such noncompliance and the Company shall have provided to the holders of the Senior Secured Debt evidence reasonably satisfactory to holders of a majority in principal amount of the Senior Secured Debt that the FDIC and DFI are aware of such noncompliance and the Company has not received any notice from the FDIC or DFI of the intent of either of them to take any such adverse action as a result of such noncompliance. (e) Holders of a majority of the then outstanding aggregate principal amount of the Senior Secured Debt shall have received evidence reasonably satisfactory to them that the Security Agreement creates in favor of the Collateral Agent for the benefit of the holders of the Exchange Notes a valid and perfected first priority security interest in the Collateral (as defined in the Security Agreement). Section 4.5 Conditions to the Obligations of the Company. The obligations -------------------------------------------- of the Company to fulfill its obligations under this Agreement, including without limitation the obligations set forth in Section 2.1 hereof, shall be subject to the satisfaction or waiver prior to the Closing of the following conditions: (a) Each of the representations and warranties of the Investors contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the applicable Closing Date as if made on such Closing Date, and the Company shall have 27 received a certificate signed by each Investor who is an individual and by a duly authorized officer of each other Investor to the foregoing effect. (b) Each Investor shall have tendered to the Company the consideration required by this Agreement for each of the Securities to be issued by the Company and acquired by the Investor pursuant to this Agreement at the applicable Closing, as set forth on Exhibit A hereto, such consideration with respect to the Senior Secured Debt and the Convertible Subordinated Debt to be payable (i) by wire transfer of immediately available funds to an account with a bank designated by the Company, by notice to each of the Investors to be provided no later than two Business Days prior to the applicable Closing Date, or (ii) by a federal (same day) funds check payable to the order of the Company, and, with respect to the Exchange Notes, to be provided through confirmed deposit of the appropriate amount of Old Notes with the depository designated for the Debt Exchange by the Company. (c) No party to this Agreement (other than the Company) shall be in material breach of this Agreement unless such breach shall have been waived in writing by each of the other parties to this Agreement. (d) The Company shall have received prior to or concurrently with the Senior Secured Debt Closing Date the favorable opinion of Houlihan, Lokey, Howard & Zukin or another nationally recognized investment banking or financial advisory firm selected by the Company as to the fairness of the transactions provided for in this Agreement, in combination, to the existing stockholders of the Company from a financial point of view. (e) The Company shall have received, in form and substance reasonably satisfactory to it, an opinion addressed to the Company and dated as of the applicable Closing Date, from the counsel to the Signatory Bondholders and the counsel to each other Investor that is purchasing at least $3.0 million in aggregate principal amount of Convertible Subordinated Debt, who shall be subject to the reasonable approval of the Company, with respect to the matters set forth in Exhibit G hereto with respect to such Closing. (f) The Company shall have received such other certificates, opinions, documents and instruments relating to the transactions contemplated hereby as may have been reasonably required by the Company and are customary for transactions of this type, and all corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement, shall be reasonably satisfactory in form and substance to the Company. ARTICLE V COVENANTS Section 5.1 Shareholder Meeting; Exemption. The Company shall (i) take ------------------------------ all action necessary (including without limitation the preparation, filing and dissemination of requisite proxy materials) to have its shareholders consider the issuance of the Common Stock, the Debt Exchange Warrants and the Convertible Subordinated Debt to be issued pursuant to this 28 Agreement at a special meeting of shareholders which is called for the purpose as promptly as practicable after the date hereof, (ii) recommend that its shareholders approve the issuance of the Common Stock, the Debt Exchange Warrants and the Convertible Subordinated Debt to be issued pursuant to this Agreement and use its best efforts to obtain such approval as promptly as practicable, and (iii) cooperate and consult with the Investors with respect to each of the foregoing matters, provided that the Company may cease taking any of the actions set forth in the foregoing clauses if it obtains the NASD Exemption referred to below. The Company agrees, if necessary to complete the transactions provided for in this Agreement in a timely manner that will enable the Company to infuse capital into the Bank within the period required by the FDIC and the DFI, to use its best efforts to obtain the approval of Nasdaq to its reliance upon an exception to the requirement under NASD Rule 4350(i) to obtain shareholder approval of the issuance of the Common Stock, the Debt Exchange Warrants and the Convertible Subordinated Debt to be issued pursuant to this Agreement and, in the event it obtains such approval, to mail to all shareholders of the Company the notice referred to in NASD Rule 4350(i)(2) (collectively, the "NASD Exemption"). Section 5.2 Applications. If any approval, consent or non-objection need ------------ be obtained by the Company, the Bank or any Investor from, or a notice or other filing need be filed by the Company, the Bank or any Investor with, the DFI, the FDIC or any other governmental authority (including, without limitation, the Federal Trade Commission and the Assistant Attorney General in charge of the Antitrust Division of the U.S. Department of Justice pursuant to the HSR) in connection with (i) the execution, delivery and performance of this Agreement or any Related Agreement by the Company or any Investor or (ii) the Company's issuance of Common Stock pursuant to this Agreement or upon exercise of any of the Debt Exchange Warrants, such party shall take all actions necessary to obtain any such approval, consent or non-objection or file such notice or other filing as promptly as practicable, and the other parties hereto agree to cooperate with such party in obtaining or filing the same. Any party that is required to file any notice, application or other document pursuant to the preceding sentence shall provide copies thereof (excluding any confidential information) for review, to each Investor in the case of the Company, and to the Company in the case of an Investor, not less than five Business Days prior to the making of such filing and shall keep such other party or parties hereto, as applicable, apprised of the status of such filing and the consideration thereof by the relevant governmental authority. Section 5.3 Investigation and Confidentiality. --------------------------------- (a) Until the last Closing that occurs pursuant to this Agreement, the Company shall permit each Investor and its representatives reasonable access to the Company's properties and personnel, including those of the Bank, and shall disclose and make available to each Investor all books, papers and records relating to the assets, stock ownership, properties, operations, obligations and liabilities of the Company and its Subsidiaries, including, but not limited to, all books of account (including the general ledger), tax records, minute books of meetings of boards of directors (and any committees thereof) and shareholders, organizational documents, bylaws, material contracts and agreements, filings with any regulatory authority, accountants' work papers, litigation files, loan files, plans affecting employees, and any other business activities or prospects in which an Investor may have a reasonable interest; provided, that such access shall be 29 reasonably related to the transactions contemplated hereby and not unduly interfere with normal operations; and provided, further, that in the event that any of the foregoing are in the control of any third party, the Company shall use its best efforts to cause such third party to provide access to such materials to each Investor who shall request the same. In the event that the Company is prohibited by law from providing any of the access referred to in the preceding sentence to an Investor or that provision of such access would jeopardize any attorney-client or other privilege, the Company shall use its best efforts to obtain promptly waivers of such law so as to permit such access or to convey the substance of any requested information without violation or waiver of any such privilege. The Company shall make the directors, officers, employees and agents and authorized representatives (including counsel and independent public accountants) of the Company and its Subsidiaries available to confer with Investors and their representatives, provided that such access shall be reasonably related to the transactions contemplated hereby and not unduly interfere with normal operations. (b) All information furnished to an Investor by the Company previously in connection with the transactions contemplated by this Agreement or pursuant hereto shall be treated as the sole property of the Company and each Investor covenants, severally and not jointly and as to itself only, that it shall use its best efforts to keep confidential all such information and shall not directly or indirectly use such information for any competitive or other commercial purposes. The obligation to keep such information confidential shall continue for five years from the date hereof but shall not apply to (i) any information which (x) an Investor can establish by convincing evidence was already in its possession prior to the disclosure thereof by the Company; (y) was then generally known to the public; or (z) became known to the public through no fault of an Investor; or (ii) disclosures pursuant to a legal requirement or in accordance with an order of a court of competent jurisdiction, provided that the Investor shall use its best efforts to give the Company at least ten Business Days prior notice thereof and shall limit such disclosure to the minimum amount required by such legal requirement or court order. Section 5.4 Press Releases. The Company and each Investor hereof shall -------------- agree with each other as to the form and substance of any press release related to this Agreement or the transactions contemplated hereby, and shall consult with each other as to the form and substance of other public disclosures which may relate to the transactions contemplated by this Agreement, provided, however, that nothing contained herein shall prohibit any party, following reasonable advance notification to such other parties, from making any disclosure which it determines in good faith to be required by law or regulation. For purposes of the foregoing, the Company may treat a law firm designated from time to time by Investors as the authorized representative of each of such Investors. Section 5.5 Use of Proceeds. The Company shall use the net cash proceeds --------------- from the sale of the Senior Secured Debt and the Convertible Subordinated Debt pursuant to this Agreement to increase the regulatory capital of the Bank, including without limitation, through the purchase of perpetual non-cumulative preferred stock of the Bank. 30 Section 5.6 Current Information. ------------------- (a) The Company shall provide to each Investor (i) promptly following the filing thereof, copies of each report filed by the Company under the Exchange Act and each regular periodic report filed by the Bank with the FDIC and the DFI, and (ii) concurrently with the mailing thereof, copies of each communication sent by the Company to its shareholders generally. (b) Subsequent to the last Closing to occur under this Agreement, the Company shall furnish to each Investor who holds Common Stock or Debt Exchange Warrants, promptly upon their becoming available, each registration statement and prospectus filed by the Company with the SEC under the Securities Act. Section 5.7 Listing of Additional Shares of Common Stock. The Company -------------------------------------------- shall take all action which is necessary to ensure that Common Stock to be issued pursuant to this Agreement, including Common Stock issuable upon exercise of the Debt Exchange Warrants to be issued hereunder and upon conversion of the Convertible Subordinated Debt, will be eligible upon issuance for quotation on the Nasdaq Stock Market's National Market System or any exchange or market on which the Common Stock is then traded. Section 5.8 Rule 144 and Rule 144A Reporting. -------------------------------- With a view to making available to holders of Securities the benefits of certain rules and regulations of the SEC which may permit the sale of the Securities to the public without registration, the Company agrees at all times to: (a) make and keep public information available, as those terms are understood and defined in Rules 144 and 144A under the Securities Act (or any successor Rule thereto); and (b) use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act. Section 5.9 Stock Options. The Company shall adopt a new stock option ------------- plan pursuant to which 5 million shares of Common Stock, or such greater number of shares of Common Stock as shall be determined by the board of directors of the Company, shall be reserved for issuance pursuant to options or other awards granted pursuant to such plan. Of the total number of shares of Common Stock reserved for issuance pursuant to such plan, the board of directors of the Company shall grant to Persons who are members of the management of the Company as of the date of this Agreement options relating to 1.5 million shares of Common Stock, having an exercise price equal to the Conversion Price of Common Stock set forth in the Convertible Subordinated Debt and having such vesting schedule and term to expiration (which shall not exceed 10 years) as shall be determined by the Compensation Committee of the board of directors of the Company as constituted as of the date of this Agreement, which Committee shall also determine the allocation of such options among such Persons. The foregoing determinations by such Committee so constituted shall be binding upon the Company and its Board of Directors notwithstanding that adoption and implementation of the new stock option 31 plan referred to in this Section 5.9 may occur at a later date as of which the composition of the Compensation Committee of the board of directors of the Company has changed. In the event the Company is unable for any reason to adopt or implement a new stock option plan as contemplated in this Section 5.9, the Company shall promptly make such alternative arrangements, including, without limitation, adoption and implementation of one or more phantom stock or other compensation plans, as it shall reasonably determine to be appropriate to provide comparable incentive compensation opportunities to the Persons referred to in this Section 5.9. The provisions of this Section 5.9 are intended to confer upon the Persons designated by the existing Compensation Committee of the Company's Board of Directors the right to receive the compensation opportunities hereinabove described and to be enforceable by each of such Persons. Section 5.10 Board of Directors; Supermajority Voting Requirements. ----------------------------------------------------- (a) From and after the completion of the last to occur of the recapitalization transactions provided for in this Agreement, the board of directors of the Company shall be comprised of seven persons. The board of directors of the Company shall nominate four persons for election as directors of the Company at the next annual meeting of shareholders following the date hereof who have been proposed by the Signatory Debtholders and who are approved by the board of directors of the Company in the exercise of its fiduciary duties, which approval shall not be unreasonably withheld or delayed; provided, that the four persons so nominated shall not take office as directors prior to the completion of the last to occur of the recapitalization transactions provided for herein. Three persons serving as directors of the Company as of the date hereof have indicated that they each intend to resign as directors prior to the Company's next annual meeting of shareholders. The board of directors of the Company shall elect the persons listed on Schedule 5.10 hereto as replacement directors at the times indicated on such Schedule. Notwithstanding the foregoing provisions of this Section 5.10, no person shall have the right, or be permitted, to become a director of the Company unless and until any and all applicable regulatory requirements have been complied with. (b) During the first year following consummation of the Subordinated Convertible Debt Placement, the approval of five or more directors (or directors constituting at least 70% of the directors eligible to vote on such proposal if one or more directors is not able to vote because of a conflict of interest or other basis for recusal) shall be required to approve: (i) the filing of a voluntary bankruptcy petition pursuant to Title 11 of the United States Code; (ii) a liquidation of the Company pursuant to state or other applicable law; (iii) a merger or acquisition transaction following which shareholders of the Company immediately prior to such transaction own less than 50% of the equity of the surviving corporation or other entity following such transaction; or (iv) a sale of all or substantially all of the assets of the Company; provided, however, that the foregoing shall not be applicable if, in light of the then existing financial position of the Company, a majority of the board of directors determines that such transaction is in the best interests of the Company's shareholders. Section 5.11 Exchange of Securities. The Company will, at its expense, ---------------------- promptly upon surrender of (i) any Senior Secured Debt or Convertible Subordinated Debt instrument, 32 (ii) any certificate evidencing Common Stock and (iii) any Debt Exchange Warrant, at the office of the Company referred to in, or designated pursuant to, Section 6.4, execute and deliver to the Investor (i) such number of new Senior Secured Debt or Convertible Subordinated Debt instruments in such principal amounts as shall be specified by the Investor (subject to the respective minimum denomination requirements thereof) in an aggregate principal amount equal to the Senior Secured Debt or Convertible Subordinated Debt instruments surrendered, (ii) a new certificate or certificates in denominations specified by the Investor for an aggregate number of shares of Common Stock equal to the number of shares of such stock represented by the certificate or certificates surrendered and (iii) a new Debt Exchange Warrant or Warrants covering a number of shares of Common Stock specified by the Investor for an aggregate number of shares of Common Stock equal to the number of shares of Common Stock covered by the Debt Exchange Warrant or Warrants surrendered. Section 5.12 Acquisition of Common Stock; Other Tax Matters. During the ---------------------------------------------- period commencing on the date of this Agreement and ending on the third anniversary of such Closing: (a) Except for the acquisitions made pursuant to the terms of this Agreement, such as acquisition of Common Stock and Debt Exchange Warrants pursuant to Sections 2.2 or 2.4, the exchange of Exchange Notes for Convertible Subordinated Debt pursuant to Section 2.4(b) or the conversion of Convertible Subordinated Debt for Common Stock, each Investor agrees to give the Company advance written notice of any proposed purchase or other acquisition of Capital Stock or Stock Equivalents of the Company. Such notice shall be accompanied by information related to such proposed transaction which is reasonably sufficient to enable the Company to determine, in its reasonable judgment, whether such acquisition (i) would result either in such Investor (or his "Group" within the meaning of Treas. Regs. (S) 1.382-3(a)(1)(i)) becoming a "5% shareholder" of the Company as such term is defined in Section 382(k)(7) of the Code, or increasing such Investor's interest (or that of his "Group") as such a "5% shareholder" and (ii) could reasonably be expected to result either (x) in an "ownership change" under Section 382 of the Code and the regulations promulgated thereunder, or (y) the acquisition of "control" by any such person or Group within the meaning of Treas. Regs. (S) 1.382-4(d)(4) (taking into account both the proposed transfer and any other transactions of which the Company is aware). (b) Within three Business Days of its receipt of the above-referenced notice from the Investor (the "Review Period"), the Company shall provide the Investor with written notice that either (i) states that the Company has made determinations of the type described in Section 5.12(a) hereof, (ii) contains a reasonable written request of the Company for further information concerning such proposed transaction (in which case the Review Period shall be extended until the third Business Day after receipt of such further information and the Company will provide a further written notice to such Investor with the content required herein by the end of the Review Period as so extended), or (iii) states that the proposed purchase or acquisition (or a purchase or acquisition of a specified lesser amount of Capital Stock or Stock Equivalents) will not have the result described in subparagraphs (i) or (ii) of Section 5.12(a) hereof. If, by the expiration of the Review Period, the Company has given notice to the Investor that the Company has made determinations of the type described in Section 5.12(a) hereof, the Investor shall refrain from effecting any purchase or acquisition as the Company may reasonably request in order to avoid 33 such an "ownership change" or acquisition of "control." If (x) the Company has given notice that the proposed purchase or acquisition will not have the result described in subparagraphs (i) or (ii) of Section 5.12(a) hereof or (y) the Company has not given any notice (other than a request for information) during the Review Period, then the Investor shall not be restricted in making such proposed purchase or acquisition during the 60 calendar days following the expiration of the Review Period; provided, however, that during such 60-day period the Company may give notice to such Investor that further purchases or acquisitions by the Investor would have the result described in subparagraphs (i) or (ii) of Section 5.12(a) hereof, and, upon receipt of such notice, the Investor shall refrain from making any further purchases or acquisitions. (c) The parties hereto shall cooperate with each other and use their respective commercially reasonable efforts to achieve the result that the transactions provided for in this Agreement shall not cause the limitations on utilization of net operating losses or other tax attributes of the Company or any of its subsidiaries to be subject to the limitations set forth in Section 382 of the Code. ARTICLE VI MISCELLANEOUS Section 6.1 Survival of Provisions. The representations, warranties and ---------------------- covenants of the Company and the Investors made herein and each of the provisions of Articles V and VI shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Investor or the Company, as the case may be, (ii) acceptance of any of the Securities and payment by the Investors therefor and retirement thereof, (iii) the transfer of any Securities or interest therein by any Investor, provided that no transferee may claim the benefit of any such representation or warranty, or (iv) any termination of this Agreement. Section 6.2 Termination. This Agreement may be terminated (by the party ----------- electing so to terminate it) by giving written notice of termination to all other parties at any time prior to the Senior Secured Debt Closing: (a) By the Company if the Senior Secured Debt Closing has not occurred by March 31, 2001, or (b) By any Investor if the Senior Secured Debt Closing has not occurred by March 31, 2001; or (c) By the Company prior to the Senior Secured Debt Closing in the event that it receives a Superior Proposal and the board of directors of the Company determines, on the advice of its outside legal counsel, that such termination is required in the exercise of the fiduciary duties of the directors of the Company. As used herein, the term "Superior Proposal" means a proposal for a business combination of the Company with another entity, whether by merger, sale of substantially all assets or another type of transaction, a sale or merger of the Bank, a recapitalization of the Company or the Bank, or the sale of equity securities, either alone or in combination with debt securities, by the Company or the Bank that, in any of the foregoing 34 cases, will be on terms that, in the good faith determination of the board of the directors of the Company, are more favorable to the Company and its existing shareholders than those embodied in the recapitalization transactions provided for herein. Section 6.3 Waiver; Other Termination Events; Amendments. No failure or -------------------------------------------- delay on the part of the Company or any Investor in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company or any Investor at law or in equity. No waiver of or consent to any departure by the Company or any Investor from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof. Except as otherwise provided, herein, no amendment, modification or termination of any provision this Agreement shall be effective unless signed in writing by or on behalf of the Company and each Investor affected thereby. Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on any party hereto in any case shall entitle another party hereto to any other or further notice or demand in similar or other circumstances. Notwithstanding the foregoing, any consent, waiver, amendment, supplement, modification or termination hereof, other than a Unanimous Consent Action, required from the Senior Secured Debt Purchasers, or any subsequent holders of Senior Secured Debt shall be deemed given or approved, and shall be binding on all Senior Secured Debt Purchasers and on all such subsequent holders if such consent, waiver, amendment, supplement, modification or termination has been consented to, waived by or approved by Senior Secured Debt Purchasers that own or have hereby contracted to purchase, a majority in aggregate principal amount of the Senior Secured Debt. Section 6.4 Communications. All notices, demands and other communications -------------- provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to any Investor, initially at the address set forth below its name on Exhibit A hereto, and thereafter at such other address, notice of which is given in accordance with this Section 6.4; and (ii) if to the Company, initially at 23550 Hawthorne Boulevard, Building 1, Suite 110, Torrance, California 90505, Attention: H. Wayne Snavely; and thereafter at such other address notice of which is given in accordance with this Section 6.4. 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 sent by certified mail, return receipt requested, if mailed; when answered back, if telexed; when receipt is 35 acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. Section 6.5 Costs, Expenses and Taxes. Whether or not the transactions ------------------------- contemplated hereby are consummated, the Company agrees to pay all reasonable costs and expenses incurred by it in connection with the negotiation, preparation, reproduction, execution, delivery and performance of this Agreement and the Related Agreements and any amendment or supplement or modification hereof or thereof (except to the extent otherwise provided in the Registration Rights Agreement or the Exchange Note Registration Rights Agreement), including without limitation, attorneys fees and expenses and all reasonable costs and expenses incurred by it in connection with the Company's administration of this Agreement and any Related Agreement. The Company also agrees to pay up to $375,000 of the reasonable costs and expenses of the Senior Secured Debt Purchasers incurred in connection with the transactions provided for herein, including legal fees and expenses. The Company further agrees to pay up to $750,000 of the expenses of the Signatory Debtholders incurred in connection with the transactions provided for herein, including fees and expenses payable to the firms listed in Schedule 6.5 hereto, in connection with the negotiation, preparation, reproduction, execution and delivery of this Agreement and the Related Agreements, plus such additional sums as shall be approved by the Company, the Company agreeing to approve any such expense incurred in good faith and in pursuit of the consummation of the transactions contemplated hereby. Such amounts as are incurred by the Signatory Debtholders on or before the date of consummation of the Senior Secured Debt offering shall be paid from the proceeds of such offering. Section 6.6 Execution in Counterparts. This Agreement may be executed in ------------------------- any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement. Section 6.7 Binding Effect: Assignment. The rights and obligations of an -------------------------- Investor under this Agreement may not be assigned to any other Person except with the prior written consent of the Company, except that, notwithstanding the foregoing, such assignment may be made as collateral to a bank or other financial institution as security for a bona fide loan for money borrowed. The obligations of the Company under this Agreement may not be assigned by the Company without the consent of each Investor. Except as expressly provided in this Agreement, this Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement, and their respective successors and permitted assigns. This Agreement shall be binding upon the Company and each Investor, and their respective successors and permitted assigns. Section 6.8 Governing Law. This Agreement shall be deemed to be a ------------- contract made under the laws of the State of California, and for all purposes shall be construed in accordance with the laws of said state, without regard to the principles of conflict of laws thereof. Section 6.9 Severability of Provisions. Any provision of this Agreement -------------------------- which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the 36 extent of such prohibition or unenforceability only without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 6.10 Headings; Gender. The Article and Section headings, and Table ---------------- of Contents used or contained in this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. Use of a particular gender herein shall be considered to represent the masculine, feminine or neuter gender whenever appropriate. Section 6.11 Interpretation. When a reference is made in this Agreement to -------------- Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." Whenever the context so requires, the use of the singular shall be deemed to include the plural and vice versa. Section 6.12 Integration. This Agreement and the Related Agreements ----------- constitute the entire agreement among the parties with respect to the subject matter thereof and there are no promises or undertakings with respect thereto not expressly set forth or referred to herein or therein. Section 6.13 Tax Indemnities. --------------- (a) It is the intention of the Company that the transactions contemplated by this Agreement will not give rise to an ownership change under Section 382 of the Code (an "Ownership Change") resulting in limitations on the ability of the Company to use net operating loss carryforwards, built-in losses or other tax attributes that would otherwise have been immediately available to the Company, as of December 31, 2000, for use in subsequent years (the "Tax Attributes"). The Company has not relied upon any Investor for any advice concerning tax consequences, including the absence of an Ownership Change, no Investor is making any representation or warranty as to the Company's tax consequences, including the absence of an Ownership Change, the Investors are not guaranteeing the absence of an Ownership Change or any other tax result for the Company, and nothing contained in this Agreement shall be deemed to be such a representation, warranty or guarantee. Nevertheless, the Company has requested that each Investor make the representations and warranties set forth in Schedule 3.2(j)(A) or (B), as the case may be, and to provide the covenants set forth in Section 5.12 of this Agreement (collectively, the "Tax Provisions"). As specified in Section 3.2(j), the Tax Provisions are made or committed to, as the case may be, severally and not jointly by each Investor, only to such Investor's knowledge, and the Investors are making such representations and covenants subject to the various qualifications set forth in those provisions of this Agreement. (b) The sole liability of any Investor for damages suffered by the Company from a breach by such Investor of the Tax Provisions shall be to make payments (the "Makeup Payments") as set forth in this Section 6.13. The obligations of an Investor under this Section 6.13 are independent of any obligation of the Company under this Agreement and the Related Agreements, and the Company shall have no right to offset claims under this Section 6.13 against 37 its obligations under this Agreement or any Related Agreement including, specifically, payment of principal, interest and other amounts, when due, pursuant to the terms of the Senior Secured Debt, the Exchange Notes and the Convertible Subordinated Debt, which obligations are absolute and unconditional. (c) Upon the occurrence of any event which in the opinion of the Company may cause a Breaching Holder (as hereinafter defined) to be liable for a Makeup Payment for any year, the Company shall give notice describing the nature of such event to such Breaching Holder (a "Potential Claim Notice"). A Potential Claim Notice shall include the Company's calculation of each Breaching Holder's potential Makeup Payment and shall show, in reasonable detail, the factual basis for such determination and calculation. No Investor shall have any liability for a Makeup Payment unless a Potential Claim Notice has been given to such Investor on or before March 15, 2004 identifying such Investor as a Breaching Holder. (d) In the event that the Company receives notice from any tax authority (a "Tax Notice") questioning, contesting or limiting the availability to the Company of any Tax Attribute that could result in the imposition of liability for a Makeup Payment on any Breaching Holder, the Company shall promptly (and in any event within 30 days following receipt of such notice) send notice (a "Claim Notice") to each Breaching Holder of such Tax Notice. The Claim Notice shall include a copy of the Tax Notice, the identity of all Breaching Holders, a statement of the Company's intention to claim a Makeup Payment from each Breaching Holder and an explanation in reasonable detail of the breach for which Makeup Payment is being claimed. (e) Following receipt of the Potential Claim Notice or Claim Notice, each Breaching Holder identified in such Potential Claim Notice or Claim Notice shall be entitled to consult with the Company concerning any administrative or judicial proceeding, hearing or conference that involves the Alleged Breach or the Ownership Change. The Breaching Holder shall also be entitled to inspect the books, records or other documents of the Company to the extent that such inspection is necessary in connection with any proceeding referred to in this Section 6.13. (f) A "Potential Indemnity Event" with respect to an Investor shall be deemed to have occurred if (and only if) (i) an Ownership Change shall be alleged by the Company to have occurred as a result of a breach by such Investor of any of the Tax Provisions and the use by the Company of the Tax Attributes shall have been restricted, and (ii) as a result of such breach and Ownership Change, the Company's cumulative tax liabilities for periods following such Ownership Change shall have been increased by an amount in excess of $2,000,000 (the "Agreed De Minimis Amount"). 38 (g) Liability of a Breaching Holder for a Makeup Payment in connection with any Potential Indemnity Event shall arise if and only if (i) there has been a final determination (by virtue of an unappealed court order, unappealed arbitration award or written acknowledgement, as the case may be) that such Investor (a "Breaching Holder") has breached one or more of the Tax Provisions made by such Investor, and (ii) such Potential Indemnity Event resulted solely from a breach of one or more Tax Provisions by either (x) such Breaching Holder acting alone, or (y) collectively by such Breaching Holder, if he is a Senior Secured Debtholder, together with one or more other Breaching Holders, each of whom is a Senior Secured Debtholder, or (z) collectively by such Breaching Holder, if he is a Signatory Debtholder, together with one or more other Breaching Holders each of whom is a Signatory Debtholder. (h) A Breaching Holder's liability to the Company for any Makeup Payment shall be subject to material compliance by the Company with the other relevant provisions of this Section 6.13 and shall, in the aggregate for all Breaching Holders, be equal to the actual damages suffered by the Company in excess of the Agreed De Minimis Amount as a result of a breach of one or more Tax Provisions, provided that no Investor shall be required, individually, to pay Makeup Payments in an amount in the aggregate in excess of 20% of such Investor's original investment in the Securities and the liability of each Investor under this Section 6.13 is limited to such amount. (i) In the event that a Potential Indemnity Event has occurred for which a Breaching Holder is liable pursuant to this Section 6.13, the Company shall give notice (a "Breach Notice") to the Breaching Holder of the amount of the Makeup Payment for which the Breaching Holder is so liable. Such Breach Notice shall include the Company's calculation of the Breaching Holder's potential Makeup Payment showing, in reasonable detail, the factual basis for such determination and calculation. The Breaching Holder shall have 30 days following receipt by the Breaching Holder of such notice within which to review the matters set forth in such notice. If the Breaching Holder objects to any matters set forth in such notice within such 30-day period, the Company and the Breaching Holder shall attempt to resolve the objection. If the objection is not resolved within 30 days following receipt by the Company of the Breaching Holder's objection, the factual determination and calculation of the Makeup Payment shall be submitted to binding arbitration under the commercial arbitration rules of the American Arbitration Association. Except as expressly set forth in this Section 6.13, the Investors shall have no obligation or liability for or with respect to the Tax Provisions and the Company hereby waives any claim against any Investor, on any theory of liability, for direct, actual, special, indirect, consequential or punitive damages arising out of, in connection with, or as a result of, this Agreement, the Related Agreements, or any agreement or instrument contemplated hereby or thereby and the transactions contemplated hereunder and thereunder. Section 6.14 Indemnification of Investors. Except as expressly set forth ---------------------------- in Section 6.13, the Company agrees to indemnify the Investors and their respective shareholders, directors, officers, employees, agents, advisers and affiliates (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, 39 damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, the Related Agreements or any agreement or instrument contemplated hereby, the performance by the parties hereto and thereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby, (ii) the use of the proceeds from the issuance of the Senior Secured Debt, or (iii) any factual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto. The Company agrees that, without the prior written consent of the Indemnitee, the Company will not settle, compromise or consent to the entry of any judgment in any pending or threatened proceeding in respect of which indemnification is reasonably likely to be sought under these indemnification provisions (whether or not any Indemnitee is an actual or potential party to such proceeding), unless such settlement, compromise or consent includes an unconditional written release of such Indemnitee from all liability arising out of such proceeding and does not include any statement as to an admission of fault, culpability or failure to act by or on behalf of any Indemnitee and does not involve any payment of money or other value by any Indemnitee or performance of any obligation by an Indemnitee or any injunctive relief or factual findings of stipulations binding on any Indemnitee. Section 6.15 Appointment and Authorization of Collateral Agent. By ------------------------------------------------- execution of this Agreement and acceptance of the Senior Secured Debt, each Senior Secured Debt Purchaser hereby irrevocably designates and appoints Wilmington Trust Company as the Collateral Agent for the benefit of such Senior Secured Debt Purchaser under the Security Agreement and each Senior Secured Debt Purchaser hereby irrevocably authorizes the Collateral Agent (i) to take action on its behalf and exercise such powers and use such discretion as are expressly permitted thereunder and all instruments relating thereto and (ii) to exercise such powers and perform such duties as are, in each case, expressly delegated to the Collateral Agent by the terms thereof, together with such other powers and discretion as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement or in the Security Agreement, the Collateral Agent shall not have any duties or responsibilities except those expressly set forth in the Security Agreement or any fiduciary relationship with any Senior Secured Debt Purchaser and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into the Security Agreement or otherwise exist against the Collateral Agent. Without limiting the generality of the foregoing, each Senior Secured Debt Purchaser hereby agrees to the provisions of the Security Agreement and authorizes the Collateral Agent to execute the Security Agreement as Collateral Agent on behalf of such Senior Secured Debt Purchaser. [signature pages follow] 40 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. IMPERIAL CREDIT INDUSTRIES, INC. By: /s/ H. Wayne Snavely -------------------- Name: H. Wayne Snavely Title: Chief Executive Officer Signatory Debtholders: IMPERIAL HOLDINGS GROUP, LLC, a Nevada limited liability company By: IMPERIAL HOLDINGS GROUP, LLC, a Florida limited liability company, its Manager By:_________________________________ Title: Michael S. Riley Manager 41 [___________________________________] By: * -------------------------------- Name:____________________ Title:___________________ [___________________________________] By: ________________________________ Name:____________________ Title:___________________ _________________________ By [________________], Attorney-in-fact. 42 Schedule 3.2(j)-A. Additional Representations of the Senior Secured Debt Purchasers In connection with each of the representations set forth below, it is understood that no breach of such representation shall have been deemed to occur as the result of the exercise by a purchaser of Senior Secured Debt of any rights or options expressly set forth in (or contemplated by) the Master Recapitalization Agreement to which this is attached (such as, for instance, the conversion of Convertible Subordinated Debt into Common Stock, or the exchange of Exchange Notes into Convertible Subordinated Debt). 1. Each purchaser of Senior Secured Debt severally represents (i) he evaluated his purchase of Senior Secured Debt on an independent review and analysis of the Company performed by him or on his behalf by his financial advisor or by another purchaser of Senior Secured Debt (or such purchaser's financial advisor) and (ii) although his purchase is conditional upon the commitments to sell and exchange securities of the Company as provided in the Master Recapitalization Agreement, he has not conditioned his purchase on the acquisition of Common Stock or Debt Exchange Warrants by any particular person or on the identity of any particular Signatory Debtholder. 2. Each purchaser of Senior Secured Debt agrees that he will not serve as a member of the board of directors of the Company prior to consummation of an acquisition by the Company (if any such acquisition were to occur) of Affinity Bank or Affinity Bank Holdings, Inc., nor is he a party to any voting trust or voting agreement proxy arrangement by virtue or which he participates in the selection of directors of the Company. 3. Each purchaser of Senior Secured Debt represents that he does not presently own either Common Stock, or any security convertible into Common Stock, other than as set forth in Schedule 3.2(1)-A attached hereto. ----------------- -1- Schedule 3.2(j)-B. Additional Representations of Riley (SDH) Group Representations (the Signatory Debtholders) For purposes of the following representations and warranties, two or more persons are "related" if they bear a relationship specified in Internal Revenue Code of 1986, as amended ("Code") sections 267(b) or 707(b), and are treated as "acting in concert" in the acquisition of the Convertible Subordinated Debt, Senior Secured Debt or Common Stock (as the case may be), if they have a formal or informal understanding among themselves to make a coordinated acquisition of those securities. A principal element in determining if such understanding exists is whether an investment decision with respect to any such securities of any such person is based upon the investment decision of some other such person concerning any such securities. For these purposes, (i) the "SDH Group" shall consist of and include all persons who are Signatory Debtholders, any persons to whom any Signatory Debtholder is related, and any person with whom a Signatory Debtholder is acting in concert, and (ii) the "Public CSD Group" will consist of and include each holder who purchases Convertible Subordinated Debt for cash in the Convertible Subordinated Debt Placement, and any person to whom such holder is related or with whom he is acting in concert. 1. (a) No purchaser of Senior Secured Debt (collectively, together with any person related to or acting in concert with such purchaser, the "SSD Group," and all such persons being members of the SSD Group), and no other member of the SSD Group is a member of, is related to, or is acting in concert with any person who is a member of the SDH Group or, to the best knowledge and belief of the SDH Group and its members, the Public CSD Group. To the best knowledge and belief of the SDH Group and its members, each purchaser of Senior Secured Debt has based his purchase thereof on an independent review and analysis of the Company's performance and prospects by (or on behalf of) himself or another purchaser of Senior Secured Debt, without regard to the analysis and opinions of the SDH Group and its members. (b) In particular, no person that is a member of the SDH Group (or is acting on behalf of the SDH Group) has (i) solicited or otherwise arranged for purchases of Senior Secured Debt by any member of the SSD Group (except by introducing such a member to the investment banker for the placement of the Senior Secured Debt); (ii) negotiated the terms or conditions of the purchases of Senior Secured Debt on behalf of the SSD Group; (iii) made any promise or commitment to the effect that such or any other member of the SDH Group, or any present or future director of the Company, favors or will favor the acquisition of Affinity Bank by the Company; (iv) entered into any agreement or understanding pursuant to which such person would deliver any cash, securities, or other consideration to the SSD Group or any 1 member thereof (other than that set forth specifically in the Master Recapitalization Agreement); or (v) entered into any agreement or understanding with any member of the SSD Group regarding any matters relating to the Company, the Company's management or operations, or the Company's acquisition, disposition, or holding of any securities. 2. To the best knowledge of each Signatory Debtholder, no member of the SSD Group has conditioned his purchase of the Senior Secured Debt from the Company (i) on the acquisition of Common Stock or Debt Exchange Warrants by the SDH Group; (ii) on any changes in its management of the Company (including officers or directors), except to the extent provided in Section 5.10 of the Master Recapitalization Agreement; or (iii) on completion of the Convertible Subordinated Debt Placement. 3. No member of the SDH Group has conditioned (i) its participation in the Debt Exchange, or (ii) its acquisition of Common Stock, on the purchase of any Senior Secured Debt by the SSD Group. 4. No member of the SDH Group is a participant in any plan, right or arrangement with any member of the SSD Group that would permit participation by any member of the SSD Group directly or indirectly in the selection of directors of the Company (except and to the extent that conversion of any Convertible Subordinated Debt acquired in the Senior Secured Debt Exchange would result in the ordinary rights of a shareholder to participate in the selection of directors). 5. No member of the SDH Group will lend its cooperation to the election of any member of the SSD Group as a director of the Company prior to consummation of an acquisition by the Company (if any such acquisition were to occur) of Affinity Bank or Affinity Bank Holdings, LLC. 6. Other than (i) approximately 650,000 shares of common stock currently held by the SDH Group, (ii) its purchases of Old Junior Notes, Old Senior Notes or ROPES or (iii) as contemplated by the terms of the Master Recapitalization Agreement, neither the SDH Group nor any of its members owns (or intends to acquire) either (A) additional stock of the Company or (B) instruments exercisable or convertible into such stock (including any Convertible Subordinated Debt issued in the Convertible Subordinated Debt Placement). 7. Immediately after the Convertible Subordinated Debt Placement and Senior Secured Debt Exchange, none of the Convertible Subordinated Debt issued in the Convertible Subordinated Debt Placement will be held by any holder who (i) is related to, or acting in concert with, any member of the SDH Group, or, (ii) (to the best knowledge and belief of each Signatory Debtholder) is related to, or acting in concert with, any member of the SSD Group. 8. No person who is either a member of the SDH Group or is acting on behalf of the SDH Group, and (to the best knowledge and belief of each Signatory Debtholder) no person who is a member of the SSD Group or is acting on behalf of the SSD Group, (i) has solicited or will 2 solicit or otherwise arrange for purchases of Convertible Subordinated Debt by any member of the Public CSD Group, or (ii) has discussed or will discuss with any member of the Public CSD Group the advisability of making such purchases. 9. No member of the SDH Group has conditioned his participation in the Debt Exchange or acquisition of his share of the 7.04 million shares of Common Stock on the purchase of Convertible Subordinated Debt by any member of the Public CSD Group. 10. To the best knowledge and belief of each Signatory Debtholder, no member of the Public CSD Group has conditioned its purchase of Convertible Subordinated Debt on the acquisition of Common Stock by the SDH Group, and the purchase of Convertible Subordinated Debt by each such member was based on its own independent review and analysis of the Company. 11. To the best knowledge and belief of each Signatory Debtholder, no member of the CSD Public Group has any plan, right or arrangement that would permit participation directly or indirectly in the selection of directors of the Company (except and to the extent that conversion of Convertible Subordinated Debt would result in the ordinary rights of a shareholder to participate in the selection of directors). 12. To the best knowledge and belief of each Signatory Debtholder, neither the SDH Group, the SSD Group, any of their members, or any other person has structured an ownership interest in stock in the Company (including rights to acquire such stock) in such manner as to avoid treating such person as a 5- percent shareholder, as described in Treas. Reg. (S) 1.382-2T(k)(4). 3 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS........................................................................................ 2 Section 1.1 Definitions........................................................................ 2 ARTICLE II RECAPITALIZATION TRANSACTIONS..................................................................... 7 Section 2.1 Purchase and Sale of Senior Secured Debt........................................... 7 Section 2.2 Debt Exchange...................................................................... 8 Section 2.3 Convertible Subordinated Debt Placement............................................ 10 Section 2.4 Exchange of Senior Secured Debt; Further Exchange or Market-Based Adjustment....... 10 ARTICLE III REPRESENTATIONS AND WARRANTIES................................................................... 14 Section 3.1 Representations and Warranties of the Company...................................... 14 Section 3.2 Representations and Warranties of the Investors.................................... 20 Section 3.3 Additional Representations, Warranties and Covenants of the Signatory Debtholders...................................................................... 23 ARTICLE IV CONDITIONS PRECEDENT TO THE CLOSINGS.............................................................. 24 Section 4.1 Conditions to the Obligations of the Parties....................................... 24 Section 4.2 Conditions to the Obligations of the Investors..................................... 25 Section 4.3 Additional Conditions to the Obligations of the Senior Secured Debt Purchasers..... 26 Section 4.4 Conditions to the Senior Secured Debt Exchange..................................... 27 Section 4.5 Conditions to the Obligations of the Company....................................... 27 ARTICLE V COVENANTS.......................................................................................... 28 Section 5.1 Shareholder Meeting; Exemption..................................................... 28 Section 5.2 Applications....................................................................... 29 Section 5.3 Investigation and Confidentiality.................................................. 29 Section 5.4 Press Releases..................................................................... 30 Section 5.5 Use of Proceeds.................................................................... 30 Section 5.6 Current Information................................................................ 31 Section 5.7 Listing of Additional Shares of Common Stock....................................... 31 Section 5.8 Rule 144 and Rule 144A Reporting................................................... 31 Section 5.9 Stock Options...................................................................... 31 Section 5.10 Board of Directors; Supermajority Voting Requirements.............................. 32
i TABLE OF CONTENTS (continued)
Page Section 5.11 Exchange of Securities............................................................. 32 Section 5.12 Acquisition of Common Stock; Other Tax Matters..................................... 33 ARTICLE VI MISCELLANEOUS..................................................................................... 34 Section 6.1 Survival of Provisions............................................................. 34 Section 6.2 Termination........................................................................ 34 Section 6.3 Waiver; Other Termination Events; Amendments....................................... 35 Section 6.4 Communications..................................................................... 35 Section 6.5 Costs, Expenses and Taxes.......................................................... 36 Section 6.6 Execution in Counterparts.......................................................... 36 Section 6.7 Binding Effect: Assignment......................................................... 36 Section 6.8 Governing Law...................................................................... 36 Section 6.9 Severability of Provisions......................................................... 36 Section 6.10 Headings; Gender................................................................... 37 Section 6.11 Interpretation..................................................................... 37 Section 6.12 Integration........................................................................ 37 Section 6.13 Tax Indemnities.................................................................... 37 Section 6.14 Indemnification of Investors....................................................... 39 Section 6.15 Appointment and Authorization of Collateral Agent.................................. 40
Exhibit A List of Senior Secured Debt Purchasers and Signatory Debtholders Exhibit B-1 Form of Senior Secured Note Exhibit B-2 Form of Collateral Agency and Security Agreement Exhibit C-1 Form of Exchange Note Indenture Exhibit C-2 Form of Debt Exchange Warrant Agreement Exhibit D Form of Convertible Subordinated Note Exhibit E-1 Form of Registration Rights Agreement Exhibit E-2 Form of Exchange Note Registration Rights Agreement Exhibit F Matters to be Covered by Opinion of Counsel to the Company Exhibit G Matters to be Covered by Opinions of Counsel to the Respective Investors Exhibit H Indenture Amendments ii EX-20.1.2 7 0007.txt EXCHANGE NOTE REGISTRATION RIGHTS 3/29/2001 EXHIBIT 20.1.2 EXCHANGE NOTES REGISTRATION RIGHTS AGREEMENT EXCHANGE NOTES REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of March 29, 2001, by and among Imperial Credit Industries, Inc., a California corporation (the "Company"), and each of the undersigned Investors (hereinafter referred to individually as an "Investor" and collectively as the "Investors"). WITNESSETH: WHEREAS, the Company and each of the Investors have entered into a Master Recapitalization Agreement, dated as of March 29, 2001 (the "Recapitalization Agreement"), providing for the purchase by the Investors of the Company's Senior Secured Notes due 2002 (the "Senior Secured Notes"); WHEREAS, the Senior Secured Notes are, in the event of the satisfaction of certain conditions, to be exchanged for Senior Secured Notes due 2005 (the "Exchange Notes") with an election to exchange such Exchange Notes for 12% Convertible Subordinated Notes due 2005 (the "Convertible Subordinated Debt"); WHEREAS, to induce the Investors to execute and deliver the Recapitalization Agreement, the Company has agreed to provide certain registration rights under the Securities Act (this, and other capitalized terms used herein and not otherwise defined herein are defined in Section 1 hereof) and under applicable state securities laws; WHEREAS, in addition to the rights provided by this Agreement, the Investors have been afforded other registration rights pursuant to the terms of the Recapitalization Agreement and the instruments contemplated thereby including, in specific, registration rights in respect of the Convertible Subordinated Debt and, accordingly, it is understood that the rights under this Agreement are not exclusive. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investors hereby agree as follows: 1. DEFINITIONS. ------------ As used in this Agreement, the following terms shall have the following meanings: (a) "Investor" means a purchaser of the Senior Secured Notes and any transferee or assignee thereof to whom an Investor assigns its rights under this Agreement as permitted by the terms hereof and who agrees to become bound by the provisions of this Agreement in accordance with Section 9. (b) "Person" means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, an entity, a governmental or political subdivision or a governmental agency. (c) "Register," "registered," and "registration" refer to a registration effected by preparing and filing one or more Registration Statements in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement(s) by the United States Securities and Exchange Commission (the "SEC"). (d) "Registrable Securities" means (i) the $18.2 million in Exchange Notes issuable to the Investors pursuant to the Recapitalization Agreement and (ii) the $5 million in additional Exchange Notes which the Company may be obligated to issue to the Investors pursuant to Section 2.4 of the Recapitalization Agreement. (e) "Registration Statement" means a registration statement of the Company filed under the Securities Act. 2. REGISTRATION. ------------- (a) Mandatory Registration. The Company shall prepare, and, on or ---------------------- prior to 60 days after the initial issuance date of the Senior Secured Notes (the "Closing Date"), file with the SEC a Registration Statement or Registration Statements on Form S-3 (or, if such form is not available for such a registration, on such other form as is available for such a registration, at the request of any Investor) covering the resale of all of the Registrable Securities. The Company shall use its best efforts to have the Registration Statement declared effective by the SEC within 120 days after the Closing Date. (b) Counsel and Investment Bankers. Subject to Section 5 hereof, in ------------------------------ connection with any offering pursuant to this Section 2, the Investors shall have the right to select legal counsel and an investment banker or bankers and manager or managers to administer their interest in the offering, which investment banker or bankers or manager or managers shall be reasonably satisfactory to the Company. The Company shall reasonably cooperate with any such counsel and investment bankers. (c) Eligibility for Form S-3. The Company has filed and shall use its ------------------------ best efforts to file all reports required to be filed by the Company with the SEC in a timely manner. In the event that Form S-3 is not available for sale by the Investors of the Registrable Securities, then (i) the Company, at the request of any Investor, shall register the sale of the Registrable Securities on another appropriate form and (ii) the Company shall undertake to register the Registrable Securities on Form S-3 as soon as such form is available, provided that the Company shall maintain the effectiveness of the Registration Statement then in effect until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the SEC. 2 3. RELATED OBLIGATIONS. -------------------- At such time as the Company is obligated to file a Registration Statement with the SEC pursuant to Section 2(a), the Company will use its best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, pursuant thereto, the Company shall have the following obligations: (a) The Company shall promptly prepare and file with the SEC a Registration Statement with respect to the Registrable Securities (on or prior to the 60/th/ day after the Closing Date and solely (unless otherwise consented to in writing by the Investors) for the registration of Registrable Securities pursuant to Section 2(a)) and use its best efforts to cause such Registration Statement(s) relating to Registrable Securities to become effective as soon as possible after such filing and keep the Registration Statement(s) effective pursuant to Rule 415 at all times until the earlier of (i) six months after the date as of which the Investors may sell all of the Registrable Securities without restriction pursuant to Rule 144(k) promulgated under the Securities Act (or successor thereto) or (ii) the date on which the Investors shall have sold all the Registrable Securities (the "Registration Period"), which Registration Statement(s) (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. In the event that the Registration Statement is not declared effective by the SEC before November 1, 2001, from and after November 1, 2001, the Senior Secured Notes shall bear interest at 20% per annum, as is provided in the Senior Secured Notes. (b) The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement(s) and the prospectus(es) used in connection with the Registration Statement(s), which prospectus(es) are to be filed pursuant to Rule 424 promulgated under the Securities Act, as may be necessary to keep the Registration Statement(s) effective at all times during the Registration Period, and, during such period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement(s) until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statement(s). (c) The Company shall furnish to each Investor whose Registrable Securities are included in the Registration Statement(s) and its legal counsel without charge (i) promptly after the same is prepared and filed with the SEC, at least one copy of the Registration Statement and any amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits, the prospectus(es) included in such Registration Statement(s) (including each preliminary prospectus) and, with regard to the Registration Statement, any correspondence by or on behalf of the Company to the SEC or the staff of the SEC and any correspondence from the SEC or the staff of the SEC to the Company or its representatives, (ii) upon the effectiveness of any Registration Statement, ten copies of the prospectus included in such Registration Statement and all amendments and supplements thereto 3 (or such other number of copies as such Investor may reasonably request) and (iii) such other documents, including any preliminary prospectus, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor. The Company will promptly respond to any and all comments received from the SEC, with a view toward causing any Registration Statement or any amendment thereto to be declared effective by the SEC as soon as practicable and shall, subject to Section 3(h), promptly file an acceleration request as soon as practicable following the resolution or clearance of all SEC comments or, if applicable, following notification by the SEC that the Registration Statement or any amendment thereto will not be subject to review. (d) The Company shall use its best efforts to (i) register and qualify the Registrable Securities covered by the Registration Statement(s) under such other securities or "blue sky" laws of such jurisdictions in the United States as any Investor reasonably requests, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify each Investor who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose. (e) In the event Investors who hold a majority of the Registrable Securities being offered in the offering select underwriters for the offering reasonably satisfactory to the Company, the Company shall, subject to Section 2(b) hereof, enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering. (f) As promptly as practicable after becoming aware of such event, the Company shall notify each Investor in writing of the happening of any event as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare a supplement or amendment to the Registration Statement to correct such untrue statement or omission, and deliver ten copies of such supplement or amendment to each Investor (or such other number of copies as such Investor may reasonably request). The Company shall also promptly notify each Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a 4 Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to each Investor by facsimile on the same day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. (g) The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify each Investor who holds Registrable Securities being sold (and, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. (h) The Company shall permit each Investor and a single firm of counsel, initially Kaplan, Strangis and Kaplan, P.A. or such other counsel as may thereafter be designated as counsel by the Investors who hold a majority of the Registrable Securities being sold, to review and comment upon the Registration Statement(s) and all amendments and supplements thereto at least four business days prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects. The Company shall not submit a request for acceleration of the effectiveness of a Registration Statement(s) or any amendment or supplement thereto without the prior approval of such counsel, which consent shall not be unreasonably withheld. (i) At the request of the Investors who hold a majority of the Registrable Securities being sold, the Company shall furnish, on the date that Registrable Securities are delivered to an underwriter, if any, for sale in connection with the Registration Statement (i) if required by an underwriter, a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the underwriters and the Investors. (j) The Company shall make available for inspection by (i) any Investor, (ii) any underwriter participating in any disposition pursuant to a Registration Statement, (iii) one firm of attorneys and one firm of accountants retained by the Investors, and (iv) one firm of attorneys retained by all such underwriters (collectively, the "Inspectors") all such pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably deemed necessary by each Inspector to enable each Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that each Inspector shall agree to, 5 and shall, hold in strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the Securities Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement. Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein (or in any other confidentiality agreement between the Company and any Investor) shall be deemed to limit the Investors' ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations. (k) The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non- appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Investor and allow such Investor, at the Investor's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. (l) The Company shall use its best efforts to cause all the Registrable Securities covered by a Registration Statement to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(l). (m) The Company shall cooperate with the Investors who hold Registrable Securities being offered and, to the extent applicable, any managing underwriter or underwriters, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the managing underwriter or underwriters, if any, or, if there is no managing underwriter or underwriters, the Investors may reasonably request and registered in such names as the managing underwriter or underwriters, if any, or the Investors may request. Not later than the date on which any Registration Statement registering the resale of Registrable Securities is declared effective, the Company shall deliver to the Exchange Notes Indenture Trustee instructions, 6 accompanied by any reasonably required opinion of counsel, that permit sales of unlegended securities in a timely fashion that complies with then mandated applicable securities settlement procedures. (n) The Company shall provide a CUSIP number for the Registrable Securities not later than the effective date of such Registration Statement. (o) If requested by the managing underwriters or an Investor, the Company shall immediately incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriters and the Investors agree should be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and supplement or make amendments to any Registration Statement if requested by a shareholder or any underwriter of such Registrable Securities. (p) The Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities. (q) The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder. 4. OBLIGATIONS OF THE INVESTORS. ----------------------------- (a) At least seven days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor or its counsel in writing of the information the Company requires from each such Investor if such Investor elects to have any of such Investor's Registrable Securities included in the Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information as may be requested in writing by the Company regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. (b) Each Investor by such Investor's acceptance of the Registrable Securities agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement(s) hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement. 7 (c) Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(g) or the first sentence of 3(f), such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement(s) covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(g) or the first sentence of 3(f) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy all copies in such Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. (d) No Investor may participate in any underwritten registration hereunder unless such Investor (i) agrees to sell such Investor's Registrable Securities on the basis provided in any underwriting arrangements approved by the Investors entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 5. EXPENSES OF REGISTRATION. ------------------------- All reasonable expenses, including underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, and fees and disbursements of counsel for the Company and fees and disbursements of one counsel for the Investors, shall be paid by the Company. In addition, the Company shall pay all of the Investors' reasonable costs (including legal fees) incurred in connection with the successful enforcement of the Investors' rights hereunder. 6. INDEMNIFICATION. ---------------- In the event any Registrable Securities are included in a Registration Statement under this Agreement: (a) To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Investor who holds such Registrable Securities, the directors, officers, partners, employees, agents and each Person, if any, who controls any Investor within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), and any underwriter (as defined in the Securities Act) for the Investors, and the directors and officers of, and each Person, if any, who controls, any such underwriter within the meaning of the Securities Act or the 1934 Act (each, an "Indemnified Person"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, attorneys' fees, amounts paid in settlement or expenses, joint or several (collectively, "Claims"), incurred in investigating, preparing for the defense of or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, to which an indemnified party is or may be a party ("Indemnified Damages"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any 8 untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered, or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to the restrictions set forth in Section 6(d) with respect to the number of legal counsel, the Company shall reimburse the Investors and each such underwriter or controlling person, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a) and the agreement with respect to contribution contained in Section 7: (i) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c); (ii) with respect to any preliminary prospectus, shall not inure to the benefit of any such person from whom the person asserting any such Claim purchased the Registrable Securities that are the subject thereof (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if such prospectus was timely made available by the Company pursuant to Section 3(c), and the Indemnified Person was promptly advised in writing not to use the incorrect prospectus prior to the use giving rise to a Violation and such Indemnified Person, notwithstanding such advice, used it; and (iii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. (b) In connection with any Registration Statement in which an Investor is participating, each such Investor agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each Person, if any, who controls the Company within the meaning of the Securities Act or the 1934 Act 9 (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim or Indemnified Damages to which any of them may become subject, under the Securities Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(d), such Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. (c) The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in any distribution, to the same extent as provided above, with respect to information such persons so furnished in writing expressly for inclusion in the Registration Statement. (d) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right (at its expense) to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that such indemnifying party shall diligently pursue such defense and that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the Indemnified Person or Indemnified Party, as the case may be, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The Company shall pay reasonable fees for only one separate legal counsel for the Investors, and such legal counsel shall be selected by the Investors holding a majority in interest of the 10 Registrable Securities included in the Registration Statement to which the Claim relates. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. (e) The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred. (f) The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law. 7. CONTRIBUTION. ------------- To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6; (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 11 8. REPORTS UNDER THE 1934 ACT. --------------------------- With a view to making available to the Investors the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 5.8 of the Master Recapitalization Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and (c) furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration. 9. ASSIGNMENT OF REGISTRATION RIGHTS. ---------------------------------- The rights to have the Company register Registrable Securities pursuant to this Agreement shall be assignable by the Investors to any Person (a "Transferee") of all or any portion of Registrable Securities if: (i) the Investor agrees in writing with the Transferee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment; (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such Transferee, and (b) the securities with respect to which such registration rights are being transferred or assigned; (iii) immediately following such transfer or assignment the further disposition of such securities by the Transferee is restricted under the Securities Act and applicable state securities laws; (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence the Transferee agrees in writing with the Company to be bound by all of the provisions contained herein; (v) such transfer shall have been made in accordance with the applicable requirements of the Master Recapitalization Agreement; (vi) such Transferee shall be an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act; and (vii) in the event the assignment occurs subsequent to the date of effectiveness of the Registration Statement required to be filed pursuant to Section 2(a), the Transferee agrees to pay all reasonable expenses of amending or supplementing such Registration Statement to reflect such assignment. 12 10. AMENDMENT OF REGISTRATION RIGHTS. --------------------------------- Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a majority of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. 11. MISCELLANEOUS. -------------- (a) A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) Any notices consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (iii) three days after being sent by U.S. certified mail, return receipt requested; or (iv) one day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: if to the Company: Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard Building 1, Suite 110 Torrance, California 90505 if to an Investor: to its address and facsimile number on the Schedule of Investors attached hereto, with copies to such Investor's counsel as set forth on the Schedule of Investors. Each party shall provide five days prior notice to the other party of any change in address, phone number or facsimile number. (c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (d) This Agreement shall be governed by and interpreted in accordance with the laws of the State of California without regard to the principles of conflict of laws. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. 13 (e) This Agreement, the Senior Secured Notes and the Recapitalization Agreement (including all schedules and exhibits thereto) constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. The aforementioned documents supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. (f) Subject to the requirements of Section 9, this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto. (g) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) This Agreement may be executed in two or more identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement provided that an original is promptly delivered thereafter to the other party. (i) Any legal action, suit or proceeding brought against the Company with respect to this Agreement may be brought in any federal court of the Central District of California or any state court located in the State of California, and by execution and delivery of this Agreement, the Company hereby irrevocably and unconditionally waives any claim (by way of motion, as a defense or otherwise) of improper venue, that it is not subject personally to the jurisdiction of such court, that such courts are an inconvenient forum or that this Agreement or the subject matter may not be enforced in or by such court. The Company hereby irrevocably and unconditionally consents to the service of process of any of the aforementioned courts in any such action, suit or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, at its address set forth or provided for in Section 11, such service to become effective 10 days after such mailing. Nothing herein contained shall be deemed to affect the right of any party to serve process in any manner permitted by law or commence legal proceedings or otherwise proceed against any other party in any other jurisdiction to enforce judgments obtained in any action, suit or proceeding brought pursuant to this Section. The Company irrevocably submits to the exclusive jurisdiction of the aforementioned courts in such action, suit or proceeding. THE COMPANY HEREBY IRREVOCABLY WAIVES TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING, WHETHER AT LAW OR EQUITY, BROUGHT BY IT OR AN INVESTOR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 14 (j) Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. [the balance of this page is intentionally left blank] 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. IMPERIAL CREDIT INDUSTRIES, INC. By: /s/ H. Wayne Snavely ----------------------- Name: H. Wayne Snavely Title: Chief Executive Officer INVESTOR: By:_____________________________ Name: Title: INVESTOR: By:_____________________________ Name: Title: INVESTOR: By:_____________________________ Name: Title: INVESTOR: By:_____________________________ Name: Title: SCHEDULE OF INVESTORS
Investor Address and Investor's Legal Counsel Investor Name Facsimile Number and Counsel's Address - ---------------------- -------------------------- ---------------------------
EX-20.1.3 8 0008.txt FORM OF SENIOR NOTE SECURED 3/29/2001 EXHIBIT 20.1.3 Form of Senior Secured Note --------------------------- THIS SENIOR SECURED NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY ITS ACCEPTANCE HEREOF, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS NOTE MAY BE OFFERED, SOLD OR OTHERWISE DISPOSED OF ONLY (1) TO THE COMPANY, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER", AS DEFINED IN RULE144A, THAT IS PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE SALE OR OTHER DISPOSITION IS BEING MADE IN RELIANCE ON RULE 144A, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION IN ACCORDANCE WITH RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (4) TO AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501 UNDER THE SECURITIES ACT ("ACCREDITED INVESTOR"), THAT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF ANOTHER ACCREDITED INVESTOR FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, IF A SIGNED CERTIFICATION LETTER (A FORM OF WHICH MAY BE OBTAINED FROM THE COMPANY) IS DELIVERED BY THE TRANSFEREE TO THE COMPANY, (5) AS OTHERWISE PROVIDED IN THE MASTER RECAPITALIZATION AGREEMENT (AS DEFINED BELOW) OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. BY PURCHASING THIS NOTE, THE HOLDER HEREOF AGREES AND REPRESENTS FOR THE BENEFIT OF THE COMPANY THAT (A) IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN ACCREDITED INVESTOR ACQUIRING THIS NOTE FOR INVESTMENT PURPOSES FOR ITS OWN ACCOUNT OR THE ACCOUNT OF ANOTHER ACCREDITED INVESTOR FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT AND (B) IT WILL NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE RESTRICTIONS REFERRED TO ABOVE. THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO CERTAIN ADDITIONAL RESTRICTIONS ON TRANSFER CONTAINED IN SECTION 3.2 OF THE MASTER RECAPITALIZATION AGREEMENT DATED AS OF MARCH 29, 2001 AMONG THE COMPANY AND THE OTHER PARTIES NAMED ON THE SIGNATURE PAGES THEREOF, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. ANY SALE OR TRANSFER NOT IN COMPLIANCE WITH SUCH MASTER RECAPITALIZATION AGREEMENT SHALL BE NULL AND VOID. No. _________ Original Principal Amount: $______________ Original Issue Date: March 30, 2001 IMPERIAL CREDIT INDUSTRIES, INC. 23550 Hawthorne Boulevard Building 1, Suite 110 Torrance, California 90505 SENIOR SECURED NOTE IMPERIAL CREDIT INDUSTRIES, INC., a California corporation (together with its permitted successors and assigns hereunder, the "Issuer"), for value received hereby promises to pay to _____________, [insert address for notices and payments] and registered assigns (the "Holder") the unpaid balance of the principal sum of $_________ on April 30, 2002 (the "Maturity Date") and to pay interest thereon as provided herein. Section 1. Interest. -------- (a) Interest (i) shall accrue upon the outstanding principal of this Note at the Accrual Rate, and (ii) shall be payable in cash to the Holder (A) in arrears, on the first day of each calendar month (each an "Interest Payment Date") of each year commencing with May 1, 2001, and (B) at the Maturity Date (or earlier to the extent provided in Section 5) to the extent accrued but theretofore unpaid. (b) From and after the occurrence of a Event of Default, the Issuer agrees to pay to the Holder, upon demand (and, in any event, not less frequently than monthly in arrears, on each Interest Payment Date) interest at the Default Rate on the outstanding principal hereunder and all interest accrued but unpaid thereon. (c) Interest hereunder shall be calculated on the basis of a 360-day year, actual days elapsed, and, to the extent accrued but unpaid, shall be compounded monthly on each Interest Payment Date. The interest accrued but unpaid on any date, or payable on any Interest Payment Date, hereunder shall be calculated to but excluding the date in question. (d) Notwithstanding anything to the contrary contained herein, interest accrued but unpaid on the first Interest Payment Date after issuance of this Note shall be calculated for the period commencing on the date of issuance of this Note to but excluding such Interest Payment Date. Section 2. Issue; Priority. This Note is one of a duly authorized issue --------------- of Senior Secured Notes (the "Notes") in the maximum aggregate principal amount of $16,200,000 issued or to be issued pursuant to the Master Recapitalization Agreement dated as of March 29, 2001 among the Issuer and the purchasers listed on the signature pages thereto, as amended, supplemented or otherwise modified from time to time (the "Master Recapitalization Agreement"), to which all the terms of this Note are subject. This Note constitutes a senior secured obligation of the Issuer that shall not be subordinated in right or priority of payment to any existing or future obligation of the Issuer. This Note and the Holder hereof shall be secured by and entitled to the benefits of the Collateral Agency and Security Agreement, dated as of March 29, 2001 and initially entered into between the Company and Wilmington Trust Company, not individually but solely in its capacity as Collateral Agent, to which Agreement the Holder and each other Holder of Notes consents and, by their acceptance of the Notes, agrees to be bound. Section 3. Certain Terms Defined. The following terms for all purposes of --------------------- this Note shall have the respective meanings specified below: "Accrual Rate" means 12% per annum, except that if the Senior Secured Debt ------------ Exchange (as defined in the Master Recapitalization Agreement) has not occurred on or before November 1, 2001, the Accrual Rate from and after November 1, 2001 shall be 20% per annum. "Affiliate" means, with respect to any Person, any Person that, directly or --------- indirectly, controls, is controlled by or is under common control with such Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or voting equity interests. "Bank" means Southern Pacific Bank, a California industrial bank, together ---- with its successors. "Business Day" means any day except a Saturday, Sunday or other day on ------------ which commercial banks in the State of California are authorized by law to close. "Capital Stock" of any Person means any and all shares or other equity ------------- interest of such Person. "Collateral Agent" means Wilmington Trust Company in its capacity as agent ---------------- for the benefit of the Holders pursuant to the terms of the Collateral Agency Agreement. "Debt" of any Person means at any date, without duplication, (a) all ---- obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person in respect of standby or direct pay letters of credit or bankers' acceptances or other similar instruments (or reimbursement obligations with respect thereto), (d) all obligations of such Person to pay the deferred purchase price of property of services, and (e) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles then in effect in the United States. "Default" means any condition or event which constitutes an Event of ------- Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Default Rate" means the per annum interest rate that is 5% per annum ------------ greater than the then applicable Accrual Rate. "DFI" means the Department of Financial Institutions of the State of --- California. 3 "DFI Order" means the Final Order, dated December 27, 2000, issued by the --------- DFI to the Issuer. "Event of Default" has the meaning set forth in Section 5. ---------------- "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "FDIC" means the Federal Deposit Insurance Corporation and any successor ---- thereto. "FDIC Order" means the Cease and Desist Order, dated December 15, 2000, ---------- issued by the FDIC to the Issuer. "Holder" means the Person identified hereinabove as the Holder of this Note ------ and includes the Holders of all other Notes referred to in Section 2. "Interest Payment Date" has the meaning set forth in Section 1(a)(ii). --------------------- "Lien" means, with respect to any asset, any mortgage, lien, pledge, ---- encumbrance, charge or security interest of any kind in respect of such asset (including any conditional sale or other title retention agreement and any lease in the nature thereof). "Master Recapitalization Agreement" has the meaning set forth in Section 2. --------------------------------- "Material Adverse Effect" means a material adverse effect on the financial ----------------------- condition, business, assets or results of operations of (i) the Bank or (ii) the Issuer and its Subsidiaries taken as a whole. "Material Subsidiary" of any Person means, as of any date, any Subsidiary ------------------- of such Person which, as of such date, is a "significant subsidiary" of such Person, as the term "significant subsidiary" is defined in Regulation S-X promulgated by the SEC under the Securities Act of 1933, as amended, as in effect on the date hereof. "Notes" has the meaning set forth in Section 2. ----- "Officers' Certificate" means a certificate signed by a Responsible --------------------- Officer. "Person" means an individual, a corporation, a partnership, an association, ------ a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Responsible Officer" means, with respect to any Person, the chief ------------------- executive officer, president or any executive vice president or senior vice president of such Person, or, with respect to financial matters, the chief financial officer or treasurer of such Person or any other officer authorized by such Person to deliver documents with respect to financial matters. "SEC" means the Securities and Exchange Commission and any successor --- thereto. 4 "Security Agreement" has the meaning set forth in the Master ------------------ Recapitalization Agreement. "Subsidiary" of any Person means any entity of which securities or other ---------- ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are owned directly or indirectly by such Person. "Wholly-Owned Subsidiary" of any Person means any Subsidiary all of the ----------------------- Capital Stock or ownership interests of which (except director's qualifying shares) are at the time owned directly, or, through one or more Wholly-Owned Subsidiaries, indirectly by such Person. Section 4. Covenants. So long as any Note is outstanding or any amount --------- payable in respect of any Note remains unpaid: (a) The Issuer shall pay or cause to be paid the principal of and interest on the Notes on the dates and in the manner provided in the Notes. (b) The Issuer shall, so long as any of the Notes are outstanding, deliver to the Holders thereof, 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 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 Issuer is taking or proposes to take with respect thereto. (c) The Issuer 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. (d) The Issuer 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 Note; and the Issuer (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 Holders, but shall suffer and permit the execution of every such power as though no such law has been enacted. (e) The Issuer will not, and will not permit the Bank to, consolidate with, merge with or into, or sell, lease or otherwise transfer all or substantially all of its assets (as an entirety in one transaction or a series of related transactions) to, any Person (other than a Wholly-Owned Subsidiary of the Issuer) unless, in the case of the Issuer, the surviving or acquiring entity (if other than the Issuer) (i) is organized and existing under the laws of the United States of America or any state thereof or the District of Columbia, (ii) shall expressly assume all obligations of the Issuer under this Note, the Master Recapitalization Agreement and the Related Documents, and (iii) at the time of such consolidation, merger, sale or transfer and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing. 5 (f) The Issuer will not and will not permit any Subsidiary to: (i) sell, transfer or otherwise convey any shares of the Bank's Capital Stock that are legally or beneficially owned by the Issuer or any Subsidiary; (ii) incur, create, assume or otherwise cause or suffer to exist (directly, indirectly or contingently) any Lien on any shares of Capital Stock of the Bank that are legally or beneficially owned by the Issuer or any Subsidiary, except for (x) Liens for taxes, assessments, government charges or claims (I) that are being contested in good faith by appropriate proceedings, and with respect to which a reserve or other appropriate provision, if any, as shall be required in conformity with generally accepted accounting principles then in effect in the United States shall have been made, or (II) that are not yet due and payable, or (y) any Lien arising out of an attachment, judgment or award as to which an appeal or other appropriate proceeding or contest or review has been promptly commenced (and as to which foreclosure or similar proceedings shall not have commenced); or (iii) incur any indebtedness except as contemplated under the Master Recapitalization Agreement. (g) The Issuer will furnish to each Holder of a Note: (i) within 90 days after the end of each fiscal year of the Issuer, audited consolidated financial statements for such fiscal year of each of the Issuer and its consolidated Subsidiaries, including consolidated balance sheets and statements of operations, statements of changes in stockholders' equity and statements of cash flows, accompanied by the reports thereon of the Issuer's independent public accountants, which financial statements shall be prepared in accordance with generally accepted accounting principles then in effect in the United States applied consistently throughout the period reflected therein (except as disclosed therein), (ii) within 45 days after the end of the first, second and third fiscal quarters of the Issuer, unaudited consolidated financial statements for such fiscal quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter of each of the Issuer and its consolidated Subsidiaries, including consolidated balance sheets and statements of operations, statements of changes in stockholders' equity and statements of cash flows, which financial statements shall be prepared in accordance with generally accepted accounting principles then in effect in the United States applied consistently throughout the period reflected therein (except that such statements may be presented in condensed form, with no notes to such financial statements being required, and except as otherwise disclosed therein), (iii) promptly upon their becoming available, (x) each report, notice, proxy statement or other communication sent by the Issuer to its stockholders generally and (y) each regular or periodic report filed by the Issuer with the SEC pursuant to the Exchange 6 Act and each registration statement and prospectus filed by the Issuer with the SEC under the Securities Act of 1933, as amended, and (iv) concurrently with the delivery of the financial statements referred to in paragraphs (i) and (ii) above, with respect to the relevant reporting periods, a certificate of a Responsible Officer of the Issuer stating that, to the best of such Responsible Officer's knowledge after due inquiry, (x) all such financial statements have been prepared in accordance with generally accepted accounting principles in effect in the United States applied consistently throughout the period(s) reflected therein (except as otherwise disclosed therein) and (y) such Responsible Officer has obtained no knowledge of any Default. The requirement to deliver the financial statements referred to in paragraphs (i) and (ii) above shall be deemed to be satisfied to the extent that they are contained in reports filed by the Issuer with the SEC under the Securities Exchange Act of 1934, as amended, and such reports are delivered to each Holder of a Note within the time specified in such paragraphs (i) and (ii). (h) The Issuer will not, and will not permit any of its Subsidiaries to, purchase any Notes other than pursuant to a repurchase offer made to each Holder of a Note pro rata in accordance with the aggregate principal amount of Notes held by such Holder. (i) The Issuer will not, and will not permit any of its Subsidiaries to, make any payment or distribution in respect of any Common Stock or other security of the Issuer or make any payments on or in respect of any other indebtedness of the Company if such payment would be inconsistent with any subordination provisions of any such indebtedness or with the provisions of the Security Agreement. Section 5. Event of Default Defined; Remedies. In case one or more of the ---------------------------------- following events (each an "Event of Default") shall have occurred and be continuing: (a) default in the payment of any interest under Section 1 as and when the payment shall become due and payable, if the Issuer shall have failed to cure such default in full within 5 calendar days after the occurrence of any such default; or (b) default in the payment of all or any part of the principal on this Note as and when the same shall become due and payable, whether on the Maturity Date, by acceleration or otherwise; or (c) unconsolidated Debt of the Issuer in an amount equal to or exceeding $500,000 in the aggregate outstanding at any time shall not be paid within 30 calendar days after the maturity date thereof or the maturity date of any such Debt aggregating $500,000 or more shall be accelerated upon default of the Issuer; or (d) any Debt of any Material Subsidiary or Material Subsidiaries of the Issuer in an aggregate principal amount equal to or exceeding $500,000 in the aggregate outstanding at any time shall not be paid within 30 calendar days after the maturity date thereof, or the maturity of 7 any such Debt aggregating $500,000 or more shall be accelerated upon default of any Material Subsidiary or Material Subsidiaries; or (e) the Bank shall (i) have a conservator or receiver appointed for it, or (ii) become or be deemed by the FDIC to be "critically undercapitalized" within the meaning of Section 38(b) of the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), any successor statute thereto, or any regulations promulgated thereunder; or (f) the Issuer or any of its Material Subsidiaries shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall be unable to, admit its inability to, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing or any other action indicating its consent to, or approval of, or acquiescence in, or furtherance of any of the foregoing; or (g) an involuntary case or other proceeding shall be commenced against the Issuer or any of its Material Subsidiaries seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Issuer or any of its Material Subsidiaries under the federal bankruptcy laws as now or hereafter in effect; or (h) a final judgment for the payment of money, together with all other outstanding final judgments for the payment of money against the Issuer or any of its Material Subsidiaries (to the extent that such judgments are not covered by insurance from insurers that are not Affiliates of the Issuer or any of its Subsidiaries) in an aggregate amount in excess of $500,000, shall be rendered against the Issuer or any Material Subsidiary by a court of competent jurisdiction and such judgment shall remain undischarged, unstayed or unvacated for a period of 30 calendar days after such judgment becomes final and unappealable; or (i) failure on the part of the Issuer to duly observe or perform in any material respect any covenant contained in this Note; or (j) any warranty, representation or other statement by or on behalf of the Issuer contained in this Note, the Security Agreement, the Master Recapitalization Agreement or any of the Related Agreements or in any instrument furnished in compliance with or in reference to any such agreement or instrument is false or misleading in any material respect; or 8 (k) the Bank shall fail to be in compliance with the FDIC Order and the DFI Order and either the FDIC or DFI shall have taken or threatened to take any action adverse to the Bank or the Company as a result of such noncompliance; then, at any time thereafter during the continuance of any such Event of Default, other than (x) in the case of an Event of Default specified in Sections 5(e), (f) or (g), in any of which events the unpaid principal of and accrued interest on the Notes shall become and be immediately due and payable without any declaration or any other act on the part of the Holder and (y) in the case of an Event of Default specified in Section 5(i), in which event such declaration may be made 30 days after notice of such default, the Holder of this Note may, by written notice to the Issuer, declare this Note to be forthwith due and payable, whereupon this Note shall become forthwith due and payable both as to unpaid principal and accrued interest without presentment, demand, or protest or other notice of any kind, all of which are hereby expressly waived, anything contained herein to the contrary notwithstanding. Such remedy shall be in addition to any other remedy available to the Holder pursuant to applicable law or otherwise. A Holder, solely by express written notice to the Issuer, may waive all Defaults and rescind any acceleration of the Note or Notes held by such Holder and the consequences of such acceleration. Section 6. Exchange. The indebtedness evidenced by this Note shall be -------- exchanged for Exchange Notes of the Issuer upon the terms and conditions more particularly set forth in Section 2.4 of the Master Recapitalization Agreement. Section 7. Modification of Note. -------------------- (a) No provision of the Notes may be amended, modified, supplemented or waived without notice to and the written consent of the Issuer and the Holders of not less than a majority of the aggregate principal amount of the Notes then outstanding, provided that no such amendment, modification, supplement or waiver shall, unless signed by each Holder of a Note affected thereby, (i) reduce the amount or rate of, or postpone the date fixed for, any payment of principal of or interest on such Note, (ii) make such Note payable in money other than that stated in such Note or (iii) amend the provisions of this Section 7. The Holder may waive compliance by the Issuer with any provision of the Note. No failure or delay on the part of the Holder in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Holder at law or in equity or otherwise. (b) The Issuer will not solicit, request or negotiate for or with respect to any proposed amendment, modification, supplement or waiver of any of the terms or provisions of any of the Notes unless each of the Holders of Notes then outstanding (irrespective of the outstanding aggregate principal amount of Notes then owned by each such Holder) shall be informed thereof by the Issuer and shall be afforded the opportunity of considering the same for the same period of time and shall be supplied by the Issuer with a brief written statement regarding the reasons for any such proposed amendment, modification, supplement or waiver, a copy of the proposed amendment, modification, supplement or waiver and such other information as such Holder shall 9 reasonably request regarding such amendment, modification, supplement or waiver to enable it to make an informed decision with respect thereto. The Issuer will not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fees, additional securities or otherwise, to any Holder of the Note as consideration for or as an inducement to the entering into by any such Holder of any amendment, modification, supplement or waiver of any of the terms and provisions of any of the Notes unless such remuneration is offered to all Holders of Notes then outstanding on the same terms, ratably in proportion to the aggregate principal amount of Notes then owned by each such Holder who enters into such amendment, modification, supplement or waiver. Section 8. Method and Application of Payments. Payments hereunder shall ---------------------------------- be made at a bank specified in writing by the Holder, in immediately available funds in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. If the Maturity Date, any Interest Payment Date or any other day on which a payment is due hereunder is not a Business Day the payment due on such date shall be made on the next succeeding Business Day. All payments made pursuant to this Note shall be applied first to accrued and unpaid interest and thereafter to unpaid principal. Section 9. Assignment. This Note and the rights and obligations of the ---------- Issuer hereunder may not be assigned or otherwise transferred by the Issuer without the prior written consent of the Holder hereof. This Note may not be assigned or otherwise transferred by any Holder to any Person, other than an Affiliate of such Holder, unless the Holder has complied with the applicable requirements set forth in Section 3.2 of the Master Recapitalization Agreement, except that, notwithstanding the foregoing, this Note may be pledged or otherwise assigned as collateral to a bank or other financial institution as security for a bona fide loan for money borrowed. Except as so limited, this Note shall be binding upon and inure to the benefit of the Issuer and the Holder and their respective successors and permitted assigns hereunder. Section 10. Communications. All notices, demands and other communications -------------- provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (a) if to the Holder, initially at the address set forth above, and thereafter at such other address, notice of which is given in accordance with this Section 10; (b) if to the Issuer, initially at 23550 Hawthorne Boulevard, Building 1, Suite 110, Torrance, California 90505, and thereafter at such other address, notice of which is given in accordance with this Section 10. 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 sent by certified mail, return receipt requested, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. 10 Section 11. Miscellaneous. This Note shall be deemed to be a contract ------------- under the laws of the State of California and shall be governed by and construed in accordance with the laws of said State, without regard to principles of conflict of laws. The parties hereto hereby waive presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note, except as specifically provided herein. The Holder by acceptance of this Note agrees to be bound by the provisions hereof and of the Master Recapitalization Agreement. Except as otherwise required by mandatory provisions of applicable law, the Issuer may deem and treat the Person in whose name this Note is registered as the Holder and owner hereof for all purposes. This Section headings herein are for convenience only and shall not modify, restrict or otherwise affect the construction of any of the terms and provisions hereof. In case any provisions of this Note or the Master Recapitalization Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Note and the Master Recapitalization Agreement shall not in any way be affected or impaired thereby. IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed. IMPERIAL CREDIT INDUSTRIES, INC. By:___________________________________ Name: H. Wayne Snavely Title: Chairman, President and Chief Executive Officer EX-20.1.4 9 0009.txt COLLATERAL AGENCY AND SECURITY AGREEMENT 3/29/2001 EXHIBIT 20.1.4 COLLATERAL AGENCY AND SECURITY AGREEMENT This COLLATERAL AGENCY AND SECURITY AGREEMENT (as it may be amended, supplemented or otherwise modified from time to time, this "Agreement") is dated --------- as of March 29, 2001 and is made by and between Imperial Credit Industries, Inc. (the "Grantor") in favor of and for the benefit of Wilmington Trust Company ------- ("WTC"), acting hereunder not individually but solely as collateral agent (in --- such capacity, the "Collateral Agent") for the benefit of (i) the Senior Secured ---------------- Debt Purchasers and (ii), from and after the Debt Exchange Closing Date, Chase Manhattan Bank and Trust Company, N.A. ("Indenture Trustee"), not individually ----------------- but solely as trustee for the holders of the Exchange Notes (the Senior Secured Debt Purchasers and the Indenture Trustee, together with any successors and assigns, are individually referred to herein as a "Secured Party" and ------------- collectively referred to herein as the "Secured Parties"). --------------- PRELIMINARY STATEMENTS Pursuant to that certain Master Recapitalization Agreement dated as of March 29, 2001 (said agreement, as it may hereafter be amended or otherwise modified from time to time, being the "Recapitalization Agreement"), the Senior -------------------------- Secured Debt Purchasers have agreed to loan $16,200,000 to the Grantor and the Signatory Debtholders have agreed to tender their Old Notes to the Grantor in exchange for Exchange Notes and certain other consideration pursuant to the Debt Exchange. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Recapitalization Agreement. It is a condition precedent to the closing of the transactions contemplated by the Recapitalization Agreement that the parties hereto shall have entered into this Agreement and that the Grantor shall have granted the assignments and security interests and made the pledges and assignments contemplated by this Agreement. The obligations of the Grantor under the Senior Secured Debt and, from and after the Debt Exchange Closing Date, the Exchange Notes are to be secured pursuant to this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce the Senior Secured Debt Purchasers to make loans under the Recapitalization Agreement and to induce the Holders of the Old Notes to accept the Exchange Notes and other consideration in exchange therefor, the parties hereto hereby agree as follows: SECTION 1. Grant of Security. The Grantor hereby assigns and pledges to the ----------------- Collateral Agent (i) for the benefit of the Senior Secured Debt Purchasers, and (ii) from and after the Debt Exchange Closing Date, for the benefit of (x) the Senior Secured Debt Purchasers and the Indenture Trustee as trustee for the holders of the Exchange Notes for so long as the Senior Secured Debt is issued and outstanding and (y) from and after the payment in full or exchange of the Senior Secured Debt, the Indenture Trustee as trustee for the holders of the Exchange Notes, and hereby grants to the Collateral Agent for the benefit of such Secured Parties a security interest in, all of the Grantor's right, title and interest, whether now owned or hereafter acquired, in and to the following (collectively, the "Collateral"): ---------- (a) all of the following: (i) the indebtedness (the "Pledged Debt") described on Schedule ------------ -------- I and owing to the Grantor by the issuers named therein and the - instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (ii) all additional indebtedness from time to time owed to the Grantor by any obligor of the Pledged Debt or any other Person and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; and (iii) the shares of capital stock described on Schedule II (the ----------- "Pledged Securities"), together with any other shares, stock ------------------ certificates, options or warrants of any issuer listed in Schedule II ----------- that may be issued or granted to, or held by, the Grantor while this Agreement is in effect; and (b) all proceeds of any and all of the foregoing Collateral. SECTION 2. Security for Obligations. This Agreement secures, and the ------------------------ Collateral is collateral security for, the prompt payment and performance in full when due, whether on a specified payment date, at stated maturity, by acceleration or otherwise (including, without limitation, the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code or any similar law) of all obligations of the Grantor under (i) the Senior Secured Debt, and (ii) from and after the Debt Exchange Closing Date, (x) the Senior Secured Debt and the Exchange Notes for so long as the Senior Secured Debt is issued and outstanding and (y) from and after the payment in full or exchange of the Senior Secured Debt, the Exchange Notes, including interest (including, without limitation, interest that, but for the filing of a petition in bankruptcy would accrue on such obligations) or any fees or other expenses related thereto (any and all such obligations being the "Secured Obligations"). ------------------- SECTION 3. Delivery of Collateral. All certificates or instruments ---------------------- representing or evidencing Collateral shall be delivered to and held by or on behalf of the Collateral Agent on behalf of the Secured Parties entitled to the benefit thereof pursuant to the terms hereof and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Secured Parties entitled to the benefit thereof pursuant to the terms hereof. The Collateral Agent shall have the right after the occurrence and during the continuance of an Event of Default (as defined in Section 6(a)(v)) beyond any --------------- grace period applicable thereto to transfer to or to register in the name of the Collateral Agent or any of its nominees any or all of the Collateral. In addition, the Collateral Agent shall have the right after the occurrence and during the continuance of an Event of Default beyond any grace period applicable thereto to exchange instruments representing or evidencing the Collateral, for instruments of smaller or larger denominations. 2 SECTION 4. Representations and Warranties. The Grantor hereby represents ------------------------------ and warrants as follows: (a) The chief place of business and chief executive office of the Grantor is located at the address specified for the Grantor on Schedule -------- III. The Grantor's federal tax identification number is as set forth on --- Schedule III. ------------ (b) The Grantor is the legal and beneficial owner of the Collateral free and clear of any lien. No effective financing statement or other instrument similar in effect covering all or any part the Collateral is on file in any recording office, except such as may have been filed relating to this Agreement. (c) Assuming continuous possession by the Collateral Agent on behalf of the Secured Parties entitled to the benefit thereof pursuant to the terms hereof, the pledge of each of the Pledged Debt and Pledged Securities pursuant to this Agreement creates a valid and first priority perfected security interest in the Pledged Debt and Pledged Securities, respectively. (d) All shares of capital stock described on Schedule II are duly ----------- authorized, validly issued, fully paid and non-assessable. (e) The Pledged Debt described on Schedule I constitutes 100% of the ---------- outstanding indebtedness of the Bank to the Grantor and its Affiliates (excluding any indebtedness arising from deposit accounts or bank accounts maintained by the Grantor and its Affiliates with the Bank) and the Pledged Securities described on Schedule II represent 100% of the total issued and ----------- outstanding shares of capital stock of the Bank. (f) The execution and delivery of this Agreement and the performance by the Grantor of its obligations hereunder are within the Grantor's corporate power, have been duly authorized by all necessary corporate action and do not and will not contravene or conflict with any provision of law or of the organizational documents of the Grantor or of any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon the Grantor. (g) This Agreement is a legal, valid and binding obligation of the Grantor, enforceable in accordance with its terms, except that the enforceability of this Agreement may be limited by bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) and creates a valid and, except for Permitted Liens, after all appropriate financing statements are filed, first priority security interest in the Collateral and such security interest is entitled to all rights, priorities and benefits afforded by the Uniform Commercial Code in effect in the State of California (the "Uniform Commercial Code"). ----------------------- 3 SECTION 5. Further Assurances. ------------------ (a) The Grantor agrees from time to time that, at the expense of the Grantor, the Grantor will promptly execute and deliver all further instruments and documents, and take all further action required, or that the Collateral Agent may reasonably request, in order to perfect, protect and maintain the priority of any pledge, assignment or security interest granted or purported to be granted hereunder or to enable the Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. (b) The Grantor hereby authorizes the Collateral Agent on behalf of the Secured Parties entitled to the benefit thereof pursuant to the terms hereof to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of the Grantor where permitted by law. A photocopy or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. SECTION 6. Voting Rights; Dividends; Payments; etc. --------------------------------------- (a) Until the occurrence of an Event of Default and the continuance thereof beyond any grace period applicable thereto: (i) The Grantor shall be entitled to exercise any and all voting or consensual rights and powers and stock purchase or subscription rights relating or pertaining to the Pledged Securities for any purpose; (ii) The Grantor shall be entitled to receive and retain any and all lawful dividends payable in respect of the Pledged Securities which are paid in cash by any issuer, but all dividends and distributions in respect of such Collateral or any part thereof made in shares of stock or other property or representing any return of capital, whether resulting from a subdivision, combination or reclassification of such Collateral or any part thereof or received in exchange for such Pledged Securities or any part thereof or as a result of any merger, consolidation, acquisition or other exchange of assets to which any issuer of Pledged Securities may be a party or otherwise or as a result of any exercise of any stock purchase or subscription right, shall be and become part of the Collateral hereunder and, if received by the Grantor, shall be forthwith delivered to the Collateral Agent on behalf of the Secured Parties in due form for transfer (i.e., endorsed in blank or accompanied by stock or bond powers executed in b lank) to be held for the purposes of this Agreement. (iii) The Collateral Agent shall execute and deliver, or cause to be executed and delivered, to the Grantor, all such proxies, powers of attorney, dividend orders and other instruments as the Grantor may request in writing (upon which the Collateral Agent may fully rely) for the purpose of enabling the Grantor to exercise the rights and powers which it is entitled to exercise pursuant to 4 subclause (i) above and to receive the dividends which it is ------------- authorized to retain pursuant to subclause (ii) above. -------------- (iv) The Grantor shall be entitled to (A) collect all regular payments made or proceeds received with respect to the Pledged Debt and (B) enforce and prosecute all rights and remedies available under any of the Pledged Debt. (v) For all purposes under this Agreement, "Event of Default" means (A) prior to the Debt Exchange Closing Date, an Event of Default as defined in the Senior Secured Debt, (B) from and after the Debt Exchange Closing Date and so long as any Senior Secured Debt shall remain outstanding, an Event of Default as defined in the Exchange Notes Indenture or in the Senior Secured Debt and (C) after the Senior Secured Debt has been paid in full, an Event of Default as defined in the Exchange Notes Indenture. (b) After the occurrence of an Event of Default and the continuance thereof beyond any grace period applicable thereto, all rights and powers which the Grantor is entitled to exercise pursuant to Section 6(a)(i) --------------- hereof, and all rights of the Grantor to receive and retain dividends pursuant to Section 6(a)(ii) hereof, and all rights of the Grantor to ---------------- receive payments pursuant to Section 6(a)(iv) hereof, shall forthwith ---------------- cease, and all such rights and powers shall thereupon become vested in the Collateral Agent which shall have, during the continuance of such Event of Default, the sole and exclusive authority to exercise such rights and powers and to receive such dividends and payments. Any and all money and other property paid over to or received by the Collateral Agent pursuant to this clause (b) shall be retained by the Collateral Agent as additional ---------- Collateral hereunder and applied in accordance with the provisions hereof. SECTION 7. Place of Perfection; Records. The Grantor shall keep its chief ---------------------------- place of business and chief executive office and the office where it keeps its records concerning the Collateral, at the location therefor specified on Schedule III or, upon prior written notice to the Collateral Agent, at such - ------------ other locations in a jurisdiction where all actions required by Section 5 shall --------- have been taken with respect to the Collateral. SECTION 8. Transfers and Other Liens; Additional Shares. Except as -------------------------------------------- otherwise permitted under the Recapitalization Agreement, the Grantor shall not (a) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, or (b) create or suffer to exist any Lien upon or with respect to any of the Collateral. SECTION 9. (a) Appointment and Authorization of Collateral Agent. By acceptance ------------------------------------------------- of the Senior Secured Debt or Exchange Notes, as the case may be, each Secured Party hereby irrevocably designates and appoints WTC as the Collateral Agent of such Secured Party under this Agreement and each Secured Party hereby irrevocably authorizes the Collateral Agent to execute this Agreement and (i) to take action on its behalf and exercise such powers and use such d iscretion as are expressly permitted hereunder and all 5 instruments relating hereto and thereto and (ii) to exercise such powers and perform such duties as are, in each case, expressly delegated to the Collateral Agent by terms hereof and thereof together with such other powers and discretion as are reasonably incidental hereto and thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Collateral Agent shall not have any duties or responsibilities except those expressly set forth herein or therein or any fiduciary relationship with any Secured Party and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Collateral Agent. (b) Delegation of Duties. The Collateral Agent may exercise its powers -------------------- and execute any of its duties under this Agreement by or through employees, agents or attorneys-in-fact and shall be entitled to take and to rely on advice of counsel concerning all matters pertaining to such powers and duties. The Collateral Agent may use the services of such persons as the Collateral Agent in its sole discretion may determine and all reasonable fees and expenses of such persons shall be borne by the Grantor. (c) Exculpatory Provisions. Neither the Collateral Agent nor any of ---------------------- its officers, partners, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action taken or omitted to be taken by it or such Person under or in connection with this Agreement or any Collateral (except for its or such person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Secured Parties for any recitals, statements, representations or warranties made by the Grantor or any officer thereof contained in, or made or deemed to be made in connection with, any Senior Secured Debt, Exchange Notes, or this Agreement or in any certificate, report, statement or other document referred to or provided for in, or received by the Collateral Agent under or in connection with, this Agreement or any Senior Secured Debt or Exchange Notes, or for the due execution, legality, validity, effectiveness, genuineness, enforceability or sufficiency of the Senior Secured Debt, Exchange Notes or this Agreement or any other document or instrument furnished pursuant thereto or for any failure of the Grantor to perform its obligations thereunder. The Collateral Agent shall be under no obligation to the Secured Parties to ascertain or to inquire as to the observance or performance of any of the agreements contained in, statements made in, or conditions of the Senior Secured Debt, Exchange Notes or this Agreement or to inspect the property, including the books and records, of the Grantor. (d) Reliance by the Collateral Agent. The Collateral Agent shall be -------------------------------- entitled to rely, and shall be fully protected and shall incur no liability in acting and relying, upon any writing, resolution, notice, consent, certificate, affidavit, telegram, telecopy, telex or teletype message, statement, order or other document or telephone conversation reasonably believed by it to be genuine and correct and to have been signed, sent or made by the proper person or persons and upon advice and statements of legal counsel, including without limitation counsel to the Grantor, independent accountants and other experts selected by the Collateral Agent. Without limiting the generality of the foregoing, the Collateral Agent may treat the payee of any Senior Secured Debt or Exchange Note as the registered holder thereof until it receives notice or otherwise has actual knowledge that such payee is no longer the registered holder of such Senior Secured Debt or Exchange Note. Notwithstanding anything to the contrary contained 6 herein, the Collateral Agent shall be fully justified in failing or refusing to take action under this Agreement, including without limitation the exercise of any rights or remedies under, or the entering into of any agreement amending, modifying, supplementing, waiving any provision of, or the giving of consent pursuant to, any provision of this Agreement, unless it shall first receive instructions of the Required Noteholders (as defined below) as contemplated by Section 10 hereof and it shall first be ---------- indemnified to its reasonable satisfaction by the Secured Parties against any and all liability and expense that may be incurred by it by reason of taking, continuing to take or refraining from taking any such action. For the purpose hereof, the "Required Noteholders" shall mean, at any time, the holders of at least 51% of the outstanding principal amount of all Senior Secured Debt, until such time as no Senior Secured Debt shall be outstanding, at which time "Required Noteholders" shall mean the Indenture -------------------- Trustee acting pursuant to the Exchange Notes Indenture. The Collateral Agent shall in all such cases be fully protected in acting or in refraining from acting under this Agreement in accordance with the provisions of Section 10(e) hereof and in accordance with written instructions and any ------------- action taken or any failure to act pursuant thereto shall be binding upon all the Secured Parties and all other holders from time to time of the Senior Secured Debt and Exchange Notes. (e) Knowledge or Notice of Default and Event of Default. The --------------------------------------------------- Collateral Agent shall not be deemed to have actual, constructive, direct or indirect knowledge or notice of the occurrence of any Default or Event of Default unless and until the Collateral Agent has received written notice from a Secured Party or the Grantor describing such Default (as defined below) or Event of Default, setting forth in reasonable detail the facts and circumstances thereof and stating that the Collateral Agent may rely on such notice without further inquiry. The Collateral Agent shall have no obligation or duty prior to or after receiving any such notice to inquire whether a Default or Event of Default has in fact occurred and shall be entitled to rely, and shall be fully protected in so relying, on any such notice furnished to it. For the purpose hereof, "Default" means (A) prior to the Debt Exchange Closing Date, a Default as defined in the Senior Secured Debt, (B) from and after the Debt Exchange Closing Date and so long as any Senior Secured Debt shall remain outstanding, a Default as defined in the Exchange Notes Indenture or the Senior Secured Notes and (C) after the Senior Secured Debt has been paid in full, a Default as defined in the Exchange Notes Indenture. (f) Non-Reliance on Collateral Agent and Other Secured Parties. By ---------------------------------------------------------- acceptance of the Senior Secured Debt or the Exchange Notes, as the case may be, each Secured Party expressly acknowledges that, except as expressly set forth in this Agreement, neither the Collateral Agent nor any of the Collateral Agent's partners, officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Collateral Agent hereinafter taken, including any review of the affairs of the Grantor, shall be deemed to constitute any representation or warranty by the Collateral Agent to any Secured Party. By acceptance of the Senior Secured Debt or the Exchange Notes, as the case may be, each Secured Party represents that it has, independently and without reliance on the Collateral Agent or any other Secured Party, and based on such documents and information as it has deemed appropriate, made its own appraisal of investigation into the business, operation, 7 property, financial and other condition and credit-worthiness of the Grantor and made its own decision to enter into this Agreement. By acceptance of the Senior Secured Debt or the Exchange Notes, as the case may be, each Secured Party also represents that it will, independently, and without reliance upon the Collateral Agent or any other Secured Party, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under the Recapitalization Agreement, the Related Agreements and this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and credit-worthiness of the Grantor. Except for notices, reports and other documents expressly required to be furnished by the Collateral Agent hereunder, the Collateral Agent shall not have any duty or responsibility to provide the Secured Parties with any credit or other information concerning the business, operations, property, financial and other condition and credit-worthiness of the Grantor that may come into the possession of the Collateral Agent or any of its partners, officers, directors, employees, agents, attorneys-in-fact or Affiliates. (g) Indemnification. The Grantor agrees to indemnify WTC from and --------------- against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever that may at any time, including, without limitation, at any time following the payment of the Secured Obligations, be imposed on, incurred by or asserted against the Collateral Agent in any way relating to or arising out of its capacity as Collateral Agent or the Recapitalization Agreement or the Related Agreements or actions or omissions of the Collateral Agent specifically required or permitted by this Agreement or by written instructions of the Required Noteholders pursuant to Section 10(c) ------------- hereof, including without limitation, costs incurred in performance of its duties under Section 9(a), provided that the Grantor shall not be liable ------------ for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Collateral Agent's gross negligence of willful misconduct. The agreements in this Section 9(g) shall survive ------------ the payment of the Secured Obligations and the termination of this Agreement. (h) Collateral Agent in its Individual Capacity. The Collateral Agent ------------------------------------------- and its Affiliates may generally engage in any kind of business with the Grantor as though such person was not the Collateral Agent hereunder and without any duty to account therefore to the Secured Parties. (i) Successor Collateral Agent. -------------------------- (i) The Collateral Agent may resign at any time upon 60 days notice to the Secured Parties and Grantor and may be removed at any time, with or without cause, by the Required Noteholders by written notice delivered to the Grantor, the Collateral Agent and the Secured Parties. After any resignation or removal hereunder of the Collateral Agent, the provisions of this Section 9(i) shall continue to inure to ------------ its benefit as to any actions taken or omitted to be taken by it in connection with its agency hereunder while it was the Collateral Agent under 8 this Agreement and it shall be entitled to be paid promptly when due any amounts owing to it pursuant to Section 9.6. ----------- (ii) Upon receiving notice of any such resignation or removal, a successor Collateral Agent shall be appointed by the Required Noteholders, provided, however, that such successor Collateral Agent shall be (A) a Person having a combined capital and surplus of at least $50 million and (B) authorized under bylaw to assume the functions of the Collateral Agent. If the appointment of such successor shall not have become effective, as provided below, within such 60-day period after the Collateral Agent's resignation or upon removal of the Collateral Agent, then the Collateral Agent may petition a court of competent jurisdiction for the appointment of a Collateral Agent. Such court shall, after such notice as it may deem proper, appoint a successor Collateral Agent meeting the qualifications specified in this Section 9(i)(ii). The Secured ---------------- Parties hereby consent to such petition and appointment so long as such criteria are met. (iii) The resignation or removal of a Collateral Agent shall become effective upon the execution and delivery of such documents or instruments as are necessary to transfer the rights and obligations of the Collateral Agent under this Agreement, including without limitation, the delivery and recordation of all amendments, instruments, financing statements, continuation statements and other documents necessary to maintain the perfection of the security interests held by the Collateral Agent under this Agreement. Copies of each such document or instrument shall be delivered to all Secured Parties. The appointment of a successor Collateral Agent pursuant to this Section 9(i) shall become effective upon the acceptance of the ------------ appointment as Collateral Agent hereunder by a successor Collateral Agent. Upon such effective appointment, the successor Collateral Agent shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Collateral Agent and the retiring Collateral Agent shall be discharged from its rights, powers, privileges and duties under this Agreement, but shall remain liable for its actions prior to and including such date of discharge. SECTION 10. Actions by the Collateral Agent. ------------------------------- (a) Duties and Obligations. The duties and obligations of the ---------------------- Collateral Agent are only those set forth in this Agreement. (b) Notification of Default. If the Collateral Agent has been notified ----------------------- in a writing conforming to the requirements of Sections 9 (d) and (e) by -------------- --- any Secured Party or Grantor that a Default or an Event of Default has occurred, the Collateral Agent shall promptly furnish, and in any event no later than three Business Days after receipt of such notice, to the Secured Parties a copy of such written notice (a "Default Notice"). The failure of -------------- any Secured Party having knowledge of the occurrence of a Default or an Event of Default to notify the Collateral Agent or any Secured Party of such occurrence, however, does not constitute a waiver of such Default or Event of Default by the Secured Parties. If the Required Noteholders have not given prior instructions to the Collateral 9 Agent, the Default Notice may contain a recommendation of actions to be taken by the Secured Parties and/or request instructions from the Secured Parties and shall specify the date on which responses are due in order to be timely within Section 10(d) hereof. If the Required Noteholders have ------------- given prior instructions to the Collateral Agent, the Collateral Agent shall take the actions requested by the Required Noteholders and the Default Notice shall inform the other Secured Parties of such actions. (c) Exercise of Remedies. Except as otherwise provided in Section -------------------- ------- 10(e) and Section 21, the Collateral Agent shall take only such actions and ----- ---------- exercise only such remedies under this Agreement as are approved in written instructions delivered to the Collateral Agent and signed by the Required Noteholders. If the Collateral Agent shall determine in good faith that taking the actions specified in such instructions is contrary to law, it may refrain, and shall be fully protected in so refraining, from taking such action and shall immediately give notice of such fact to each of the Secured Parties. If instructions received by the Collateral Agent are in its good faith judgment ambiguous or conflict with other instructions received by the Collateral Agent, the Collateral Agent (a) shall promptly notify the Secured Parties of such ambiguity or conflict and request clarifying instructions, and (b) may either (1) delay in taking any such action or exercising any such remedy pending receipt of such clarifying instructions, and shall be fully protected in so delaying, or (2) take such actions as it is entitled under Section 10(e). ------------- (d) Instructions from Secured Parties. If any Secured Party does not --------------------------------- respond in a timely manner to any notice, including without limitation a Default Notice, from the Collateral Agent or request for instructions within the time period specified by the Collateral Agent in such notice or request for instructions, which shall be a minimum of five Business Days, the Secured Obligations held by such Secured Party that would otherwise be included in a determination of Required Noteholders shall not be included in the determination of Required Noteholders for purposes of such notice or request for instructions. Any action taken or not taken without the vote of a Secured Party or the Secured Parties under this Section 10(d) shall ------------- nevertheless be binding on such Secured Party or Secured Parties. (e) Emergency Actions. If the Collateral Agent has asked the Secured ----------------- Parties for instructions and if the Required Noteholders have not yet responded to such request, the Collateral Agent shall be authorized to take, but shall not be required to take and shall in no event have any liability for the taking or the failure to take, such actions, other than any action described or permitted under Section 21 hereof, with regard to a ---------- Default or Event of Default that the Collateral Agent, in good faith, believes to be reasonably required to promote and protect the interests of the Secured Parties and to maximize both the value of the Collateral and the present value of the recovery by the Secured Parties on the Secured Obligations and shall give the Secured Parties appropriate notice of such action, provided that once instructions with respect to such request have been received by the Collateral Agent from the Required Noteholders, the actions of the Collateral Agent shall be governed thereby and the Collateral Agent shall not take any further action that would be contrary thereto. 10 (f) Other Actions. The Collateral Agent shall have the right to take ------------- such actions, or omit to take such actions, hereunder and not inconsistent with the written instructions of the Required Noteholders delivered pursuant to Section 10(c) hereof, including actions the Collateral Agent ------------- deems necessary or appropriate to perfect or continue the perfection of the liens on the Collateral for the benefit of the Secured Parties. Except as otherwise provided by the applicable law, the Collateral Agent shall have no duty as to any Collateral, the perfection, protection or maintenance of any pledge, assignment or security interest in the Collateral, the collection or protection of the Collateral or any income thereon, including any duty to ascertain or take action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Collateral Agent has or is deemed to have knowledge of such matters, nor as to the preservation of rights against prior parties, nor as to the preservation of rights pertaining to the Collateral beyond the safe custody of any Collateral in the Collateral Agent's actual possession. (g) Cooperation. To the extent that the exercise of the rights, powers ----------- and remedies of the Collateral Agent in accordance with this Agreement requires that any action be taken by any Secured Party, by acceptance of the Senior Secured Debt or the Exchange Notes, as the case may be, such Secured Party agrees to take such action and cooperate with the Collateral Agent to ensure that the rights, powers and remedies of all Noteholders are exercised in full. (h) Distribution of Proceeds. All amounts owing with respect to the ------------------------ Secured Obligations shall be secured by the Collateral without distinction as to whether some Secured Obligations are then due and payable and other Secured Obligations are not then due and payable. Upon any realization upon the Collateral, by acceptance of the Senior Secured Debt or the Exchange Notes, as the case may be, the Secured Parties agree that the proceeds thereof shall be applied, (i) first, to the amounts owing to the Collateral Agent by the Grantor solely in its capacity as Collateral Agent hereunder pursuant to this Agreement, (ii) second, ratably to the payment of all amounts of interest outstanding that constitute the Senior Secured Debt according to the aggregate amounts of such interest then owing to each Senior Secured Debt Purchaser, (iii) third, ratably to all amounts of principal outstanding under the Senior Secured Debt according to the aggregate amounts of such principal then owing to each Senior Secured Debt Purchaser, (iv) fourth, ratably to all other amounts then due to the Senior Secured Debt Purchasers, including fees and expenses, (v) fifth, ratably to the payment of all amounts of interest outstanding that constitute the Exchange Notes according to the aggregate amounts of such interest then owing to each Exchanging Debt Holder, (vi) sixth, ratably to all amounts of principal outstanding under the Exchange Notes according to the aggregate amounts of principal then owing to each Exchanging Debt Holder, (vii) seventh, ratably to all other amounts then due to the Exchanging Debt Holders, including fees and expenses, and (viii) eighth, the balance, if any, shall be returned to the Grantor or such other Persons as are entitled thereto. Upon the request of the Collateral Agent prior to any distribution under this Section 10(h), each Secured Party shall provide to ------------- the Collateral Agent certificates, in form and substance reasonably satisfactory to the Collateral Agent, setting forth the respective amounts referred to in clauses (ii) through (vii) above that each such Secured 11 Party believes it is entitled to receive, together with such wire transfer information or other payment instructions as the Collateral Agent may reasonably request. (i) Authorized Investments. Prior to any realization upon the ---------------------- Collateral, any and all funds held by the Collateral Agent in its capacity as Collateral Agent, whether pursuant to any provision of this Agreement shall, to the extent feasible, within a reasonable time, be invested by the Collateral Agent in Permitted Investments (as defined on Schedule IV). Prior to making such investment or to the extent it is not feasible to invest such funds in Permitted Investments, the Collateral Agent shall hold any such funds in an interest bearing account. By acceptance of the Senior Secured Debt or the Exchange Notes, as the case may be, each Secured Party authorizes the Collateral Agent to open such an account. Any interest earned on such funds shall be retained in such account until there shall be a realization on the Collateral, at which time such funds shall be disbursed to the Secured Parties in accordance with Section 10(h). The ------------- Collateral Agent shall have no duty to place funds held and invested pursuant to this Section 10(i) in investments that provide for a maximum ------------- return. The Collateral Agent shall not be responsible for any loss of any funds invested in accordance with this Section 10(i). ------------- SECTION 11. Priority of Notes. From and after the Debt Exchange Closing ----------------- Date until all Senior Secured Debt shall have been paid in full, exchanged for Exchange Notes or otherwise retired, in the event of: (a) the occurrence of an Event of Default (as such term is defined in the Senior Secured Debt) and continuance thereof beyond any grace period provided in the Senior Secured Debt; (b) any acceleration of the maturity of any other indebtedness of the Grantor, or (c) the institution of any liquidation, dissolution, bankruptcy, insolvency or similar proceeding relating to the Grantor, its property, or its creditors as such, the Exchanging Debt Holders, if any, shall not be entitled to receive and, by acceptance of the Exchange Notes, the holders of the Exchange Notes agree not to accept, any payment of principal or interest until all amounts owing in respect of the Senior Secured Debt shall have been paid in full; and from and after the happening of any event described in clause (c) of this Section 11, all payments ---------- and distributions of any kind or character (whether in cash, securities or property) which, except for the provisions hereof, would have been payable or distributable to the Exchanging Debt Holders, shall be made to and for the benefit of the Senior Secured Debt Purchasers (who shall be entitled to make all necessary claims therefore) in accordance with the priorities of payment set forth herein until all Senior Secured Debt shall have been paid in full. In the event that any payment or distribution is made with respect to the Exchange Notes in violation of the terms hereof, any Secured Party hereof receiving such payment or distribution shall (and, by acceptance of the Exchange Notes, agrees to) hold it in trust for the benefit of, and shall remit it to, the Senior Secured Debt Purchasers in accordance with the priorities of payment set forth herein. 12 SECTION 12. Status of Security Interests. From and after the Debt Exchange ---------------------------- Closing Date until all Senior Secured Debt shall have been paid in full, exchanged for Exchange Notes or otherwise retired: (a) The Collateral Agent, the Indenture Trustee and, by acceptance of the Senior Secured Debt or the Exchange Notes, as the case may be, the Senior Secured Debt Purchasers and the Exchanging Debt Holders hereby agree that (i) all of the Senior Secured Debt Purchasers' security interests, liens, and other collateral interests in the Collateral and all of the Senior Secured Debt Purchasers' rights and remedies, under law, agreement, or otherwise, exercisable pursuant thereto (all of which interests and rights are herein called the "Senior Rights") shall be senior and superior to (ii) all of the Exchanging Debt - -------------- Holders' and the Indenture Trustee's security interests, liens and other collateral interests in the Collateral and all of the Exchanging Debt Holders' and the Indenture Trustee's rights and remedies, under law, agreement or otherwise, exercisable pursuant thereto (all of which interests and rights are herein called the "Junior Rights"). ------------- (b) For purposes hereof, a party whose security interests are "senior and superior" (as described in Section 12(a)) shall possess the right, in its ------------- absolute discretion, (i) to make all decisions on the disposition of any Collateral in which such party's security interests are "senior and superior" (including, without limitation, foreclosing on such collateral or refraining from foreclosing), notwithstanding that any or all of the Grantor's obligations to the holders of the Junior Rights (as defined for purposes of Section 12(a)) ------------- may be due and owing or the Grantor may be in default in any other manner with regard to its obligations to the holders of the Junior Rights, (ii) to exercise or not exercise all rights granted to such secured party with regard to all or any of such Collateral, (iii) to act on behalf of the holders of the Junior Rights as their agent, not, however, at the direction of the holders of the Junior Rights, but with full right and authority to make the judgments and to take the actions such agent would be permitted to accomplish in its own right with regard to its own Collateral pursuant to clauses (i) and (ii) of this sentence and (iv) to apply all proceeds obtained from Collateral on account of the Senior Rights (as defined for purposes of Section 12(a)), in such order as ------------- the holder of the Senior Rights shall determine. SECTION 13. Agreement Available Only to Parties and Collateral Agent. -------------------------------------------------------- Notwithstanding anything to the contrary herein, the parties hereto have entered into this Agreement solely for their own benefit and in order to establish solely with respect to each other and not with respect to the Grantor their respective rights to payment of the Secured Obligations, their respective rights to the proceeds of the Collateral and their respective rights and priorities with respect to certain other matters, all as more fully set forth herein. No person or entity other than the parties hereto shall have any rights, whether as third party beneficiary or otherwise, under this Agreement, and no agreement, statement or provision of this Agreement shall be deemed to be an admission by or against any of the parties hereto or be used by any person or entity, except the parties hereto, for any purpose whatsoever. SECTION 14. Rights Unaffected. The relative rights of the parties herein in ----------------- and to the Collateral set out in this Agreement shall be unaffected by any consent or waiver with respect to, or renewal or extension of, the Secured Obligations. 13 SECTION 15. Collateral Agent's Fees, Costs and Expenses. Grantor agrees to ------------------------------------------- pay such fees to the Collateral Agent as mutually agreed from time to time and to pay all reasonable out-of-pocket costs and expenses of the Collateral Agent. SECTION 16. Remedies. If any Event of Default shall have occurred and be -------- continuing beyond any grace period applicable thereto: (a) The Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it under applicable law, all the rights and remedies of a secured party upon default under the Uniform Commercial Code (whether or not the Uniform Commercial Code applies to the affected Collateral) and also may (i) require the Grantor to, and the Grantor hereby agrees that it shall at its expense and upon request of the Collateral Agent forthwith, assemble all or part of the Collateral as directed by the Collateral Agent and make it available to the Collateral Agent at a place to be designated by the Collateral Agent that is reasonably convenient to both parties, and (ii) without notice, except as specified below, advertisement, hearing or process of law of any kind, sell the Collateral or any part thereof in one or more parcels free and clear of all rights and claims of the Grantor at public or private sale, for cash, on credit or for future delivery, and upon such other terms as the Collateral Agent may deem commercially reasonable. The Grantor agrees that, to the extent notice of sale shall be required by law, at least 10 Business Days' notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. (b) All cash proceeds received in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may be held by the Collateral Agent as collateral for, and/or then or at any time thereafter applied (after payment of any fees and expenses of the Collateral Agent) in whole or in part against, all or any part of the Secured Obligations. Any surplus of such cash or cash proceeds remaining after payment in full of all the Secured Obligations shall be promptly paid over to the Grantor or to whomsoever may be lawfully entitled to receive such surplus. (c) The Collateral Agent is hereby authorized to comply with any limitation or restriction in connection with any sale of Collateral as it may be advised by counsel is necessary in order to (i) avoid any violation of applicable law (including, without limitation, compliance with such procedures as may restrict the number of prospective bidders and purchasers and/or further restrict such prospective bidders or purchasers to persons or entities who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral) or (ii) obtain any required approval of the sale or of the purchase by any governmental regulatory authority or official. SECTION 17. Establishing Required Noteholders. In order to establish what --------------------------------- constitutes the Required Noteholders, the Collateral Agent may request from time to time, and, by acceptance of the Senior Secured Debt or the Exchange Notes, as the case may be, the Secured Parties agree to provide, certificates setting forth the amount of the Secured Obligations held or 14 represented by each Secured Party, which certificates the Collateral Agent shall be entitled to rely on. SECTION 18. Amendments: Waivers; Etc. No amendment or waiver of any ------------------------ provision of this Agreement, and no consent to any departure by the Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Collateral Agent and the Grantor, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 19. Addresses for Notices. All notices and other communications --------------------- provided to the parties hereto shall be in writing or by facsimile and addressed, delivered or transmitted to such party at its address or facsimile number set forth below its signature hereto or at such other address or facsimile number as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any notice, if transmitted by facsimile, shall be deemed given when transmitted. SECTION 20. Continuing Security Interest; Assignments under the --------------------------------------------------- Recapitalization Agreement. This Agreement shall create a continuing security - -------------------------- interest in the Collateral and shall: (a) remain in full force and effect until all Secured Obligations have been paid in full, (b) be binding upon the Grantor, its successors and assigns and (c) inure, together with the rights and remedies of the Secured Parties hereunder, to the benefit of the Secured Parties and their respective permitted successors, transferees and assigns. SECTION 21. Termination. When all Secured Obligations have been paid in ----------- full, the security interest granted hereby shall terminate and all rights to the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof shall revert to the Grantor. Upon the termination of any such security interest, the Collateral Agent shall promptly return to the Grantor, upon the Grantor's request and at the Grantor's expense, such of the Collateral (and, in the case of a release, such of the released Collateral) held by the Collateral Agent as shall not have been sold or otherwise applied pursuant to the terms hereof. The Collateral Agent will, at the Grantor's expense, execute and deliver to the Grantor such other documents as the Grantor shall reasonably request to evidence such termination or release, as the case may be. SECTION 22. Governing Law; Terms. THIS AGREEMENT SHALL BE GOVERNED BY AND -------------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO CONFLICTS OF LAW PRINCIPLES, except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of California and except that the rights and duties of WTC shall be governed by and construed in accordance with the laws of the State of Delaware. Unless otherwise defined herein or in the Recapitalization Agreement, terms used in Article 9 of the Uniform Commercial Code are used herein as therein defined. SECTION 23. Severability of Provisions. Any provision of this Agreement -------------------------- which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the 15 extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 24. Counterparts. This Agreement may be executed in any number of ------------ counterparts and by different 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. Delivery of an executed counterpart of a signature page to this Agreement by facsimile shall be as effective as delivery of a manually executed counterpart of this Agreement. 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. IMPERIAL CREDIT INDUSTRIES, INC. By: /s/ H. Wayne Snavely --------------------- Name: H. Wayne Snavely Title: Chief Executive Officer Address: 23550 Hawthorne Boulevard Building 1, Suite 110 Torrance, California 90505 Facsimile: (310) 791-373-9955 WILMINGTON TRUST COMPANY, in its capacity as Collateral Agent on behalf of the Secured Parties By: /s/ Dan Reser -------------- Name: Dan Reser Title: Vice President Address: _________________________ _________________________ Facsimile: _________________________ EFFECTIVE ON THE DEBT EXCHANGE CLOSING DATE: CHASE MANHATTAN BANK AND TRUST COMPANY, N.A., as Indenture Trustee for the holders of Exchange Notes By:_________________________________ Title:______________________________ Address: _________________________ _________________________ Facsimile: _________________________ Schedule I Pledged Debt ------------ 1. Subordinated Note, dated March 31, 1997, issued to Imperial Credit Industries, Inc. in the amount of Thirty Five Million Dollars ($35,000,000), due and payable in full on March 31, 2007. 2. Subordinated Note, dated August 17, 2000, issued to Imperial Credit Industries, Inc. in the amount of Seven Million Dollars ($7,000,000), due and payable in full on August 31, 2007. Schedule II Pledged Securities ------------------
Class of Certificate Number -------- ----------- ------ Issuer Capital Stock Number of Shares ------ ------------- ------ --------- Southern Pacific Bank Series A Preferred Stock PA-1 50,000 Southern Pacific Bank Common Stock 6 75,000 Southern Pacific Bank Common Stock 5 125,000 Southern Pacific Bank Common Stock 4 8,334
Schedule III Chief Place of Business and Chief Executive Office: 23550 Hawthorne Boulevard Building 1, Suite 110 Torrance, California 90505 Federal Tax Identification Number: 95-4054791 Schedule IV Permitted Investments (a) Securities issued or guaranteed by the United States of America or any subdivision, agency or instrumentality thereof, or money market mutual funds that invest solely in such obligations. (b) Securities issued by any state or municipality within the United States of America rated Aa or higher by Moody's Investors Service, Inc. or AA or higher by Standard & Poor's Rating's Services, a division of The McGraw- Hill Companies, Inc. ("S&P"). (c) Deposits in or certificates of deposit issued by a commercial bank which has combined capital and surplus in excess of $1 billion and which has, or the holding company of which has, a bond rating of at least A from Moody's Investors Service, Inc. or A1 by S&P. (d) Open market commercial paper rated P1 by Moody's Investors Service, Inc. or A1 by S&P. (e) Bankers' acceptances from banks referred to in paragraph (c) above. EX-21 10 0010.txt SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Subsidiary Name State of Incorporation Southern Pacific Bank California Imperial Warehouse Finance, Inc. California Imperial Business Credit, Inc. California Imperial Credit Advisors, Inc. California Imperial Credit Worldwide, Ltd. California Imperial Credit Asset Management, Inc. California ICII Ventures, Inc. California Skypark Capital Management, Inc. Delaware Imperial Credit Asset Resolution, Inc. California Corona Film Finance Fund, LLC Delaware Imperial Credit Lender Services, Inc. California Imperial Credit Commercial Asset Management Corporation California Imperial Credit Commerical Mortgage Investment Corporation Maryland P.V. Terraces, Inc. California Auto Marketing Network, Inc. Delaware Imperial Credit Investment Corp. California L.V. Atrium, Inc. California Oceanside Mission Marketplace, Inc. California EX-23.1.1 11 0011.txt CONSENT OF KMPG LLP. EXHIBIT 23.1.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Imperial Credit Industries, Inc.: We consent to incorporation by reference in the registration statements (Nos. 333-13805 and 333-15149) on Form S-8 and (Nos. 333-22141 and 333-30809) on Form S-4 of Imperial Credit Industries, Inc. of our report dated March 30, 2001, relating to the consolidated balance sheets of Imperial Credit Industries, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations and comprehensive (loss) income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000, which report appears in the December 31, 2000 annual report on Form 10-K of Imperial Credit Industries, Inc. KPMG LLP Los Angeles, California April 6, 2001 -----END PRIVACY-ENHANCED MESSAGE-----